SEBI’s new F&O reforms: Key changes and their impact on retail traders
Moved by the concern of rising cases of retail traders gambling with household savings in the high-risk realm of derivative trading, the Securities and Exchange Board of India has proposed significant reforms to the F&O market i.e. SEBI’s latest F&O reforms. Seven such proposed measures that will go a long way in protecting investors and ensuring market stability were unveiled by SEBI on Tuesday. These come at a time when disturbing statistics revealed that 92.5 lakh retail traders and proprietorship firms suffered collective trading losses of Rs 51,689 crore in FY24.
The SEBI’s latest F&O reforms proposal for these changes has now been recommended in a consultation paper just released, in line with the recommendations made by an expert panel. These measures are aimed at strengthening the framework of index derivatives and reducing the risk associated with trading in derivatives. The key SEBI’s latest F&O reforms are regarding:
Rationalization of Options Strikes
SEBI’s Latest F&O Reforms introduce the strikes of options contracts. The new methodology has proposed that strike price intervals should be uniform near the prevailing index price (within 4 percent around the current price) and increase progressively as the strikes move further away from 4 percent to 8 percent. This change shall have to smoothen options pricing and improve transparency in the market.
Collection of Options Premium Advances
To avoid undue intraday leverage and to prevent practices that support positions beyond the collateral at the end-client level, SEBI has recommended upfront collection of options premiums from buyers. This will instill financial discipline and also reduce the risk of default.
Removal of Calendar Spread Benefit on Expiry Day
It has now been proposed to withdraw the margin benefit for calendar spread positions taken in contracts expiring on the same day since these volumes on expiry days are skewed in comparison with non-expiry days. This change would factor in the intrinsic basis and liquidity risks associated with expiry day trading.
Intraday Monitoring of Position Limits
It has suggested that the clearing corporations and stock exchanges, in view of the changing market structure, need to have intraday monitoring of position limits for index derivative contracts. It has submitted a short-term solution and gradual path for full implementation in which related technology upgrades shall be required.
Minimum Contract Size
It could get enhanced in two phases, according to a proposal by SEBI, wherein the minimum value of derivatives contracts would increase to Rs 15-20 lakh in the first phase from the current Rs 5-10 lakh and further to Rs 20-30 lakh in the second. This is targeted at checking speculative trading and bringing more stability into the markets.
Rationalizing Weekly Options
To make available weekly options expiring on all five trading days a little less complex, SEBI has recommended that the weekly options contracts be introduced on only one benchmark index of each exchange. This is part of efforts to bring more simplicity in trading and enhance market efficiency.
Increase in Margin Near Contract Expiry
SEBI’s latest F&O reforms recommended increasing the Extreme Loss Margin by 3-5% to mitigate high implicit leverage in options contracts near expiry. This has been done so that the risk associated with the contracts going more and more towards expiry is captured more accurately.
These are proposed reforms that have been driven by the commitment of SEBI toward enhancing safety and stability in the F&O market. The measures are undertaken to ensure protection against excessive risk for the retail investor and to ensure more discipline in a transparent trading environment. The consultation paper solicits feedback, and the final implementation of these reforms shall be based on stakeholder responses and further regulatory processes.
