The Securities & Exchange Board of India (SEBI) has announced a new set of regulations, in a bid to enhance investor safety and foster the stability of the market within the equity derivatives segment. Here’s a look at the most important alterations:
- Increase in Minimum Trading Amount:
The overall minimum trading amount for equity derivatives has been upwardly revised from ₹5 lakh to ₹15 lakh.
This change seeks to restrict the participation in the market to only those players who possess considerable risk management abilities.
- Rationalized the Weekly Expiries:
The SEBI has taken decided to cut down the existing number of weekly expiries for derivative contracts.
Index derivatives will have only one weekly expiry allowed i.e. for the entire exchange.
This is aimed primarily to curb excessive speculation and volatility in the markets.
- Intraday Monitoring of Position Limits:
The exchanges will now also intraday monitor position limits for equity index derivates.
This will prevent the participants of the markets to breach the allowed position limits during working hours and promote better market discipline.
- Upfront Collection of Options Premium:
Brokers must demand the full premium from clients purchasing options, in its entirety and without any installments.
This will limit excess borrowing by the buyers who easily hedging their positions and mitigates risks that could arise from movement on prices within a trading session.
- Withdrawal of Calendar Spread Margin Benefit on the Day of Expiry:
There shall be no margin benefit for calendar spread positions on the expiry day.
In other words, positions which involve contracts that have the same expiry and are opened will not be able to enjoy the margin offsets which are used usually, thus lessening the risk availed in the market.
- Introduction of Additional Margins for Short Options Contracts:
Another requirement constraints for options contracts will include an additional margin of 2% on the due date for all short option positions.
This is intended to mitigate the high implicit leverage inherent in short options positions, which is reversed when the position of the premium nears its effective date.
- Increase in Margin Near Contract Expiry.
Increased margin requirements of 3% will be required on the day before expiry, and a 5% increase on margin requirements on the expiry day. This is a measure meant to cater for higher volatility and risks that arise closer to the expiration of the contract.
- Minimum Contract Size Revised:
An increase in minimum contract size for index derivatives will be proposed and implemented in two steps:
Phase 1: Minimum contract size will be fixed at no less than ₹15 lakh and not exceed ₹20 lakh.
Phase 2: After a duration of six (6) months, the minimum contract size shall be increased to a range of ₹20 lakh and not above ₹30 lakh.
- Rationalization of Option Strikes:
A new methodology for introducing strike prices has been established:
There will be a constant spacing of strike prices based on the current index price (within 4% of the price).
Further the 4% range has been crossed the spacing will further distance itself to cut down on the number of strikes at that range beyond the index price.
Summary
These measures are intended to align the equity derivatives market with international standards, improve market stability, and protect investors from excessive speculative activities. The new rules will come into effect from February 2025.