Market regulator SEBI has introduced several measures to improve the equity index derivatives framework, focusing on protecting investors and stabilising the market. These changes will be implemented in stages, with most taking effect between November 2024 and April 2025.
1. Upfront Collection of Premiums: Option buyers must now pay the full premium amount upfront.
Intent: The aim is to reduce undue risk-taking by option buyers and ensure more responsible trading.
Earlier: Previously, option buyers could take positions without paying the full premium upfront, which created the risk of over-leveraging and potential defaults during intraday trading.
2. No Calendar Spread Benefit on Expiry Day: On the expiry day of a contract, the benefit of offsetting positions across different expiry dates (calendar spread) will no longer be available.
Impact: Investors cannot benefit from offsetting positions across different expiry dates on the day of expiry, which reduces the risk of market instability due to sudden price movements.
Earlier: Before this, traders could offset positions (spread them out) across different expiry dates even on expiry day, which could amplify market risk due to fluctuating prices on that particular day.
3. Intraday Position Monitoring: Stock exchanges will now monitor position limits (the maximum number of contracts an investor can hold) throughout the trading day, rather than just at the end of the day.
Impact: Intraday limits ensure that traders stay within their allowed positions throughout the trading day, preventing excessive risk-taking during high-volume periods like expiry days.
Earlier: Position limits were only monitored at the end of the day, allowing traders to exceed their limits temporarily during the trading day without facing consequences.
4. Larger Contract Sizes: The minimum value of index derivative contracts has been increased to Rs. 15 lakhs, reflecting the market's growth since the previous limit was set in 2015.
Impact: The increase in minimum contract sizes to Rs. 15-20 lakhs means smaller investors may find it more difficult to participate, focussing the market on more sophisticated or high-net-worth investors.
Earlier: The contract sizes were smaller (Rs. 5-10 lakhs), which allowed more investors to participate, but it also increased the chances of unsuitable participants taking on more risk than they could handle.
5. Fewer Weekly Expiry Options: Exchanges will now be allowed to offer weekly expiry contracts only on one benchmark index.
Impact: By limiting each exchange to offering weekly expiry contracts on only one benchmark index, the measure reduces speculative trading, which often leads to market volatility, particularly on expiry days.
Earlier: Multiple weekly contracts could be offered on several indices, leading to hyperactive speculative trading on expiry days, which caused sharp market movements.
6. Increased Risk Coverage on Expiry Day: An additional margin (2% more) will be required for short options positions (where investors expect prices to fall) on the expiry day.
Impact: The additional 2% margin on short options positions on expiry day helps cover unexpected losses due to heightened volatility, especially from speculative trading.
Earlier: There was no additional margin requirement on expiry day, leaving markets vulnerable to large losses from short positions in options contracts.
You can access the SEBI circular here
