SEBI F&O Framework: What The Markets Regulator Announced And What Does It Mean

The market regulator, Securities and Exchange Board of India, on Tuesday issued a circular outlining the curbs for the futures and options trading segment. In an attempt to protect small investors and household wealth from hefty losses, the regulator has brought key regulations, including the limitation of weekly option expiries to one per exchange, along with a mandate requiring buyers to pay premiums upfront.

The exchanges will also be required to monitor intraday positions at least four times daily and impose penalties for intraday limit breaches just like the end-of-day penalties.

Additionally, the minimum contract value for index derivatives will be raised to Rs. 15 lakhs, reflecting an effort to increase trading standards and efficiency.

The circular also introduces a significant change by eliminating calendar spread benefits on expiry day for expiring contracts.

Let's dive deeper into the curbs brought in by SEBI.

SEBI will now let the exchanges offer weekly index options for only one main index instead of several. This will help reduce too much trading on expiry days and make the market more stable.

Additionally, SEBI will require traders to set aside an extra 2% of their money as a safety measure for short options contracts on expiry days. This new rule will apply to both existing and new contracts. These changes aim to lower risks and protect investors better.

The regulator came up with this measure because traders often buy and sell these options quickly when prices are low, which can cause big swings in the market and hurt investors.

By requiring Trading Members and Clearing Members to collect the premium upfront, this policy prevents excessive intraday leverage and ensures that buyers only engage in trades that are covered by their collateral.

The impact of this move is significant; it helps to limit the risk of clients taking on more positions than they can afford, thereby reducing potential losses.

The regulator has brought in the removal of special treatment for calendar spreads on expiry day for contracts. This means traders can no longer use future contracts to offset losses on contracts expiring that day.

The goal is to reduce risk on expiry day, which can be highly volatile and have significant price swings. By separating the loss calculations for expiring contracts, the new rules promote safer trading practices.

Currently, exchanges only check position limits at the end of the day, but to prevent traders from exceeding permissible limits during busy trading hours, they will now monitor positions intraday.

This will involve taking at least four snapshots of traders' positions at random times throughout the day. This new rule will be in effect starting April 1, 2025.

Secondly, the previous limit for contract value was between Rs. 5 lakh and Rs. 10 lakh, which hasn’t been updated since 2015. Given that market values have tripled since then, the new minimum contract value will be set at Rs. 15 lakhs. This adjustment will help ensure that contracts are more suitable and appropriate for traders, considering the increased risks in the derivatives market.

This change will apply to all new index derivatives contracts introduced after Nov. 20.