SEBI Introduces New Rules to Protect Investors in Futures and Options Trading
The Securities and Exchange Board of India (SEBI) has announced six new measures to protect retail investors who are facing significant losses in equity index derivatives trading. These measures include:
- Raising the minimum contract size to Rs 15 lakhs from the current Rs 5-10 lakhs.
- Reducing the number of expiries of derivatives contracts to one per exchange per week.
- Mandating the upfront collection of options premiums from buyers by Trading Members (TM) or Clearing Members (CM) starting February 2025.
- Introducing an additional margin requirement of 2% for short options contracts on the day of options expiry.
These changes are based on recommendations from an Expert Working Group (EWG) and consultations with the Secondary Market Advisory Committee (SMAC) of SEBI. The new rules will be implemented in phases starting November 20.
A recent SEBI study revealed that 93% of individual traders in the equity futures and options (F&O) segment incur significant losses, with aggregate losses exceeding Rs 1.8 lakh crore over three years. Despite these losses, more than 75% of traders continue to trade in F&O.
Futures and Options (F&O) are financial derivatives that allow traders to speculate on asset price movements without owning the asset itself. The underlying assets can include stocks, bonds, commodities, currencies, indices, exchange rates, or interest rates.
Doubts Revealed
SEBI -: SEBI stands for the Securities and Exchange Board of India. It is a government organization that regulates the stock market to protect investors and ensure fair trading.
retail investors -: Retail investors are regular people like you and me who buy and sell stocks or other financial products, not big companies or professional traders.
equity index derivatives -: Equity index derivatives are financial products that derive their value from a stock market index, like the Nifty 50 or Sensex. They are used for trading and investing.
minimum contract size -: Minimum contract size is the smallest amount of money you need to trade a particular financial product. SEBI has set this at Rs 15 lakhs for certain trades.
expiries per week -: Expiries per week refer to the number of times a financial contract, like an option, can end or ‘expire’ in a week. SEBI is reducing this number to make trading safer.
upfront collection of options premiums -: Upfront collection of options premiums means that traders have to pay the cost of an options contract right away, rather than later. This helps in reducing risks.
individual traders -: Individual traders are people who trade stocks or other financial products on their own, not as part of a company or organization.
significant losses -: Significant losses mean losing a lot of money. The study showed that 93% of individual traders in this type of trading lose a lot of money.
phases -: Phases mean that the new rules will be introduced step by step, not all at once. This helps people get used to the changes.
