Market Beat
SEBI proposes crackdown on speculative index derivatives trading As on : 31-Jul-24  11:35

In a bid to curb excessive speculation and protect investors, the Securities and Exchange Board of India (SEBI) on Tuesday proposed a series of measures to tighten regulations in the index derivatives segment. The move comes amid concerns over increased retail participation and volatile trading activity, particularly on expiry days.

The proposed changes include:

* Upfront collection of option premiums: Currently, buyers of options only need to pay the premium upon exercising the option. SEBI is considering making this payment mandatory upfront.

* Increased minimum contract size: To discourage small-ticket investors from taking excessive risks, the regulator plans to raise the minimum contract size for index derivatives in two phases.

Under phase 1, the minimum value of the derivatives contract at the time of introduction should be between Rs 15 lakh and Rs 20 lakh. After 6 months, the minimum value of the derivatives contract is to be between the interval of Rs 20 lakh and Rs 30 lakh as a part of phase 2.10 hours ago.

* Tighter position limits: To monitor market activity more closely, clearing corporations and stock exchanges will be required to track position limits on an intraday basis.

* Higher margins near expiry: To mitigate risks associated with high leverage near contract expiry, SEBI proposes increasing margin requirements on the day before and on the expiry day itself. At the start of the day before expiry, Extreme Loss Margin (ELM) is proposed to be increased by 3% while at the start of expiry day, ELM is proposed to be further increased by 5%.

* Rationalization of weekly index products: To reduce market volatility, the regulator is considering limiting weekly options contracts to a single benchmark index.

* Strike price adjustments: SEBI is proposing a more structured approach to introducing new strike prices to prevent excessive options being available. The strike interval will be uniform near the prevailing index price (four per cent around the prevailing price) and will increase as the strikes move away from the prevailing price (around four per cent to eight per cent), said SEBI. The market regulator added that not more than 50 strikes would be introduced for an index derivatives contract at the time of contract launch.

* Removal of calendar spread benefit: The margin benefit for calendar spread positions will be removed on expiry days to reduce potential risks.

These measures are aimed at creating a more stable and investor-friendly derivatives market. SEBI has invited public comments on the proposals before finalizing the rules.

The regulator has been under pressure to address concerns about the risks associated with derivatives trading, particularly in the wake of significant losses incurred by retail investors.

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