In an effort to curb excessive speculation and protect retail investors in the derivatives market, the Securities and Exchange Board of India (SEBI) has proposed a series of significant changes to the framework governing Futures & Options (F&O) trading. These proposals are seen as a strategic move to address the risks posed by the increasing participation of retail investors in this highly volatile segment.
Key Proposals by SEBI
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Rationalization of Strike Prices: SEBI plans to limit the number of strike prices available for trading. Currently, indices like Nifty and Bank Nifty offer a wide range of options strikes, which contribute to speculative trading. The proposal aims to reduce the number of strikes to ensure more liquidity and reduce excessive speculation.
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Upfront Collection of Option Premiums: One of the major changes involves the upfront collection of premiums from option buyers. Currently, there is no requirement for upfront payments, which often leads to higher risk exposure for retail traders. This move is expected to bring more discipline to the market.
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Removal of Calendar Spread Benefit on Expiry Day: The calendar spread margin benefit, which reduces the margin requirement for traders holding F&O positions across different expiry dates, is proposed to be removed on the expiry day. This change could significantly impact the trading strategies of many market participants.
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Intraday Monitoring of Position Limits: SEBI proposes to monitor position limits on an intraday basis rather than at the end of the day. This would allow for more real-time risk management and reduce the likelihood of market manipulation.
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Increase in Minimum Contract Size: SEBI is also considering an increase in the minimum contract size for index derivatives. The proposal suggests a phased implementation where the minimum contract value would be increased to Rs 15-20 lakh initially, and later to Rs 20-30 lakh.
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Rationalization of Weekly Expiry Products: Currently, there is a weekly expiry for index derivatives, leading to a continuous cycle of contract expiries throughout the week. SEBI proposes to limit this to one expiry per week for a benchmark index per exchange, which could impact trading volumes significantly.
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Higher Margins Near Contract Expiry: Additional margins are proposed for the last two trading days of a contract's life to mitigate risks associated with the high volatility typically observed during these periods.
Impact on the Market
These proposals are expected to have a mixed impact on different market participants. Retail investors, who are a major driving force behind the current volume in index derivatives, may find these changes restrictive, especially those who rely on the current flexibility in F&O trading. On the other hand, the proposals aim to bring more stability and reduce the high-risk speculative behavior that has been prevalent in recent years.
Experts believe that while these changes might reduce the overall trading volumes, they could lead to a healthier market environment by curbing excessive speculation and protecting small investors from significant losses. However, there is also concern that these measures could drive some traders towards unregulated avenues like "dabba trading," which operates outside the formal market structure.
SEBI has invited public comments on these proposals, and their final implementation will likely depend on the feedback from market participants and other stakeholders.
In summary, SEBI's proposals mark a pivotal moment for the Indian derivatives market, potentially reshaping the landscape for both institutional and retail traders. As these changes take shape, it will be crucial to monitor how they impact market dynamics and investor behavior in the long term.
