To safeguard investors’ interests and reduce speculative trading, the capital market regulator Sebi has implemented a set of strict measures aimed at the derivatives market. This six-step framework targets the increase in speculative trading volumes, particularly on expiry days, and also serves as a possible deterrent for retail investors participating in futures and options trading. Below is a comprehensive explanation of the new rules and their potential impact on market dynamics. Sebi has introduced six measures to decrease retail interest in F&O trading, which will be effective from November 2020 to April 2024, following a recent consultation paper released by the regulator. These consist of 1) Collecting options premiums in advance 2) Monitoring position limits throughout the day 3) Eliminating calendar spread advantages on expiry day 4) Increasing the contract size for index derivatives 5) Streamlining weekly index derivatives to one benchmark per exchange and 6) Strengthening margin requirements on options expiry days. 2) What impact does streamlining weekly index derivatives have on market dynamics? Sebi stated that each exchange is permitted to provide weekly expiries for just one benchmark index. At present, several indices expire weekly, which has caused an increase in speculative trading, especially on expiry days when premiums decrease. For example, the NSE provides weekly options contracts for the Nifty Financial index, Nifty index, Nifty Bank index, and the Nifty Midcap index. By focusing on just one benchmark index, the regulator intends to minimize the intense trading activity seen across multiple indices and stabilize the market. This may limit short-term speculative trading opportunities for retail investors, which could decrease intraday volatility but also restrict their chances of benefiting from frequent expirations. Experts noted that limiting weekly options to a single index per exchange will likely shift trading activity to the less volatile monthly expirations. “Derivatives should be utilized for hedging risks, not for speculative gambling by those with little understanding, training, or experience in these instruments.” “Overall, this is a positive move for protecting small investors and maintaining market integrity,” stated market veteran Ajay Bagga. 3) Increasing the minimum contract size. Another major change is the growth in the contract size for index derivatives.
