Sebi clamps down on derivatives surge, ups ticket size three-fold to Rs 15 lakh
MUMBAI: Market watchdog Sebi has finally announced a volley of measures to strengthen the index derivative framework by making it less lucrative for retail investors who have been heavily losing in this front. It has increased the minimum lot size or trading amount three-fold and also reduced the number of expiries per exchange to a weekly basis.
The new measures will be effective from November 20 and the regulator has asked each exchange to provide only derivatives contracts for one of its benchmark indices on a weekly expiry model.
In a circular issued a day after a marathon board meeting, Sebi on Tuesday said the minimum trading amount for derivatives will be Rs 15 lakh, up from the present Rs 5-10 lakh, which will later be increased to Rs 20 lakh.
“The lot size shall be fixed in such a manner that the contract value of the derivative on the day of review is within Rs 15 lakh to Rs 20 lakh," the circular said, adding the new norms for derivative trading will be rolled out in phases, starting November 20.
Index derivative contracts with weekly expiries, increase in contract sizes and increase in tail risk coverage by levying additional ELM (extreme loss margin) will be launched from that day.
From February 1, 2025, there will be upfront collection of option premium from buyers and removal of calendar spread treatment on the expiry day, while from April 1, 2025, there will be intraday monitoring of position limits.
Last week, Sebi, based on its own study, said each retail investor who dabbled in derivatives trade lost on average Rs 2 lakh between FY22 and FY24 and the system wide loss during this period is a whopping Rs 1.8 trillion. In January, the regulator said its study had found that the retail investor’s F&O play rose from 2 percent in FY18 to over 42 percent by FY23 and most of them lost money heavily.
Following these findings, Sebi had in late June committed an internal working group to suggest measures to curb the retail play in the F&O market and today’s announcements are based on their suggestions.
Ending daily expiries, the regulator said trading in index options on the expiry day, when option premium are low, is largely speculative. Stock exchanges offer contracts that expiry every day. Sebi’s consultation paper has noted hyperactive trading in index options on expiry day, with average position holding periods in minutes, followed by higher volatility through the day and at expiry.
"All this has implications for investor protection and market stability, with no discernible benefit towards sustained capital formation," Sebi said, adding therefore exchanges have been mandated to have only one index derivative contracts per week.
Increasing the contract size three fold, Sebi said the current contract sizes were set in 2015 and given how the market has changed and grown--with market value and prices having gone up 3x since—it’s time for a review in the interest of maintaining market stability and ensuring that participants are only taking appropriate risks.
"Given the inherent leverage and higher risk in derivatives, this recalibration in minimum contract size (from Rs 5 lakh to Rs 10-15 lakh from November 20 and to Rs 20 lakh later on), in tune with the growth of the market, would ensure that an inbuilt suitability and appropriateness criteria for participants is maintained as intended," Sebi said
Mandating higher margin for derivatives play, it has asked market makers to collect the ELM or extreme loss margin from investors upfront so as to cover extreme market events or tail risks. Therefore going forward, investors will have to pay an additional 2 percent ELM because there is excessive speculative activity on expiry days.
The higher margin, Sebi said, will be applicable for all open short options at the start of the day, as well as on short option contracts initiated during the day that are due for expiry on that day.
