The Securities and Exchange Board of India (SEBI) has introduced a set of significant changes to the regulations governing Futures and Options (F&O) trading, effective from November 2024. These reforms are aimed at improving market stability, curbing excessive speculation, and safeguarding retail investors, who have increasingly been caught in the volatile and sometimes risky world of derivatives trading.
Key Changes in SEBI’s New F&O Rules
1. Increase in Lot Sizes
One of the most notable changes is the increase in lot sizes for certain index and stock options contracts. SEBI has adjusted the minimum lot sizes for contracts to ensure that the contract value remains between ₹15 lakh and ₹20 lakh on the day of review. The revised lot sizes for major indices such as Nifty and Bank Nifty will see a significant increase. For instance, the Nifty lot size, which was previously 50, will be raised to 75, while the Bank Nifty lot size will increase from 15 to 30.
The primary reason behind this increase is to reduce speculative trading. By raising the lot size, SEBI is making it more expensive for traders to enter positions. This change is expected to curb excessive leverage and prevent smaller, high-risk trades that can lead to market instability. As a result, these new rules are likely to lead to fewer, but more substantial, trades. SEBI aims to focus on larger, informed trading positions, rather than allowing smaller retail traders to indulge in speculative betting.
2. Transition to Weekly Expiries
Another significant change is the transition of all derivatives contracts to weekly expiry schedules starting November 20, 2024. Currently, several derivatives contracts are expiring on different days, which often leads to hyperactive trading, particularly on expiry days, resulting in heightened volatility. By moving to a consistent weekly expiry, SEBI hopes to create more stability in the market, reduce intra-day volatility, and promote more rational trading strategies.
This change also comes with a reduction in the number of options contracts available for trading, as each exchange will now offer only one benchmark index with weekly expiries. This change is designed to reduce the volume of short-term speculative activity that has dominated the market in recent years.
3. Increased Margin Requirements
In addition to the changes in lot sizes and expiries, SEBI has imposed stricter margin requirements to mitigate risk. The margin requirements will be especially high for short options contracts, which are more volatile. For example, an additional 2% margin will be required for short options on the day of expiry.
This increase in margin requirements is part of SEBI’s strategy to curtail excessive risk-taking in the market, especially among retail traders who often rely on high leverage to maximize their returns. By mandating higher margins, SEBI is attempting to ensure that traders have enough capital at risk to avoid extreme positions that could lead to significant losses.
4. Minimum Threshold for Participation
To further reduce speculative trading, SEBI has raised the minimum trading amount required for participation in F&O from ₹5 lakh to ₹15 lakh. This rule is designed to prevent smaller traders from entering the market with little capital, thereby reducing the number of retail participants engaging in high-risk options trading. This move will likely create barriers for smaller traders but is expected to attract more institutional players who are better equipped to handle larger investments.
5. Phased Implementation of Norms
The implementation of SEBI’s new norms will happen in phases. The first phase, which includes the new lot sizes and weekly expiry schedule, will come into effect on November 20, 2024. Other important changes, such as the collection of upfront premiums and the removal of calendar spread treatment, will take effect from February 1, 2025. Additionally, starting from April 2025, SEBI will introduce intraday monitoring of position limits to ensure compliance throughout the trading day.
SEBI’s Motivation Behind the Reforms
SEBI’s decision to introduce these regulations comes in response to the increasing participation of retail investors in F&O trading. Retail investors have made up approximately 50% of the trading volumes in index derivatives, which has led to concerns over market stability. A report from SEBI estimates that losses incurred by retail investors in F&O trading could range from ₹50,000 crore to ₹60,000 crore annually.
These figures highlight the need for stronger regulatory oversight to protect the financial health of households investing in high-risk derivatives. The new F&O rules are designed to curb excessive speculation, which has led to substantial losses for many small traders. By imposing stricter rules on margin requirements and increasing lot sizes, SEBI aims to ensure that only those who are well-capitalized and informed can participate in this segment of the market.
Potential Impact on Market Participants
Retail Traders
Retail traders are expected to face the most significant impact from these changes. The increase in lot sizes and margin requirements will make it more difficult and costly for them to engage in speculative trades. Many small traders might choose to exit the market due to the higher entry barriers. This reduction in trading volumes could lead to less market liquidity in the short term, although the market is likely to stabilize in the long run as more substantial, informed trading takes precedence.
Institutional Investors and High Net-Worth Individuals (HNIs)
Institutional investors and HNIs are expected to be less affected by the new regulations. With their larger capital bases, these players will likely be better equipped to meet the new margin requirements and participate in the market under the new lot sizes. However, these changes may also discourage frequent speculative trading, which has been a common practice among HNIs looking for quick returns.
Market Liquidity
The changes to lot sizes, margin requirements, and participation thresholds will likely lead to a decrease in overall market liquidity, particularly in the short term. However, this is expected to reduce market volatility and create a more stable trading environment in the future. SEBI’s ultimate goal is to bring the F&O market in India closer to international standards, where similar measures are already in place to curb excessive speculation and promote long-term, sustainable growth.