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Mumbai: Capital market regulator Securities and Exchange Board of India (Sebi), with a good intention to wean retail investors and the younger generation that is flocking to the country's stock markets in large numbers away from speculative and casino-like habits of futures and options (F&O) trading which are highly risky, has proposed seven stringent measures for F&O.
Concerned over statistics of youngsters risking huge losses in the high-risk-high-return casino of derivatives trading, Sebi today suggested seven measures to curb this speculative activity. This includes raising the minimum contract size in F&D to Rs 20 lakh and capping weekly options contracts.
Stating that 92.5 lakh retail traders and proprietary firms suffered trading losses of Rs 51,689 crore in FY24, the regulator issued a consultation paper on measures to strengthen the index derivatives framework to enhance investor protection and market stability.
Based on the recommendations of the Expert Committee for action, SEBI has proposed seven proposed actions to be taken by the stock exchanges and clearing corporations.
(1) Rationalisation of option strikes: Sebi has proposed to rationalise the existing strike price introduction mechanism. It says, the strike interval should be uniformly close to the prevailing index value (about four per cent of the current value) and should be increased in case the index moves beyond the prevailing value (about four per cent to eight per cent).
(2) Upfront Collection of Option Premium: In order to avoid any undue intra-day leverage to alienate clients and to discourage any market-wide practice of allowing positions beyond the collateral at the client level, it is proposed to make it desirable to make it mandatory for upfront collection of option premium from the buyer of the option.
(3) Elimination of Calendar Spread Benefit on Expiry Day: Taking into account the discrepancy in volumes witnessed on the expiry day as compared to other non-expiry days and the underlying basis and liquidity risks, margin benefit for calendar spread positions is eliminated on the same day. It will not be given for any contract position.
(iv) Intra-day monitoring of position limits: Position limits for index derivative contracts will be monitored by the clearing corporations-stock exchanges on an intra-day basis taking into account the evolving market structure, with suitable short-term corrections and guidelines. Full implementation will be subject to technology changes as required.
(5) Minimum Contract Size: The minimum value of derivative contract is proposed to be increased from the existing Rs 5 lakh-10 lakh to Rs 15 lakh-Rs 20 lakh in the first phase and from Rs 20 lakh to Rs 30 lakh in the second phase.
(6) Simplification of Weekly Options: Given that weekly contracts expire daily on all five trading days, the regulator has proposed that there should be a single weekly option contract based on a single benchmark index of the exchange.
(7) Increase in margin near contract expiry: In order to address the problem of high implied leverage in options contracts near expiry, Sebi has suggested increasing the Extreme Loss Margin (ELM) from three to five per cent to create a higher risk of anticipated downside for companies dealing in options.