SEBI Cracks Down on Equity Derivatives Speculation

SEBI tightens equity derivatives rules

The Securities and Exchange Board of India (SEBI) is enhancing regulations in the equity derivatives (futures and options) segment to safeguard small investors. The new measures involve increasing the contract sizes for futures and options, raising margin requirements, and limiting the number of weekly contracts. These adjustments, set to take effect in November, are especially important for retail investors.

The contract size for index options and futures will rise to ₹15 lakh, up from the current range of ₹5 lakh to ₹10 lakh. Kunal Sanghavi, Chief Strategy and Transformation Officer at HDFC Securities, stated that this increase in the contract value for index derivative contracts by SEBI aims to reduce speculation and excessive trading by small individual and retail investors, who often take on unnecessary risks and incur losses in the futures and options segment.

According to Jefferies India, the most significant impact of SEBI’s measures will stem from reducing the number of weekly option contracts to one benchmark index per exchange, resulting in a total of six weekly contracts per month instead of the current 18. Kunal Sanghavi noted that implementing a single index expiry for weekly contracts per exchange will restrict uncovered or naked option selling by providing fewer opportunities.

Sanghavi added that withdrawing cross-margin benefits for calendar contracts on the last day will compel traders to execute rollovers sooner rather than wait until expiry day, thereby reducing speculation related to “basis” on expiry day.

However, Jefferies analysts believe the margin increase is less than anticipated. They noted that the additional margin for option sellers on expiry day is set at 2%, while no extra margin has been introduced on T-1 day, compared to the previously proposed 3%. Although retail participation in options is likely to decrease, the lower-than-expected margin hikes could lessen the overall impact, according to a Jefferies report.

According to Jefferies, the first three measures—reducing weekly contracts, increasing margins, and raising lot sizes—will have a greater impact on retail participation.

In contrast, the latter three measures are more significant for institutional players, such as high-frequency traders and algorithms. These include the upfront collection of premiums and the elimination of calendar spreads, set to take effect on February 1, 2025, with intraday monitoring of position limits starting on April 1, 2025.

Jefferies views the phased implementation over the next 3-6 months as a major positive for market health, as it helps prevent systemic shocks and facilitates a gradual tightening of the market.