To protect retail investors from loss, market regulator Securities Exchange Board of India i.e. SEBI issued a new circular on Tuesday (October 1) regarding Futures and Options (FO). According to the circular, the contract size for index derivatives will be increased from Rs 5-10 lakh to Rs 15 lakh. At the same time, every exchange will have weekly expiry on only one day. SEBI will implement a total of six new rules including contract size and weekly expiry. SEBI has created a new framework i.e. new rules to regulate the high-risk world of FO. The new rules regarding FO will be implemented in several phases from November 20. These rules are based on the recommendations of an Expert Working Group (EWG) to strengthen the equity index derivatives framework. SEBI’s 6 rules to regulate FO trading in India 1. Upfront collection of option premium from option buyers Upfront collection of option premium will be done from option buyers. This rule will come into effect from February 1, 2025. SEBI said that the upfront margin collection requirements will also include net options premium at the client level. 2. Increased contract size for index derivatives SEBI has increased the minimum contract size for index futures and options from Rs 5-10 lakh to Rs 15 lakh. Apart from this, the lot size will be fixed in such a way that the contract value of the derivative on the day of review can be between Rs 15 lakh and Rs 20 lakh. This rule will be effective from November 20, 2024. 3. Limiting weekly index expiry to one per exchange To address the problem of excessive trading in index derivatives on the expiry day, it has been decided to rationalize the index derivative products offered by exchanges expiring on a weekly basis. From November 20, 2024, weekly derivative contracts will be available on only one benchmark index for each exchange. This means that BSE and NSE will have to choose one index derivative product each for weekly expiry contracts. 4. Intraday monitoring of position limits will be done SEBI directed the stock exchanges to monitor the existing position limits for equity index derivatives. Because, there is a risk of positions exceeding the permissible limits due to large volume of positions on the expiry day. This rule will be applied to equity index derivative contracts from 1 April 2025. 5. Increase in tail risk coverage on option expiry day In view of the increasing speculative activity around option positions and the risks associated with it, SEBI has decided to increase the tail risk coverage by imposing an additional ELM (Extreme Loss Margin) of 2% for short option contracts. This will apply to all open short options at the beginning of the day as well as short option contracts initiated on that day, which are to expire on the same day. For example, if the weekly expiry on the index contract is on the 7th of the month and other weekly/monthly expiries on the index are on 14th, 21st and 28th, then an additional ELM of 2% will be charged on the 7th for all option contracts expiring on the 7th. This rule will also be effective from November 20, 2024. 6) Calendar spread treatment will be removed on the day of expiry SEBI has decided to remove the calendar spread treatment on the day of expiry. This rule will come into effect from February 1, 2025. Why did SEBI implement new rules? The derivatives market is very risky. SEBI is currently concerned that the share of retail investors is increasing in it. SEBI believes that investors are coming into it because they expect to get very high profits from here. However, most of such investors do not understand the derivatives market. The objective behind increasing the limits by SEBI is that only such investors should enter the derivatives market who think seriously about the market. 9 out of 10 traders lose in FO: SEBI
SEBI had released an analysis report a week ago, in which it said that 9 out of 10 individual traders have suffered losses in the equity futures and options (FO) segment. In the three-year time period between FY22 and FY24, 93% of the more than 1 crore FO traders have suffered a total loss of Rs 1.8 lakh crore. That is, out of about 93 lakh traders, each trader has suffered an average loss of about Rs 2 lakh. Read the full SEBI report… What is Futures and Options? Futures and Options (FO) are a type of financial instrument that allows the investor to take large positions in stocks, commodities, currencies with less capital. Futures and options are a type of derivative contract, which have a fixed period. Within this time frame, their prices change according to the price of the stock. Futures and options of every stock are available in one lot size.
