SEBI Changes F&O Game, Says Capitalmind's Deepak Shenoy Decoding New Framework

The measures introduced by the Securities and Exchange Board of India on Tuesday to strengthen the futures and options trading framework have "changed the F&O game,"  according to Deepak Shenoy, founder and chief executive officer of Capitalmind.

The measures, which include upfront premium collection, position monitoring, and expiry day reforms, are aimed at investor protection and market stability, SEBI said in a circular.

The new regulations will come into effect in phases, starting from Nov. 20 onwards. In a social media post, Shenoy decoded each of the measures.

From Feb. 1, 2025 onwards, upward collection of options premiums from buyers will be mandatory. The move, said Shenoy, will prevent the "mad intraday options" buy positions facilitated by some brokers.

"Currently, intraday, the exchanges just block the broker's collateral for options bought, which therefore allows one person to effectively buy and sell intraday using another person's collateral. This must be a few brokers that provided this facility to allow mad intraday options buy positions. From February 2025, this won't happen," Shenoy said.

SEBI will remove calendar spread treatment on the expiry day of contracts, aiming to minimise basis risk on these high-volume trading days. This measure will also be effective from Feb. 2025.

Calendar spread allows a trader to sell an option on expiry day and buy futures or options for a later expiry. "This provides a calendar spread benefit that reduces margins by as much as 50%," Shenoy explained, adding that this lower margin allows a trader with any amount of margin to take twice the position as he would without the calendar spread benefit.

"SEBI doesn't like it. So they've removed the spread benefit only for expiry day," the Capitalmind CEO said. "This is not a bad idea, as there was a large amount of retail scalping happening on daily options expiries, especially selling straddles," he pointed out.

Under this regulatory measure, stock exchanges will be required to randomly take at least four position snapshots during the day to ensure compliance with permissible limits. This will be implemented in equity index derivatives from April 2025 to combat speculative trading.

At a broker level, one has to be less than some percentage of all open interest, Shenoy pointed out. This is monitored at the end of the day.

"Obviously, mad trading happens on expiry day for options and the OI will expand considerably due to massive participation, but all of it is intraday. To, therefore, ensure that one broker doesn't breach the limits, SEBI says exchanges have to monitor the limits intraday," the analyst explained.

This means that if a broker hits the permissible limits, the trader cannot undertake fresh trades and can only close existing ones until the broker-level OI is less than the limits allowed.

"Good, for systemic risk. Impact-wise, I don't know how bad this is. But if SEBI had a full note on it, it must be serious," Shenoy further said.

From Nov. 20 onwards, the minimum contract size for index derivatives will be raised to Rs 15 lakh, the SEBI circular stated. This will mark an increase as compared to the current lot size of around Rs 6.5 lakh for Nifty at present, Shenoy pointed out.

According to him, this is a "good" move. "Higher lot sizes are just a function of the GDP growing. In the US, the median contract size in the top 100 is about $17,000, which is about Rs 14 lakh."

The exchanges will only be allowed to offer weekly expiry derivatives contracts on one benchmark index, with effect from Nov. 20. The move is aimed at reducing speculative trading and volatility on expiry days.

This will cut down the weekly expiry days to two from five at present. Currently, there is "too much drama," with expiries every day alternating between exchanges, Shenoy said.

"While I don't think the volumes will reduce (people will just move to the weekly that they can instead) but it's better than having the madness daily," he wrote on X.

SEBI decided to increase the tail risk coverage by levying an additional extreme loss margin of 2% for short options contracts. This regulation will also come into effect from Nov. 20.

According to Shenoy, this will just ensure that the "short-straddle kind of plays on expiry day become more expensive." Short straddles, even those with stop losses, have an extreme risk, he said.

"Enough people play those, and when stops hit (Nifty moves sharply in one direction), the price of the option can go bonkers. We have seen a Rs 2 option hit Rs 800 in the past, which might be higher than the margin placed on the short option trade. So, a higher ELM will provide some buffer, even if 2% is hardly enough," Shenoy added.

Notably, the measures announced by SEBI are based on the recommendations made by its expert working committee and secondary market advisory committee to tighten regulations for retail individual derivative traders. In a recent study, the market watchdog found that nine out of 10 traders in the F&O segment faced losses in the three-year period ending March 2024.