SEBI’s proposed F&O measures: How will brokerages like Zerodha, Angel One, ICICI Securities be impacted?

The Securities and Exchange Board of India's (SEBI) proposed F&O measures to the derivatives trading framework are set to significantly impact the market, particularly with the removal of 12 out of 18 weekly option contracts. Brokerage house Jefferies highlighted that these changes will affect 35 percent of industry premiums.

On Tuesday, SEBI released a discussion paper outlining seven key proposed changes aimed at enhancing investor protection and market stability. Among these, the most consequential is the reduction in the number of weekly option contracts to just one benchmark index per exchange, resulting in a total of six weekly contracts per month, compared to the current 18. Monthly contracts, set for the fourth week of the month, will remain unchanged.

Jefferies warned that exchanges and retail-focused brokers would be most affected by these changes. The BSE might mitigate the impact and potentially benefit if volumes spill over from the discontinued products. Discount brokers such as Zerodha, Angel One, and Paytm Money are expected to face a significant impact due to the tightening of the F&O market and recent orders on transaction charges. Traditional brokers, including MOFSL, IIFL Securities, and ICICI Securities, are anticipated to experience a high impact from the tightening of the F&O market, but only a low impact from the recent transaction charge orders.

Jefferies has listed some key issues that might arise from said amendments.

Reduction in weekly options: Currently, weekly premiums make up 65 percent of overall industry premiums and depending on the choice of index (to be continued) by exchanges, supply of contracts amounting to 35 percent of industry premiums can be removed. Spillover of trading activity (if any) from these into the two continuing products can limit the impact to 20-25 percent for the system, noted Jefferies. Also, phased hike in lot sizes (by 3-4x) and margin hike near expiry can impact retail traders, said the brokerage.

Lower retail participation (from higher lot sizes) can magnify impact: SEBI highlighted that around 92 lakh unique individuals and proprietorship firms made a cumulative loss of ₹51,700 crore in FY24 and within them, only 15 percent traders (14 lakh) made net profits, informed Jefferies. On the other side, larger non-individual players like HFTs/algo-traders/FPIs are, in general, making offsetting profits. SEBI has proposed 3-4x hike in lot sizes in a phased manner over 6 months which will lead to higher ticket sizes even on expiry days. While small retail (less than ₹10 lakh monthly premiums) make up less than 3 percent of system premiums, overall impact from their reduced participation can be magnified as they may be contributing to the profit pool disproportionately, noted the brokerage.

Higher margin impacts options seller, other measures are incremental: As per the brokerage, the proposed hike in margins (by 8pp) near expiry will reduce the leverage for option sellers and impacts product profitability. While larger institutional players may absorb the impact due to high leverage, HNI/retail individuals with low to NIL leverage will see more impact and can reduce volumes in absence of additional margin money/assets. Other measures like a) rationalisation of strike prices, b) upfront collection of premiums, c) removal of calendar spreads, and d) intraday monitoring of limits are incremental and will improve quality of premiums over the long term, it noted.

Divergent impact on market players: Jefferies sees exchanges and retail-focused brokers being most affected from the proposed changes. Clearing members like Nuvama (Asset Services business) cater to institutional players (HFTs / FPIs) which are less impacted but may see some second order impact. For BSE, removal of Bankex weekly contract can impact EPS by 7-9 percent over FY25-27E.

In its scenario analysis, gains from spillover of trading activity from discontinued products can offset EPS impact and in the event of moderate industry-wide impact of SEBI measures, can even drive EPS upgrades, predicted the brokerage.

The 7 proposals are listed below:

1. Rationalisation of weekly index products: Weekly options contracts to be provided on single benchmark index of an exchange.

2. Minimum contract size: In view of growth witnessed in the broad market parameters, the minimum contract size for index derivatives contract to be revised, in phased manner:

a. Phase 1: Minimum value of derivatives contract at the time of introduction to be between ₹15 lakh and ₹20 lakh.

b. Phase 2: After 6 months, minimum value of derivatives contracts to be ₹20 lakh to ₹30 lakh.

3. Increase in margin near contract expiry: The margins on expiry day and the day before expiry shall be increased in the below stated manner:

a. At the start of the day before expiry, Extreme Loss Margin (ELM) to be increased by 3 percent.

b. At the start of expiry day, ELM to be further increased by 5 percent.

4. Rationalisation of options strikes: The strike scheme for weekly/monthly index options contracts shall be based on the following principle:

a. Strike interval to be uniform up to a fixed percentage coverage near prevailing index price, i.e. 4 percent around prevailing index price.

b. Beyond the initial coverage threshold, specified at (a) above, the strike interval to be expanded to ensure that fewer strikes are introduced further away from the prevailing index price.

c. The number of strikes at the time of introduction should not be more than 50.

d. New strikes to be introduced to comply with aforesaid requirement at and above, on a daily basis.

5. Upfront collection of option premium from options buyers: Members to collect option premiums on an upfront basis from the clients.

6. Removal of calendar spread benefit on the expiry day: The margin benefit for calendar spread positions would not be provided for positions involving any of the contracts expiring on the same day.

7. Intraday monitoring of position limits: The position limits for index derivative contracts shall be monitored by the clearing corporations/stock exchanges on an intra-day basis, with an appropriate short-term fix, and a glide path for full implementation.

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