The Securities and Exchange Board of India (SEBI) issued a circular on October 1, 2024, announcing new measures to enhance investor protection and promote market stability in the equity index derivatives market. These changes come in response to increased retail participation, speculative trading, and heightened volumes in the derivatives segment, especially around the expiry days of contracts. The measures are based on the recommendations of an Expert Working Group (EWG) and follow consultations with stock exchanges and clearing corporations.
Key measures announced by SEBI:
- Upfront collection of option premiums from buyers
To ensure proper risk management and avoid undue intraday leverage for options buyers, SEBI has mandated the upfront collection of option premiums by Trading Members (TMs) and Clearing Members (CMs). This rule will be effective from February 1, 2025, and will apply to the equity derivatives segment. It is aimed at preventing any positions beyond collateral levels at the client level. - Removal of calendar spread treatment on expiry day
SEBI has decided to eliminate calendar spread benefits for contracts expiring on the expiry day, effective from February 1, 2025. This measure addresses the significant “basis risk” observed on expiry days when contracts expiring on the day behave differently from future contracts. The new rule ensures that the worst-case scenario losses are calculated separately for expiring contracts, providing better risk management for market participants. - Intraday monitoring of position limits
To prevent the creation of positions beyond permissible limits during the day, especially on expiry days, SEBI has introduced intraday monitoring of position limits for index derivatives. Stock exchanges will be required to take at least four random snapshots of positions throughout the day, effective from April 1, 2025. This rule will help mitigate risks associated with large volumes of speculative trades on expiry days. - Increase in minimum contract size for index derivatives
SEBI has revised the minimum contract size for index derivatives to reflect market growth since 2015. Starting November 20, 2024, the minimum value of new derivative contracts will be set at Rs. 15 lakhs. The lot size will be fixed such that the contract value is between Rs. 15 lakhs and Rs. 20 lakhs at the time of introduction. This move ensures that contracts remain appropriate for participants as market values have tripled over recent years. - Rationalization of weekly index derivatives products
In response to concerns about excessive speculative trading on weekly expiries, SEBI will limit the number of weekly expiring index derivatives contracts to one benchmark index per stock exchange. Effective November 20, 2024, this measure aims to curb hyperactive trading observed on expiry days, which has increased market volatility with no significant contribution to sustained capital formation. - Increase in tail risk coverage on options expiry day
SEBI has mandated an additional 2% Extreme Loss Margin (ELM) on short options contracts expiring on the day. This will apply to all short options that are either open at the start of the day or initiated during the day. This measure, effective from November 20, 2024, aims to provide increased risk coverage due to the speculative activity on expiry days.
Effective dates of the new measures:
| Measure | Effective From |
|---|---|
| Upfront collection of option premiums | February 1, 2025 |
| Removal of calendar spread treatment | February 1, 2025 |
| Intraday monitoring of position limits | April 1, 2025 |
| Increase in minimum contract size | November 20, 2024 |
| Rationalization of weekly index derivatives | November 20, 2024 |
| Increase in tail risk coverage on expiry day | November 20, 2024 |
Impact on market participants:
These new measures are designed to safeguard investors while maintaining market stability, particularly during periods of high speculative trading activity. The introduction of upfront premium collection, stricter intraday monitoring, and larger contract sizes will ensure a more controlled and stable trading environment. SEBI’s focus on reducing excessive volatility on expiry days will contribute to a healthier market ecosystem and better risk management for traders and investors alike.
Stock exchanges and clearing corporations have been directed to implement the required systems and regulations to comply with these new guidelines and ensure seamless execution.
