SEBI cracks whip on speculative traders: 6 major F&O changes decoded

Capital market regulator Securities and Exchange Board of India (SEBI) has introduced a host of measures aimed at curbing speculative trading and gambling in derivatives—futures and options (F&O)—to protect retail investors participating in the segment. Derivatives are a popular market segment where contract value is derived from an underlying asset, such as Nifty50.

The various steps announced by the regulator include a stricter framework for equity index derivatives (futures and options contracts), which features a larger minimum contract size, a mandatory advance collection of option premiums, intraday monitoring of open positions, and the rationalisation of weekly index derivatives.
Most of the changes are scheduled to come into force on November 20.

In this special report, Zee Business research has decoded six important measures introduced by SEBI in a circular issued this week, and whether they may impact market participants on Dalal Street:

Will SEBI's measures impact the market?

• The measures are neutral for the market and hence may not lead to a decline.
• They can impact F&O volumes.
• The measures are expected to reduce speculative trading and gambling in the retail segment.
• They are likely to limit the profitability of big funds and traders.
• An expected decrease in income from algo, machine, and prop trading, as well as arbitraging, is anticipated.
• There is a possibility that brokers may lose some business. 

Here’s a summary of six important changes in the F&O market as announced by SEBI:

1. Weekly expiry to be allowed in only one index

According to the changes, a weekly contract will only be allowed in the largest index; i.e., only Sensex on BSE and Nifty50 on NSE will have weekly derivatives. All other indices on the exchanges will have only monthly contracts in their derivatives segments. This change will take effect on November 20.

2. Bigger contract size

An important change announced by the market regulator is an increase in the contract size to ₹15 lakh. In the future, the contract value will be maintained in the ₹15 lakh-₹20 lakh range during reviews. This change will also come into force on November 20.

Analysts say that the larger lot size will result in a higher margin, although the increase in size is smaller than many expected. A section of the market had anticipated the current increase to be to ₹15 lakh-₹20 lakh and then to ₹20 lakh-₹30 lakh after six months. This measure may worsen the losses incurred by those trading out of habit.

3. Calendar spread benefit is history

Traders will no longer be able to take advantage of calendar spreads on the F&O expiry day. This measure will come into effect on February 1. The move is set to increase the required margin and make rollovers and hedging more expensive, which will be negative for arbitrage traders.

4. Mandatory upfront payment of option premium

Another key change introduced by SEBI is a mandatory upfront payment of the premium while purchasing an option, set to take effect on February 1. However, there will be an option to pay the advance premium by the end of the first day. This change is likely to make options trading more expensive for retail investors, although it may reduce instances of reckless buying in the segment. Some analysts believe it will also hurt liquidity in the options market.

5. Higher margin on expiry day

The market regulator has announced a higher premium on the day of expiry due to an extreme loss margin (ELM) of 2 per cent applicable on a short option contract, effective November 20. Analysts say the ELM is smaller than the widely expected 5 per cent.

This move will discourage holding on to an open position until the last day of the contract, prompting traders to either roll over or close their positions earlier. It will affect several types of participants, including algo traders, prop traders, arbitragers, and retail investors.

6. Intraday monitoring of positions

The market regulator has mandated stock exchanges and clearing corporations to monitor open positions regularly at different intervals during the trading session, effective April 1. This move will require all types of participants to pay higher margins.

What Jefferies says 

According to Jefferies, the SEBI circular was broadly in line with its discussion paper and is set to impact 35 per cent of industry premiums. The phased implementation over the next 3-6 months is expected to drive a calibrated tightening of the market, according to the foreign brokerage, which also highlighted that the lower ELM of 2 per cent is among the key deviations in the circular compared to SEBI's earlier proposal.

Discount brokers will likely be impacted the most by the changes, followed by exchanges, according to Jefferies. 

Catch all the latest stock market updates here. For all other news stories in buzzing categories like technology, automobiles and personal finance, and much more, visit Zeebiz.com.