Sebi tightens rules to check F&O madness in Indian market
In a move expected to curtail retail participation in the futures and options (F&O) segment, the Securities and Exchange Board of India (Sebi) on Tuesday introduced six regulations. These include a higher minimum contract value of `15 lakh, upfront options premium payment, limit on weekly expiry to just one per exchange and a rise in margins closer to expiry.
The new rules come into effect in a phased manner with only three changes – higher contract size, rationalisation of weekly expiries, and a 2% increase in extraordinary loss margin on all short options contracts on expiry day – starting November 20.
Other measures include the upfront collection of options premium from buyers, and removal of calendar spread benefit to traders on the day of expiry – taking effect from February 1. The final rule of mandating intra-day monitoring of position limits will be in place from April 1, 2025.
The circular comes a day after the Sebi board surprised traders by deferring the announcement. The board was widely expected to approve the slew of measures proposed by the regulator in July, aimed at curbing the increased retail investor frenzy and speculation in the `500-trillion F&O market.
The markets regulator said that most of these measures are intended to address heightened activity in the index options on expiry day, while the others will ensure continued suitability and appropriateness of the index derivatives segment as well as basic risk hygiene.
However, brokerage houses and stock exchanges are expected to take a hit because of these regulations, with analysts pegging a shrinkage of around 30-40% in derivatives volumes.
The regulatory action follows multiple concerns raised, including by the Reserve Bank of India (RBI) and the finance minister, about the risks of losing household savings by taking punts in the equity derivatives segment.
Sebi had also come out with a study on F&O traders last week, revealing how retail traders continued to lose money in the high risk-reward market, with 93% of them incurring an average loss of `2 lakh during the last three financial years.
The latest report showed that retail traders incurred a combined net loss of `1.81 trillion in the last three financial years (FY22-FY24) in the futures and options (F&O) segment. The number of loss-making individual investors went up to 91.1% in FY24.
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