New Sebi Rules to Curb F&O Frenzy, Aim to Protect Small Investors

New Sebi Rules to Curb F&O Frenzy, Aim to Protect Small Investors

  • The Securities and Exchange Board of India (SEBI) has introduced six measures to strengthen the equity index derivatives framework.
  • The F&O segment has experienced a significant increase in trading volumes.
  • Many investors in the F&O market are incurring losses.
  • The heightened activity in the derivatives market raises concerns for the government and regulators, as:
    • Rising F&O volumes may hinder capital formation
    • They pose a systemic risk to the country’s economic growth

Six Measures by SEBI

  • Recalibration of Contract Size for Index Derivatives
  • Change: Minimum contract size increased from Rs 5-10 lakh to Rs 15 lakh.
  • Implication: Aims to curb speculation by small traders; may lead to reduced participation from retail investors, especially in tier 2 and tier 3 cities.
  • Upfront Collection of Options Premium
  • Change: Options premium must be collected upfront from options buyers by trading or clearing members, effective February 1, 2025.
  • Implication: Enhances risk management at the investor level, minimizes undue intraday leverage, and reduces aggressive short-term speculation.
  • Rationalisation of Weekly Index Derivatives Products
  • Change: Each exchange can provide derivatives contracts for only one benchmark index with weekly expiry.
  • Implication: Limits avenues for uncovered/naked options selling; reduces hyperactive trading and market volatility, particularly on expiry days.
  • Intra-day Monitoring of Position Limits
  • Change: Exchanges will monitor existing position limits for equity index derivatives intra-day, effective April 1, 2025.
  • Implication: Proactive compliance with regulatory norms; helps prevent speculative excesses and maintain orderly market behavior throughout the trading day.
  • Removal of ‘Calendar Spread’ Treatment on Expiry Day
  • Change: No offsetting positions across different expiries allowed on the expiry day, effective February 1, 2025.
  • Implication: Encourages early rollovers, reducing speculation related to expiry day price movements.
  • Increase in ‘Tail Risk’ Coverage on Expiry Day
  • Change: An additional ‘Extreme Loss Margin’ (ELM) of 2% for short options contracts on expiry day.
  • Implication: Provides a buffer against abrupt market moves and protects both investors and the broader market ecosystem from significant downside risks.

About SEBI

  • Statutory Body: Established on 12th April 1992 under the SEBI Act, 1992. A non-constitutional body formed by Parliament.
  • Primary Functions: Protect investor interests. Promote and regulate the securities market.
  • Headquarters and Regional Offices:
  • Headquarters: Mumbai.
  • Regional Offices: Ahmedabad, Kolkata, Chennai, and Delhi.
  • Board Composition: SEBI’s board includes a Chairman and multiple whole-time and part-time members.
  • Committees: SEBI appoints committees as needed to address specific issues.
  • Securities Appellate Tribunal (SAT): Established to hear appeals against SEBI decisions.
  • Composed of a Presiding Officer and two Members.
  • Holds powers equivalent to a civil court.
  • Appeals against SAT decisions can be taken to the Supreme Court.

HOW SEBI’S NEW RULES COULD TRANSFORM THE ADVISORY SECTOR