The Securities and Exchange Board of India (SEBI) suggested several measures to reduce speculative trading, particularly in index derivatives on Tuesday (30 July, 2024), which often resemble gambling. These include limiting multiple option contract expiries and increasing the size of options contracts.
SEBI has frequently raised concerns about the risks of retail investors engaging in speculative trading with derivatives. The regulator’s new proposals address these issues, considering the rise in retail participation, the availability of short-term index options contracts, and the significant increase in speculative trading on expiry days.
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Following recommendations from an expert panel, SEBI has proposed some major rules for stock exchanges and clearing corporations which aims to boost investor protection, ensure market stability in derivatives trading, and support ongoing capital growth.
SEBI’s New Measures to Make Trading Safer and More Stable
SEBI has proposed several changes to make trading in index derivatives safer and more stable. Here’s a simple breakdown of what they are suggesting:
Limiting Strike Prices for Options
Current Practice: Nifty options have about 70 strike prices, while Bank Nifty has around 90. These cover roughly 7-8% of index movement in a day.
Proposed Change: Introduce no more than 50 strike prices when a contract starts. Keep strike prices uniform near the current index price and adjust up to 8% if necessary.
Adjusting Weekly Expiry of Index Products
Current Practice: Different index derivatives expire on different days, leading to one expiry almost every day.
Proposed Change: Allow only one benchmark index per exchange to expire weekly.
Collecting Options Premium Upfront
Current Practice: Futures traders must pay a margin upfront, but options buyers don’t have to pay the premium immediately.
Proposed Change: Require options buyers to pay the premium upfront.
Monitoring Trading Limits Throughout the Day
Current Practice: Trading limits are checked at the end of each day.
Proposed Change: Check trading limits multiple times during the day to ensure compliance.
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Increasing Minimum Contract Size
Current Practice: The minimum contract size for derivatives is between Rs 5 – Rs 10 lakh.
Proposed Change: Increase the minimum contract size to Rs 15 – Rs 20 lakh initially, and then to Rs 20 – Rs 30 lakh after six months.
Removing Calendar Spread Benefit on Expiry Day
Current Practice: Traders get a margin benefit if they hold two options with different expiry dates, even on the expiry day.
Proposed Change: Eliminate this margin benefit for contracts expiring on the same day.
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Increasing Margins Near Contract Expiry
Current Practice: No additional margin is required in the last two days before expiry.
Proposed Change: Introduce an extra 3% margin two days before expiry and increase it to 5% on the last day.
These measures aim to reduce risky speculative trading, protect investors, and ensure the market remains stable and secure.
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