SEBI vide circular dated October 1, 2024 has issued regulations, targeted at stock exchanges and clearing corporations, focus on enhancing investor protection and bolstering market stability. With increased retail participation and speculative trading in index derivatives, SEBI has proactively introduced steps to maintain the integrity of the derivatives market.
The Role of the Derivatives Market
The equity derivatives market serves critical functions, including price discovery, liquidity enhancement, and risk management for investors. However, recent market trends—particularly the heightened speculative activity on expiry days and the proliferation of short-tenure index options—have introduced new risks. SEBI recognizes that the integrity of the securities market depends on effective risk management, surveillance, and product development by stock exchanges and clearing corporations. Hence, the new measures aim to address these concerns.
Key Measures for Strengthening the Framework
- Upfront Collection of Option Premiums
One of the most significant changes is the mandatory upfront collection of option premiums from buyers. SEBI noted that options carry high leverage and can experience rapid price movements. To curb excessive intraday leverage and ensure clients have sufficient collateral, trading members (TMs) and clearing members (CMs) must collect the net option premium at the client level. This change will take effect from February 1, 2025. - Removal of Calendar Spread Treatment on Expiry Day
On expiry days, contracts expiring on that day can exhibit significant basis risk—where their value deviates from future contracts. To mitigate this risk, SEBI has decided to remove the benefit of calendar spread on expiry day for such contracts. This aligns with SEBI’s cross-margin framework for correlated indices. The new rule will be effective from February 1, 2025. - Intraday Monitoring of Position Limits
While position limits for index derivatives are currently monitored at the end of the trading day, SEBI has introduced intraday monitoring of position limits to prevent breaches. Stock exchanges will now conduct at least four random snapshots during the trading day to ensure compliance. This measure aims to prevent undetected position creation beyond permissible limits and will be enforced starting April 1, 2025. - Recalibration of Contract Size for Index Derivatives
The contract sizes for index futures and options have remained unchanged since 2015. To reflect the market’s growth and increased prices, SEBI has raised the minimum contract value for index derivatives to Rs. 15 lakhs (from the previous range of Rs. 5-10 lakhs). This measure will ensure that derivatives maintain an appropriate risk profile for participants and will come into effect for new contracts introduced after November 20, 2024. - Rationalization of Weekly Index Derivatives
SEBI has also addressed concerns surrounding speculative trading on expiry days for short-tenure index derivatives. Moving forward, each stock exchange can offer weekly expiring derivatives contracts for only one benchmark index. This move aims to reduce speculative behavior and increase market stability, taking effect on November 20, 2024. - Increase in Tail Risk Coverage on Expiry Day
Given the volatility on expiry days, SEBI will impose an additional 2% Extreme Loss Margin (ELM) for all short options contracts on the day of expiry. This aims to cover tail risks, especially for speculative options trading. The measure will be applicable from November 20, 2024.
