NEW SEBI RULES TO CURB FUTURES & OPTIONS (F&O) FRENZY

Aspect

New Rule

Implications

Contract size for index derivatives 

The minimum contract size at the time of its introduction in the market has been increased to Rs 15 lakh from the existing stipulation of Rs 5-10 lakh.

This will apply to all new index derivatives contracts introduced after November 20 this year. 

This step raises the entry barrier and seeks to ensure that participants in the derivatives market take appropriate risks.

The increase in contract size can curb speculation by small traders who have been hyperactive in the F&O segment.

Upfront collection of options premium

Collection of options premium upfront from options buyers by the trading member (TM) or the clearing member (CM) should be done. 

The new rule will be applicable from February 1, 2025.

This will minimise undue intraday leverage, ensuring that positions are taken only against adequate collateral.

This will instil discipline, reduce aggressive short-term speculation, and mitigate the risk of defaults due to overleveraged positions.

Rationalisation of weekly index derivatives products

Each exchange may provide derivatives contracts for only one of its benchmark indexes with weekly expiry. This will be effective from November 20.

This will limit the avenues for naked options selling. A naked position one that is not hedged.

Intra-day monitoring of position limits

To address the risk of position creation beyond permissible limits, existing position limits for equity index derivatives shall henceforth also be monitored intra-day by exchanges.

This will be effective from April 1, 2025.

This will prevent speculative excesses and maintain orderly market behaviour throughout the day

Removal of ‘calendar spread’ treatment on expiry day

Given the large volumes on expiry day, from February 1, 2025, the benefit of offsetting positions across different expiries will not be available on the day of expiry for contracts expiring on that day.

This will force players to do rollovers early and not wait until expiry day, easing expiry day ‘basis’ speculation.

Increase in ‘tail risk’ coverage on the day of expiry

The ‘tail risk’ coverage has been increased by levying an additional ‘Extreme Loss Margin’ (ELM) of 2% for short options contracts. 

ELM is the margin that exchanges charge over and above the normal margin requirement. 

Tail risk is the chance of a loss due to a rare event.

It acts as a buffer against abrupt market moves and protects both investors and the broader market ecosystem from significant downside risk.

PRACTICE QUESTION

Q.Which of the following best describes "tail end" in trading?

A) The potential for large losses in trading due to rare events, often associated with extreme market conditions.

B) The normal margin requirement for standard trading contracts.

C) The percentage of profits made from regular trading activities.

D) A method to calculate average daily returns in trading.

Correct Answer: A) 

Explanation:

The ‘tail risk’ coverage has been increased by levying an additional ‘Extreme Loss Margin’ (ELM) of 2% for short options contracts by SEBI in its recent guidelines.

ELM is the margin that exchanges charge over and above the normal margin requirement. 

Tail risk is the chance of a loss due to a rare event.