SEBI Clarifies Proposed F&O Guideline Only To Curb Expiry Day Frenzy
Narayan said that 90% of trading in some contracts of futures and options happen during the last hours of trading.
Days after market regulator Securities and Exchange Board of India issued guidelines for proposed new measures—in a move to increase investor protection and market stability in the booming derivatives market—Ananth Narayan, a whole-time SEBI member, clarified that these guidelines are only to curb the frenzy during expiry day.
"We only propose to specifically address the issue of hyperactive trading on expiry day options and reset derivative lot sizes to account for movement in the market over time," Narayan said while speaking at the Annual Capital Markets Conference by the Federation of Indian Chambers of Commerce and Industry.
Explaining the reason behind these guidelines, Narayan said that 90% of trading in some contracts of futures and options happens during the last hours of trading. This is the time when, if a speculator takes a small capital outlay, they can get a large profit if the markets move only a few points, he said. This low premium has attracted many traders.
"Trading close to expiry can resemble a slot machine," hoping that it will "hit a jack pot," he said. This makes it important for the guidelines to be implemented, as a big event just before the expiry could have a major impact on traders.
"As regulators, we are conscious that we must not throw the baby out with bath water," he said. However, when it comes to the frenzy in trading options near the expiry day, "it is difficult to see the baby," he added.
SEBI Proposal
In the July 30 consultation paper, SEBI has proposed to limit the number of expiries, increase margins around expiry day, remove the benefits of calendar spreads on expiry day, monitor intraday positions and rationalise option strikes. These are centred around controlling the frenzy in the last hour of expiry and reducing the systematic risks arising from it, according to Narayan.
On the other hand, the proposal to increase lot size "is simply to reset them," considering the momentum of the market since they were first set up. He added that this will have a minimal impact on option trading due to the low premium.
The proposal stating that brokers must collect option premiums from investors is for basic hygiene, he said.
