SEBI’s New Measures to Protect Investors in Futures and Options Trade
In New Delhi, India, the Securities and Exchange Board of India (SEBI) has announced a series of measures to protect investors in the Futures and Options (F&O) market. These measures aim to prevent systemic shocks and ensure a gradual tightening of the market, according to a report by investment banking company Jefferies.
Key Measures Announced
On October 1, SEBI introduced six measures to strengthen the derivatives framework. These include:
- Raising the minimum contract size from Rs 5 lakh to Rs 15 lakh.
- Upfront collection of options premiums.
- Removing calendar spread benefits on expiry day.
- Increasing the contract size for index derivatives.
- Intraday monitoring of position limits.
- Rationalizing weekly index derivatives to one benchmark per exchange.
These measures will be implemented in phases from November 20, 2024, to April 1, 2025. However, the upfront collection of premiums and removal of calendar spreads will start on February 1, 2025, and intraday monitoring of position limits will begin on April 1, 2025.
Impact on Market Participants
Jefferies’ report highlights that the reduction in weekly contracts, additional margin, and higher lot size will significantly impact retail investors. Currently, weekly premiums account for about 65% of industry premiums, and changes could reduce this by 20-25%.
Institutional players, such as High-Frequency Traders (HFTs) and Algorithmic Traders (Algos), will also be affected by the reduction in expiry dates from five days to two days per week. This change is expected to alter trading behaviors.
Retail-focused discount brokers and exchanges may face challenges due to reduced system premiums. However, traditional brokers might experience less impact as lower margin hikes benefit their High Net-Worth Individual (HNI) clients, who often engage in option selling.
Clearing members like Nuvama Asset Services, which serve institutional players, are expected to see minimal impact. Other market participants, such as Asset Management Companies (AMCs), wealth managers, and depositories, are likely to remain unaffected.
Doubts Revealed
SEBI -: SEBI stands for the Securities and Exchange Board of India. It is a government agency responsible for regulating the securities market in India, ensuring that it operates fairly and transparently.
Futures and Options -: Futures and Options are types of financial contracts used in trading. Futures are agreements to buy or sell something at a future date for a set price, while Options give the right, but not the obligation, to buy or sell at a set price before a certain date.
Systemic shocks -: Systemic shocks are sudden events that can cause major disruptions in the financial system, affecting many people and businesses. SEBI’s measures aim to prevent these shocks to keep the market stable.
Minimum contract size -: Minimum contract size refers to the smallest amount of a financial product that can be traded. By raising this, SEBI aims to ensure that only serious investors participate, reducing risks.
Upfront collection of options premiums -: This means collecting the payment for an options contract at the start of the trade. It helps ensure that investors have enough funds to cover their trades, reducing the risk of defaults.
Retail investors -: Retail investors are individual people who buy and sell securities for their personal accounts, not for a company or organization.
Discount brokers -: Discount brokers are companies that offer trading services at a lower cost, usually with fewer services than traditional brokers. They are popular among retail investors for their cost-effectiveness.
Traditional brokers -: Traditional brokers provide a wide range of services, including investment advice and research, and usually charge higher fees than discount brokers.
Institutional players -: Institutional players are large organizations, like banks or mutual funds, that invest large amounts of money in the market. They often have more resources and expertise than individual investors.
