July 30, 2024: The Securities and Exchange Board of India (SEBI) has unveiled a series of proposed measures aimed at curbing speculation in index derivatives, enhancing investor protection, and improving overall market stability. The new measures include changes to option premium collections, revisions to contract sizes, and stricter monitoring of trading limits.
Upfront Collection of Option Premiums
One of the significant proposals from SEBI is the requirement for brokers to collect option premiums from clients on an upfront basis. Presently, brokers collect margins for futures positions and short options positions, but not for long options. The new rule aims to ensure consistency and better risk management by mandating that premiums are paid at the contract’s inception.
Increase in Minimum Contract Sizes
SEBI has also proposed an increase in the minimum contract size for index derivatives. Initially, the minimum value would be raised to Rs 15-20 lakhs, with a further increase to Rs 20-30 lakhs after six months. The current minimum contract size, last updated in 2015, stands at Rs 5-10 lakhs. This adjustment is intended to align with the substantial rise in benchmark indices over the past nine years.
Intraday Monitoring of Position Limits
To adapt to changing market conditions, SEBI recommends that position limits for index derivatives be monitored on an intraday basis by clearing corporations and stock exchanges. This proposal includes a short-term solution and a gradual implementation path, highlighting the need for technological updates.
Higher Margins for Expiring Options Contracts
SEBI proposes higher margins for options contracts as they approach expiry. The Extreme Loss Margin (ELM) would be increased by 3% the day before expiry and by an additional 5% on the expiry day. This change aims to manage the heightened risk associated with options contracts nearing their expiration.
Introduction of Weekly Options Contracts
To bolster investor protection and market stability, SEBI suggests offering weekly options contracts on a single benchmark index of each exchange. The regulator noted that the frequent expiry of options contracts and the associated market volatility pose risks to market stability.
Standardization of Strike Prices
The proposal also includes standardizing the introduction of strike prices for options. The strike price interval would be uniform within 4% of the current index price, increasing to 8% as the strike prices move further away. Additionally, a maximum of 50 strike prices would be introduced for each index derivatives contract, with new strike prices added daily as needed.
SEBI Proposes Elimination of Margin Benefits for Calendar Spread Positions
SEBI has proposed eliminating the margin benefit for calendar spread positions on contracts that expire on the same day. Calendar spreads currently offer lower margin requirements by offsetting positions, but this can lead to significant risks on expiry days when the values of contracts can differ markedly.
These proposals follow recommendations from an Expert Working Group (EWG) and discussions with the Secondary Market Advisory Committee (SMAC) of SEBI. The aim of these measures is to manage speculation in the derivatives market and ensure a more stable trading environment.
