SEBI announces strict measures for index derivatives to curb speculative trading

One of the key changes includes reducing derivatives expiries to a weekly basis, with each exchange allowed to offer contracts on only one benchmark index per week.

These reforms come in response to the speculative nature of trading on index derivatives, particularly on expiry days.

According to a Moneycontrol report, SEBI's new rules also raise the minimum trading amount for derivatives from the current Rs 5-10 lakhs to Rs 15 lakh, which may increase to Rs 20 lakh over time. As per SEBI, "the lot size shall be fixed in such a manner that the contract value of the derivative on the day of review is within Rs 15 lakh to Rs 20 lakh."

The new rules will be rolled out in phases beginning on November 20, 2024.

Weekly index derivative expiries, larger contract sizes, and additional extreme loss margin (ELM) requirements will be implemented as part of these changes.

Speculative trading on expiry day

SEBI noted that trading in index options on expiry days, when option premiums are lower, has become highly speculative. Contracts currently expire every day of the week, leading to hyperactive trading and increased volatility.

SEBI pointed out that such activities negatively impact investor protection and market stability without contributing to long-term capital formation.

As a result, SEBI has mandated that exchanges offer derivative contracts for only one index per week to mitigate excessive speculative trading.

Increase in contract size

SEBI has reviewed contract sizes, which were last updated in 2015, citing the growth of the market as a reason for the recalibration. "Given the inherent leverage and higher risk in derivatives," SEBI stated, "this recalibration in minimum contract size ensures suitability and appropriateness criteria for market participants."

Higher margin requirements

To curb speculative activity, SEBI has mandated an additional 2% ELM for all short options positions on expiry day. This margin applies to both existing positions at the start of the day and new positions initiated during the day.

Upfront premium collection

In a move to reduce intraday leverage, SEBI has mandated that brokers collect options premiums upfront from buyers. This measure ensures that end clients cannot take positions beyond their collateral, thereby discouraging excessive speculation.

End of calendar spread benefit

SEBI has also removed the calendar spread benefit for contracts expiring on the same day, noting the significant divergence in value between contracts expiring on the same day and those expiring later.

Intraday position monitoring

To address the risk of positions exceeding permissible limits during the day, SEBI has asked stock exchanges and clearing corporations to monitor index contract positions at least four times during the trading day, with flexibility to increase this frequency as needed.

These reforms are expected to bring more discipline to index derivatives trading and reduce speculative activity in India’s fast-growing derivatives market.