SEBI tightens derivatives norms - Here are 4 key takeaways from experts on the stricter measures

Indian Stock Markets: The Securities and Exchange Board of India (SEBI) in a bid to protect the interest of small investors has tightened the norms for the equity derivatives (F&O or futures and options) segment.

Some of these stricter measures introduced to curb the F&O trading rush include raising the size of futures and options contracts, increasing margin requirements, and reducing the number of weekly contracts. These changes will come into effect over the next few months and are particularly significant for retail investors.

Here are 4 key implications of stricter SEBI norms as per experts:

1. Increase in contract size expected to curb speculation

The contract size for index options and futures would increase to ₹15 lakh from the current range of ₹5 lakh to ₹10 lakh. “Increase in contract value of index derivative contracts by SEBI will curb speculation and heightened activity by small individuals and retail participants, who end up taking undue risk and making losses in the futures and options segment,” said Kunal Sanghavi, Chief Strategy and Transformation Officer, HDFC Securities.

2. Reduction in number of weekly expiries to have highest impact

Of the measures taken by SEBI, Jefferies India says the highest impact can come from the reduction in the number of weekly option contracts to one benchmark index per exchange i.e. a total of six weekly contracts in a month vs 18 currently.

Single index expiry for weekly contracts per exchange will limit uncovered or naked option selling due to fewer avenues, said Sanghavi.

3. Margin changes to impact retail participation in options

Withdrawing cross-margin benefits for calendar contracts on the last day will force players to do rollovers early and not wait till expiry day, easing expiry day “basis” speculation, Sanghavi added.

However, analysts at Jefferies feel that the margin hike was lower than expected. 

“The additional margin (relevant for option sellers) on expiry day is proposed at 2% and no additional margin has been introduced on T-1 day (vs 3% proposed earlier). While retail participation in options is expected to moderate, the lower-than-expected hikes can soften the impact,” said Jefferies in a report.

4. Phased implementation may lead to calibrated tightening 

The first three measures - reduction in weekly contracts, additional margin and higher lot size - have a higher impact on retail participation, the latter three measures are more consequential to institutional players (high-frequency trading/algos), as per Jefferies. These include upfront collection of premiums and removal of calendar spreads to be implemented from 1 February 2025. Intraday monitoring of position limits will be implemented from 1 April 2025. Jefferies sees phased implementation over the next 3-6 months as a big positive for the market health as it prevents any systemic shocks and leads to a calibrated tightening of the market.

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