SEBI's new rules for F&O trading

Securities and Exchange Board of India (SEBI) has announced new measures to strengthen the framework for index derivatives trading in India. These changes aim to protect small investors and enhance market stability, especially amid rising concerns about speculative trading practices.

Key Changes in Derivative Trading

• Reduction of Weekly Expiries: The number of weekly expiries for index derivative contracts will be reduced to one per benchmark index per exchange. Currently, exchanges offer 18 weekly contracts each month. This change aims to curb speculative trading and reduce risks from uncovered options.
• Increased Contract Sizes: The minimum trading amount for derivatives will rise from Rs 5-10 lakh to Rs 15 lakh. This increase is intended to ensure that investors are taking on appropriate risks in the derivatives market. In the future, the contract value may further adjust to between Rs 15 lakh and Rs 20 lakh.
• Higher Margin Requirements: To address volatility on expiry days, Sebi will introduce an additional extreme loss margin (ELM) of 2% for all open short options on expiry day. This measure is designed to protect investors from severe market fluctuations during busy trading sessions.
• Upfront Collection of Premiums: From February 1, 2025, brokers must collect option premiums upfront. This shift discourages excessive intraday leverage, ensuring that investors have sufficient collateral to cover their positions.
• Removal of Calendar Spread Benefits: The practice of calendar spreads—offsetting positions across different expiries—will be eliminated for contracts expiring on the same day. This aims to reduce speculative trading, particularly on expiry days.
• Intraday Monitoring of Position Limits: Effective April 1, 2025, stock exchanges will begin monitoring position limits for equity index derivatives multiple times throughout the trading day. This change helps ensure that traders do not exceed permissible limits without detection.

Impact on Retail Investors

• Curbing Speculation: The increase in contract sizes is expected to deter speculative trading, especially among smaller retail investors who may not have the financial capacity to manage larger losses.
• Lower Participation in Options Trading: The reduction in weekly expiries and the elimination of calendar spread benefits may lead to decreased retail participation in options trading. Analysts believe this could stabilize the market by reducing high-frequency trading and speculation.
• Gradual Implementation for Stability: The phased rollout of these measures allows the market to adjust gradually, preventing sudden shocks and fostering a healthier trading environment.
• Reassessing Trading Strategies: Retail investors will need to rethink their trading strategies, particularly regarding rollover timing and margin management in light of these new rules.