SEBI Proposes New Rules to Curb Speculation in Index Derivatives

SEBI’s New Measures to Regulate Index Derivatives

The Securities and Exchange Board of India (SEBI) has proposed a series of new rules aimed at curbing speculation in index derivatives. These measures are designed to enhance investor protection and improve overall market stability.

Key Proposed Changes

Collection of Option Premiums: SEBI suggests that brokers should collect option premiums from clients upfront. This change aims to bring consistency in managing risk by ensuring premiums are paid at the start of the contract, aligning with existing margin requirements for futures positions and short options.
Revised Contract Sizes: The market regulator proposes increasing the minimum contract size for index derivatives. Initially, the minimum value would be raised to Rs 15-20 lakhs, with a possible further increase to Rs 20-30 lakhs after six months. This adjustment reflects the significant rise in benchmark indices since 2015.
Enhanced Monitoring of Trading Limits: SEBI recommends that position limits for index derivatives be monitored on an intraday basis by clearing corporations and stock exchanges. This includes implementing a short-term solution and gradually moving towards full implementation to accommodate technological updates.
Higher Margins Near Expiry: To address high risks, SEBI proposes increasing the Extreme Loss Margin (ELM) for options contracts as they approach expiry. The ELM would rise by 3% the day before expiry and by an additional 5% on the expiry day.
Weekly Options Contracts: SEBI suggests introducing weekly options contracts on a single benchmark index of each exchange to manage market volatility and improve investor protection.
Standardized Strike Prices: The proposal includes standardizing strike prices with a uniform interval of 4% of the current index price, increasing to 8% as the strike prices move further away. A maximum of 50 strike prices would be available for each index derivatives contract, with daily additions as needed.
Elimination of Margin Benefits for Calendar Spreads: SEBI proposes eliminating margin benefits for calendar spread positions on contracts expiring on the same day to mitigate risks associated with significant contract value differences on expiry days.

Purpose and Impact

These proposed measures follow recommendations from an Expert Working Group (EWG) and discussions with the Secondary Market Advisory Committee (SMAC) of SEBI. The goal is to manage speculation in the derivatives market and ensure a more stable trading environment.