SEBI proposes new rules to protect retail investors in derivatives segment

On Tuesday, the Securities and Exchange Board of India (SEBI) announced several steps to curb the rise in speculative F&O trading. The consultation paper laid out certain changes in futures & options (F&O) trading to safeguard investors and traders from making steep losses.

In a consultation paper put out by SEBI, the regulatory body laid out seven steps to curb the growth in speculative trading in index derivatives. One of the steps includes rationalizing index options. SEBI has proposed to increase the intervals of the strike price moves further from the prevailing price. By introducing this measure, the regulatory body aims to reduce the scattering of liquidity across multiple strike prices.

SEBI also proposed the upfront collection of premiums to reduce undue intraday leverage to the end client. Currently, there is no explicit stipulation to collect margin from option buyers compared to the upfront collection of margin for long and short futures positions and margin collection for option selling.

Additionally, SEBI has proposed removing the calendar benefit spread on the expiry day. The calendar margin benefit reduces the required margin for an F&O position by offsetting the position on a future expiry. SEBI also put forward a proposal to monitor the intraday position limits for index derivative contracts.

One of the major proposals put forward by SEBI was the increase in the minimum contract size. The regulatory body proposed to raise the minimum contract in two phases. Phase 1 will see the minimum contract size increase to an interval of ₹15 lakh to ₹20 lakh. After six months, Phase 2 will kick in, which will see a further rise in the minimum contract size to an interval of ₹20 lakh to ₹30 lakh.

Moreover, SEBI suggested that exchanges should offer weekly expiries on only one benchmark index. SEBI aims to rationalize weekly expiries to promote market stability and investor protection. SEBI also proposed a step to increase the extreme loss margin (ELM) to 3% and an additional 5% as expiry approaches.