New F&O Trading Rules: What Investors Need to Know About the Big Changes Coming

The SEBI wants to overhaul the F&O trading landscape and ensure the markets become more stable and investor-friendly. The new set of F&O rules will be implemented between November 2024 and April 2025. Among others, this new deal will touch upon contract sizes, expiry rules, and monitoring practices in the F&O marketplace.

Here is a summarized outline of what these changes involve, especially those related to the lot sizes for Nifty 50 and Nifty 75.

Primary Changes in SEBI’s New F&O Regulations

1. Increase in Lot Sizes

Hand-in-hand with a tremendous rise in the lot sizes of the index derivatives. For instance, Nifty 50 can be bought in a lot size of 25 units, which has increased substantially to 75 lots, while the lot size for the Bank Nifty can be bought at 15 units but is now at 30 units.

The intention here is to raise entry barriers for retail investors through an entry price of speculative trading. Thus, for those contracts whose maturity dates are set later than November 20, 2024, the new lot sizes will then apply.

2. Limiting Weekly Expiry Contracts

A landmark decision passed by SEBI was one where the exchange was asked not to have contracts with more than one index, which has a weekly expiry. From Nov 20, 2024, the National Stock Exchange will have only Nifty 50 for trading in its derivative market.

Others such as the Bank Nifty and the Nifty Midcap Select will no longer have a weekly expiry. This move is going to curb volatility caused by more than one expiration and give a steadier trading environment.

3. Intraday surveillance of position limits

In tandem with the above measures for deepening market surveillance, SEBI will initiate intraday surveillance of position limits from April 1, 2025. So far, these limits have been checked at the end of each trading day.

With this, it will make four intraday random checks in a day. This will put an ace check on some traders who may take risky positions assuming the calendar spreads are tax-free.

4. Elimination of calendar spread benefits

The new regulations will remove calendar spread benefits on expiry dates. This means that trading while holding a long and short position on different expiration dates will not be able to reduce the margin on expiry days. This is aimed at curbing speculative strategies that gain from such benefits.

5. Strengthened Margin Requirements

Margin requirements will increase manifold as contract sizes increase many folds. The minimum value of trades for options contracts will increase to between Rs 15 lakh and Rs 20 lakh from the present range of Rs 5 lakh to Rs 10 lakh. Whereas the short options contracts close to expiration day will also require an additional extreme loss margin of 2% for further protection against market fluctuations.

6. Settlement Time

Under the new rules, shares within the T+1 settlement model will be credited to client accounts on the same day post settlement at 3:30 pm as against the current practice of crediting at 1:30 pm of the following day.

In order to allow ample time for the integration of the technical infrastructure with the new system for the market participants, this has been decided upon.

Implications for Retail Investors

The new regulations are thus likely to affect retail investors in the following ways:

• Increased Trading Cost: The increase in lot sizes and minimum trading amounts might lead to fewer F&O trades being taken on by smaller investors.
• Fewer Opportunities: There is just one index traded, based on weekly expiries. There will be greater scrutiny of positions; retail investors may not have the same opportunities for short-term trades.
• Market Stability vs. Access: Although these measures intend to protect naive investors from excessive risk-taking speculation, they will inherently reduce market liquidity since smaller traders without the capital to fund their quotas are forced out of the market.

Broking Business and Market Flows

The broking business will likely experience a paradigm shift with these rules:

• Loss of Revenues: Retailers that mostly depend on retail trading volume will significantly lose revenues as retail participation dries up.
• Brokerage Models/Strategies: This change will make the brokers alter their models and strategies towards such new regulations.

Conclusion

SEBI’s new F&O trading guidelines are set to become a significant hallmark in India’s derivatives market as it seeks to instil higher stability and responsibility among traders. Though these measures are aimed at the protection of the investor and lesser excessive speculation, they also raise concerns over accessibility as well as participation by retail investors.

As such, these rules are going to be rolled out over the coming months and presented to both investors and brokers as a reminder to navigate the horizon cautiously, weighing the gains of increased stability with potential entry barriers.