SEBI rules to curb F&O
Kartavya Desk Staff
Syllabus: Economics
- •Source: IE*
Context: The Securities and Exchange Board of India (SEBI) recently introduced significant reforms in the equity index derivatives (futures and options, F&O) framework to curb speculative trading, protect retail investors, and improve market stability.
Recent SEBI Reforms and Their Implications:
• Recalibration of Contract Size for Index Derivatives: Reform: The minimum contract size for index derivatives has been increased to ₹15 lakh (from the earlier ₹5-10 lakh), effective November 20, 2024. Implication: This raises the entry barrier, ensuring that participants have sufficient risk tolerance, reducing speculative trading by small retail investors. Impact: It will discourage small traders from taking excessive risks, encouraging more responsible trading.
• Reform: The minimum contract size for index derivatives has been increased to ₹15 lakh (from the earlier ₹5-10 lakh), effective November 20, 2024.
• Implication: This raises the entry barrier, ensuring that participants have sufficient risk tolerance, reducing speculative trading by small retail investors.
• Impact: It will discourage small traders from taking excessive risks, encouraging more responsible trading.
• Upfront Collection of Options Premium: Reform: From February 1, 2025, trading members must collect the options premium upfront from buyers. Implication: It reduces the misuse of leverage in options trading, enforcing financial discipline and reducing the risk of defaults. Impact: This measure protects investors from over-leveraged positions, preventing potential market volatility.
• Reform: From February 1, 2025, trading members must collect the options premium upfront from buyers.
• Implication: It reduces the misuse of leverage in options trading, enforcing financial discipline and reducing the risk of defaults.
• Impact: This measure protects investors from over-leveraged positions, preventing potential market volatility.
• Rationalization of Weekly Expiring Derivatives Products: Reform: Only one benchmark index per exchange will offer weekly expiring derivatives, starting November 20, 2024. Implication: Limits frequent speculative trades that create short-term volatility, especially on expiry days. Impact: Reduces speculative pressure, promoting market stability.
• Reform: Only one benchmark index per exchange will offer weekly expiring derivatives, starting November 20, 2024.
• Implication: Limits frequent speculative trades that create short-term volatility, especially on expiry days.
• Impact: Reduces speculative pressure, promoting market stability.
• Intra-Day Monitoring of Position Limits: Reform: From April 1, 2025, SEBI will monitor position limits intra-day, not just end-of-day. Implication: Prevents excessive speculative positions from being built up during the day. Impact: Real-time compliance ensures smoother and more stable market functioning.
• Reform: From April 1, 2025, SEBI will monitor position limits intra-day, not just end-of-day.
• Implication: Prevents excessive speculative positions from being built up during the day.
• Impact: Real-time compliance ensures smoother and more stable market functioning.
• Removal of ‘Calendar Spread’ Treatment on Expiry Day: Reform: Effective February 1, 2025, calendar spread benefits will not be available on the day of contract expiry. Implication: Forces traders to execute rollovers earlier, reducing speculation on the day of expiry. Impact: Eases volatility and stabilizes derivative prices during expiration.
• Reform: Effective February 1, 2025, calendar spread benefits will not be available on the day of contract expiry.
• Implication: Forces traders to execute rollovers earlier, reducing speculation on the day of expiry.
• Impact: Eases volatility and stabilizes derivative prices during expiration.
• Increase in ‘Tail Risk’ Coverage on Expiry Day: Reform: An additional ‘Extreme Loss Margin’ of 2% will be levied on short options contracts on expiry day. Implication: Provides greater protection against extreme market movements. Impact: Reduces the risk of significant losses due to rare market events, improving market resilience.
• Reform: An additional ‘Extreme Loss Margin’ of 2% will be levied on short options contracts on expiry day.
• Implication: Provides greater protection against extreme market movements.
• Impact: Reduces the risk of significant losses due to rare market events, improving market resilience.
• How these reforms impact India: Curbing speculation: Larger contract sizes and upfront premium collection reduce excessive speculation, particularly by small traders. Market stability: Limiting speculative positions and lowering intra-day volatility enhances market stability, attracting long-term investors. Protecting retail investors: The reforms safeguard retail investors from significant losses due to aggressive short-term trading. Promoting capital growth: A focus on disciplined investment strategies supports capital formation and sustainable economic growth.
• Curbing speculation: Larger contract sizes and upfront premium collection reduce excessive speculation, particularly by small traders.
• Market stability: Limiting speculative positions and lowering intra-day volatility enhances market stability, attracting long-term investors.
• Protecting retail investors: The reforms safeguard retail investors from significant losses due to aggressive short-term trading.
• Promoting capital growth: A focus on disciplined investment strategies supports capital formation and sustainable economic growth.
Insta Links:
Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly? (2019)
(a) Certificate of Deposit (b) Commercial Paper (c) Promissory Note (d) Participatory Note
Answer: d)