- Recently, the Securities and Exchange Board of India (SEBI) announced tightening of Futures and Options (F&O) rules to curb excessive speculation in the derivatives market, protect retail investors, and ensure market stability.
- Key Measures Announced by SEBI –
- Increase in Contract Size for Equity Derivatives: The new contract size has been fixed at minimum ₹15 lakh per contract whereas the previous contract size was between ₹5 lakh and ₹10 lakh.
- Rationalization of Weekly Index Derivatives: Each exchange can offer weekly expiry contracts on only one benchmark index. This is to address excessive trading and speculation on expiry days, reducing systemic risk.
- Upfront Collection of Options Premium: Options buyers must pay the entire premium amount upfront. This will prevent undue leverage and ensures that positions are backed by sufficient funds.
- Intraday Monitoring of Position Limits: Exchanges to monitor position limits intra-day with at least four snapshots during trading hours.
- Increase in Tail Risk Coverage: Additional Extreme Loss Margin (ELM) of 2% on short options contracts on the day of expiry. This is to cover the risk of significant losses due to rare events.
- Removal of Calendar Spread Benefit on Expiry Day: Offset benefits from calendar spreads will not be available on the expiry day for contracts expiring that day.
- Reasons Behind SEBI’s Decision –
- Surge in F&O Trading Volumes: Excessive participation of retail investors in high-risk derivative products without adequate understanding. Eg: F&O turnover increased more than four times from ₹2,189 lakh crore in May 2022 to ₹9,504 lakh crore in May 2024.
- Systemic Risk to Economic Growth: SEBI and the Reserve Bank of India (RBI) expressed concerns over the potential impact on capital formation and the economy due to speculative trading.
- Protection of Retail Investors: A significant number of retail investors are incurring losses in F&O trading.
- Alignment with Government Policy: In Budget 2024-25, increase in Securities Transaction Tax (STT) on F&O trades.
| Futures Contract: An agreement to buy or sell an asset at a predetermined price at a specified time in the future. Options Contract: Gives the buyer the right, but not the obligation, to buy or sell an asset at a specified price before a certain date. Derivatives: Financial instruments deriving their value from an underlying asset. Extreme Loss Margin (ELM): Additional margin collected to cover the risk of extreme market movements. Securities Transaction Tax (STT): A tax levied on every purchase or sale of securities listed on Indian stock exchanges. |
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