The capital markets regulator on Tuesday proposed several measures to rein in excessive speculation in the futures & options (F&O) market. The seven measures include a bigger minimum contract value of Rs 20 lakh, a limit on weekly options contracts to a single benchmark, upfront premium payments, and a smaller number of strike prices.
A consultation paper, released on Tuesday, comes following serious concerns that youngsters are risking their family savings in derivatives trades. The Securities and Exchange Board of India (Sebi) has estimated the losses from such trades in FY24 at an alarming Rs 52,000 crore. Market participants and other stakeholders have until August 20 to submit their suggestions on the proposals.
Sebi chairperson Madhabi Puri Buch said F&O volumes in the last three to four years had multiplied by a factor which was unimaginable. “In the past we felt there was no need for regulatory intervention because we were dealing with the micro issue…but today we feel it has become a macro issue,” Buch said. She was speaking at an event organised by the National Stock Exchange (NSE).
The notional turnover in the derivatives segment hit $6 trillion in early February. The surge in F&O volumes to levels that are the highest in the world — the result of a retail frenzy — has compelled the government as well as the regulator to raise the barriers. The government, in the Union Budget for 2024-25, hiked the securities transaction tax on F&O trades. Sebi observed in the consultation paper that the increase in the minimum contract size would result in “reverse sachetisation of such risk bearing products”.
The regulator has proposed an increase in the minimum contract size in a phased manner, from Rs 15-20 lakh initially and to Rs 20-30 lakh after six months. The prevailing minimum contract size of Rs 5-10 lakh for derivative contracts was last fixed in 2015.Moreover, Sebi has suggested rationalising weekly index products by allowing weekly options contracts on only a single benchmark index of an exchange. In other words, the index-based contracts that currently expire every day would come down to just two a week.
The regulator has recommended that trading and clearing members collect option premiums upfront from buyers. Currently, only the margins for futures positions and short options positions are collected upfront. Sebi has also suggested that the position limits for index derivative contracts be monitored by the clearing corporations or stock exchanges on an intra-day basis. It has also been suggested that margins be raised nearer to the expiry of contracts. It wants margins on expiry day and the day before expiry to be increased. At the start of the day before expiry, the extreme loss margin, or ELM, is to be raised by 3%, and at the start of expiry day, ELM will be raised further by 5%, the consultation paper notes.
Further, Sebi has suggested the removal of a calendar spread benefit on the expiry day, an increase in margins on near-term expiry, and prescribed certain principles for the rationalisation of options strikes.
