Overview of SEBI’s New Framework for Equity Derivatives
The Securities and Exchange Board of India (SEBI), the regulatory body overseeing capital markets in India, has introduced a transformative framework aimed at managing the rapidly growing equity derivatives market. This initiative focuses on implementing sweeping changes to futures and options (F&O) trading in response to the increasing volatility and exuberance observed in this financial sector.
Key Changes to F&O Trading
These new regulations, set to take effect in phases, include several significant changes designed to curb excessive trading behaviors. Among the most impactful adjustments is the drastic reduction of weekly expiries from five to just one per exchange. This move is expected to fundamentally alter trading patterns, particularly for index derivatives.
Industry Reactions
Nithin Kamath, co-founder and CEO of Zerodha, one of India’s leading online brokerage firms, weighed in on the implications of these changes. In his communications via social media, Kamath indicated that the revised contract sizes—rising from approximately ₹5-10 lakh to ₹15-20 lakh—could lead to a seismic shift in trading volumes. He highlighted the potential decline in overall F&O trades and orders, estimating an impact of approximately 60% and 30%, respectively.
Potential Impact of New Measures
As the derivates market braces for these changes, analysis from industry experts suggests that trading volumes may decline by 20-30%. The combination of reduced weekly expiries and increased contract sizes are anticipated to heighten market stability, albeit at the cost of liquidity. Market observers are keen to assess the outcomes after the initial phase, starting November 20, 2024, when these measures will be fully implemented.
Table: Key Changes to F&O Regulations
| Change | Previous Regulation | New Regulation |
|---|---|---|
| Weekly Expiries | Five per exchange | One per exchange |
| Contract Size | ₹5-10 lakh | ₹15-20 lakh |
| Calendar Spread Margin Benefits | Available | Removed (from February 1, 2025) |
| Extreme Loss Margin (ELM) | Not applied | 2% on expiry day (introducing additional margin requirements) |
The Road Ahead
Going into 2025, traders will also need to adapt to the elimination of margin benefits associated with calendar spreads on expiry day, further complicating their trading strategies. With the introduction of an Extreme Loss Margin of 2% on expiry day, the regulatory landscape is clearly focused on risk management amid heightened volatility.
Conclusion
In summary, the SEBI’s new framework presents a pivotal shift in India’s equity derivatives market. By enforcing stricter regulations on F&O trading, the aim is to foster a more disciplined trading environment, reducing volatility and protecting market participants. As these changes unfold, stakeholders and analysts will need to closely monitor the impact on trading volumes, pricing structures, and overall market dynamics.
