Know all about SEBI new rules for F&O
Markets regulator SEBI announced that it will start implementing a new framework to regulate the futures and options (F&O) by taking six new measures. These measures include from increasing the contract size to Rs 15 lakh from Rs 5-10 lakh to limiting weekly expiries to one per exchange.
The new rules will be made effective in a graded manner from November 20 and are based on suggestions by an EWG (Expert Working Group) to strengthen the equity index derivatives framework.
The 6 rules proposed by Sebi to regulate F&O trading(SEBI new rules for F&O) in India are as mentioned below :
1) Intraday monitoring of position limits
Previously, SEBI instructed stock exchanges to monitor existing position limits for equity index derivatives, as risk of positions being created beyond permissible limits amid huge volumes on expiry day is involved.
SEBI informed to exchanges that stock exchanges shall consider a minimum 4 position snapshots during the day. The number of snapshots may be decided by the respective stock exchanges, subject to a minimum of 4 snapshots in a day.
The intraday monitoring of position limits measure will be effective for equity index derivatives contracts from April 1, 2025.
2) Contract size for index derivatives
Effective from November 20, 2024, market regulator has increased the minimum contract size for index futures and options from Rs 5-10 lakh currently to Rs 15 lakh at the time of its introduction in the market. moreover, as per SEBI, the lot size shall be fixed in such a manner that the contract value of the derivative on the day of review is within Rs 15 lakh to Rs 20 lakh.
According to SEBI, Given the inherent leverage and higher risk in derivatives, the recalibration in minimum contract size, would ensure that an inbuilt suitability and appropriateness criteria for participants is maintained.
3) Limiting weekly index expiry to one per exchange
To resolve the issue of excessive trading in index derivatives on the day of expiry, SEBI decided to rationalize index derivatives products offered by exchanges that expire on a weekly basis. With this new rule being effective from November 20, 2024, weekly derivatives contracts would only be available on a benchmark index for each exchange.
It directly means that NSE & BSE will have to choose one index derivative product each for weekly expiry contracts.
4) Increase in tail risk coverage on the day of option expiry
Market regulator has decided to increase the tail risk coverage by levying an additional ELM (extreme loss margin) of 2% for short options contracts considering the heightened speculative activity around options positions and the attendant risks.
This system would be applicable for all open short options at the start of the day, as well as for short options contracts initiated during the day that are due for expiry on that day. For example, if the weekly expiry on an index contract is on the 7th of the month and other weekly/monthly expiries on the index are on the 14th, 21st, and 28th, then in that case, for all the option contracts expiring on the 7th, there would be an additional ELM of 2% on the date of 7.
5) Upfront collection of Option Premium from Option Buyers
In order to abstain any undue intraday leverage to the end client and to minimize any practice of allowing any positions beyond the collateral at the end-client level, it has been decided to mandate the collection of options premium upfront from option buyers by the clearing member (CM)/trading member (TM).
As per SEBI, The upfront margin collection requirement shall also include net options premium payable at the client level. The rule regarding upfront collection of Option Premium from Option Buyers will be effective from February 1, 2025.
6) on expiry day , Calendar spread treatment Removal
Given the relatively large volumes witnessed on the expiry day vis-à-vis future expiry days and the enhanced basis risk that it represents, it has been decided that the benefit of offsetting positions across different expiries (‘calendar spread’) shall not be available on the day of expiry for contracts expiring on that day. As per SEBI, the market regulator, “This would also align calendar spread treatment with a cross-margin framework on correlated indices having different expiries, wherein such cross-margin benefit is fully revoked at the start of the first of the expiring correlated indices. The removal of calendar spread treatment on expiry day rule will be made effective from February 1, 2025.
The purpose of this adjustment is to make sure that risk is properly handled for short options contracts and to better guard against severe losses in the market. The implementation of this measure will significantly enhance market-wide risk management strategies and effectively mitigate potential tail risks.
