SEBI suggests taking action against trading in speculative index derivatives.

31/7/2024,

The Securities and Exchange Board of India (SEBI) on Tuesday proposed several reforms to strengthen regulations in the index derivatives industry to prevent excessive speculation and safeguard investors. Concerns about rising retail participation and erratic trading, especially on expiry days, have prompted the decision.

Among the suggested adjustments are:

 Prepayment of option premiums in advance: As of right now, option buyers only have to pay the premium when they exercise their right. SEBI is thinking of making this upfront payment required.

A larger minimum contract size: In two stages, the regulator intends to increase the minimum contract size for index derivatives to deter small-ticket investors from taking on unwarranted risks.

Phase 1 requires that the derivatives contract have a minimum value of between Rs. 15 lakh and Rs. 20 lakh at the time of introduction. As part of phase 2.10 hours ago, the derivatives contract's minimum value after six months must fall between Rs 20 lakh and Rs 30 lakh.

 

Stricter position limitations: Stock exchanges and clearing organisations will need to track position limits intraday to better monitor market activity.

 

Margin requirements should be increased both the day before and the day of expiration, according to SEBI, to reduce the risks connected with using excessive leverage close to contract expiration.

Extreme Loss Margin (ELM) is recommended to be increased by 3% at the beginning of the day before expiry and by 5% at the beginning of the day of expiry.

 

Rationalisation of weekly index products: The regulator is thinking about restricting weekly options contracts to a single benchmark index to lower market volatility.

 

Modifications to strike prices: SEBI suggests a more deliberate process for determining new strike prices to prevent having an excessive number of options. "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. An index derivatives contract will have no more than 50 strikes at the time of contract launch, according to the market regulator.

Elimination of calendar spread benefit: On expiry days, the margin benefit for calendar spread holdings will be removed to reduce potential risks.

 

These steps are meant to make the derivatives market more stable and conducive to investment. Public feedback on the recommendations has been sought by SEBI before the regulations are finalised.

Following large losses suffered by normal investors, pressure to take action from the regulator stems from worries about the dangers involved in trading derivatives.