Introduction
In an effort to regulate the rapidly expanding equity derivatives market in India, the Securities and Exchange Board of India (SEBI) has introduced a comprehensive framework aimed at curbing excessive trading in futures and options (F&O). These changes are particularly timely given the increasing participation of retail traders in the market.
Key Changes Introduced by SEBI
Upfront Payment for Options
One of the most significant updates is the requirement for options buyers to pay option premiums upfront. Currently, many brokers allow clients to trade intraday options by blocking collateral funds instead of requiring upfront payments. This practice has created a loophole enabling traders to effectively buy and sell options using someone else’s collateral. However, starting February 2025, this will change, requiring clients to use their funds for such transactions. This move aims to ensure greater financial responsibility among traders and reduce the potential for reckless trading behavior.
Elimination of Calendar Spread Benefits on Expiry Day
Another crucial regulation is the decision to eliminate the calendar spread benefit on expiry days. Traders frequently used this strategy to reduce their margin requirements by balancing their positions within a single trading day. For instance, a trader could sell an option expiring that day while simultaneously holding a futures or options position for a later expiration date, effectively reducing their margin by as much as 50%. SEBI has removed this advantage specifically on expiry days to deter excessive scalping and mitigate systemic risks associated with sudden market movements.
The Implications of SEBI’s Framework
Reduced Scalping Activity
The revisions made by SEBI are expected to significantly reduce the high level of retail scalping prevalent on expiry days, particularly the practice of selling straddles. The removal of the calendar spread benefit will likely lead to more cautious trading behavior among individuals looking to capitalize on short-term market movements.
Understanding Systemic Risks
These changes are essential for maintaining market stability. There is inherent systemic risk involved when a trader offsets an expiring option with a longer-dated contract, especially if market conditions trigger sudden price spikes. This risk is heightened on expiry days, typically marked by an increase in trading volumes and volatility. By instituting these measures, SEBI aims to create a more robust and secure trading environment.
Conclusion
SEBI’s new framework represents a pivotal shift in the Indian equity derivatives market. By enforcing upfront payment for options and eliminating calendar spread benefits on expiry days, the regulator is taking significant steps towards enhancing market integrity. While these changes may initially seem restrictive to some traders, they are ultimately designed to foster a more sustainable trading ecosystem. As the landscape of investing continuously evolves, it remains crucial for traders to adapt to these regulations and understand the benefits they bring to the overall market.
