SEBI set to implement 7 key measures to tighten F&O norms: All you need to know

In a move to curb speculative trading by retail investors, market regulator Securities and Exchange Board of India (SEBI) plans to introduce stricter rules for derivative trading, according to sources with direct knowledge of the situation. These new measures are expected to increase entry barriers and raise the cost of trading for retail participants, Reuters reported on September 6.

SEBI's proposed changes include limiting the number of options contract expiries to one per exchange per week and nearly tripling the minimum trading amount, sources revealed. Despite resistance from traders and brokers, the regulator is pushing forward with measures similar to those it proposed in July. However, SEBI will revisit earlier proposals related to increasing margin requirements and monitoring intraday trading positions.

Concerns have been mounting over retail investors’ growing involvement in speculative trading, particularly in India's booming options market. In August, the monthly notional value of derivatives traded reached a staggering ₹10,923 trillion ($130.13 trillion), the highest globally, according to SEBI data. A significant portion of this activity involves options linked to stock indices like the BSE Sensex and NSE Nifty 50.

The share of retail investors in index options trading has risen dramatically, from 2 per cent six years ago to 41 per cent by the end of March 2024, further fuelling concerns among regulators.

"A key objective was to put an end to the large and rising speculative volumes in index options contracts close to expiry," said one source, who requested anonymity. “The regulator believes that this warrants additional measures both for small investor protection and for ensuring continued systemic stability,” as quoted by Reuters.

The final rules are expected to be issued later this month via a circular, sources said. SEBI is yet to officially comment on the upcoming changes.

This regulatory shift follows a tax increase on derivative transactions implemented in July, which was aimed at reducing retail participation. In May, Finance Minister Nirmala Sitharaman raised concerns about the potential risks associated with unchecked retail investor activity in the derivatives market, highlighting potential challenges for markets, investor sentiment, and household finances.

SEBI's seven proposals

SEBI's latest regulatory efforts build on earlier proposals released in July, which were designed to address excessive speculative trading in the derivatives market. Key measures include:

Rationalisation of Strike Prices: Reducing the number of options strikes at contract launch and standardizing strike intervals.

Upfront Collection of Premiums: Mandating upfront collection of premiums from options buyers, in addition to the existing margin requirements for futures positions.

Removal of Calendar Spread Benefit: Eliminating the margin reduction for positions with different expiries on the same day.

Intraday Monitoring: Introducing intraday monitoring of position limits for index derivatives.

Minimum Contract Size Increase: Phasing in a higher minimum contract size, starting at ₹15-20 lakh.

Rationalisation of Weekly Expiries: Limiting weekly expiry to one benchmark index per exchange.

Increased Margins Near Expiry: Requiring additional margin on the last two trading days before contract expiry.

Forming expert committees

Additionally, SEBI has formed a 15-member working group headed by former RBI executive director G Padmanabhan to suggest investor protection and risk management measures in the equity derivatives market. The group includes representatives from exchanges, brokers, clearing corporations, mutual funds, corporates, and academic experts.

These changes come in response to concerns raised by SEBI about significant losses in household savings due to speculative trading. SEBI Chairperson Madhabi Puri Buch highlighted that annual losses of ₹50,000–60,000 crore from derivatives trading represent a macroeconomic issue, suggesting that these funds could be better deployed in IPOs, mutual funds, or other productive investments.