The landscape of Indian stock markets is undergoing significant changes as the Securities and Exchange Board of India (SEBI) implements stricter regulations aimed at enhancing the protection of small investors. These new measures pertain to equity derivatives, commonly referred to as Futures and Options (F&O), and are set to be rolled out in November.
The key changes include an increase in the size of futures and options contracts, heightened margin requirements, and a reduction in the number of weekly contracts available for trading. These adjustments are particularly relevant for retail investors who often participate in these markets.
Key Takeaways from the Stricter SEBI Norms
- Increase in Contract Size – A Move to Curb Speculation
As part of the tightened regulations, the contract size for index options and futures will be raised to ₹15 lakh, up from the previous range of ₹5 lakh to ₹10 lakh. This increase in contract value is anticipated to significantly reduce speculation among small investors and retail participants, who often engage in high-risk trading activities. According to Kunal Sanghavi, Chief Strategy and Transformation Officer at HDFC Securities, this measure aims to mitigate the undue risks and resultant losses associated with F&O trading.
2. Reduction in Weekly Expiry – A Positive Shift
One of the most impactful measures is the reduction of weekly option contracts to just one benchmark index per exchange, resulting in a total of six weekly contracts per month, as opposed to the current eighteen. Analysts at Jefferies India Pvt Ltd believe that this change will limit uncovered or “naked” option selling, thereby promoting more disciplined trading practices.
Single index expiry for weekly contracts will create a more focused trading environment, decreasing the number of speculative opportunities and enhancing overall market stability, according to Sanghavi.
3. Changes in Margin Requirements
SEBI’s new rules will also eliminate the cross margin benefit for calendar contracts on the last trading day. This change is expected to incentivize traders to execute rollovers earlier, rather than waiting until expiry day—a practice that often leads to speculative behaviors on that final day.
However, Jefferies analysts have noted that the margin hikes are less stringent than some market participants had anticipated. The proposed additional margin for option sellers on expiry day is set at 2%, while there will be no increase in margin requirements on the day before expiry. This could lead to a more tempered impact on retail participation in the options market.
4. Phased Implementation for Market Stability
While the initial measures—reduction in weekly contracts, increased margin requirements, and higher lot size—will be implemented starting November 20th, later measures will mainly affect institutional players and include the upfront collection of premiums and removal of calendar spreads, scheduled for February 1st, 2025. Additionally, intraday monitoring of position limits will commence on April 1st, 2025. Jefferies regards this phased approach as beneficial for market health, preventing systemic shocks and allowing for a calibrated tightening of market conditions.
Disclaimer: The insights and recommendations presented are reflective of individual analysts or brokerage firms and do not necessarily represent the views of this publication. It is advisable for investors to consult certified experts before making any investment decisions.
