SEBI’s proposed measures to curb F&O speculation

• SEBI has proposed several measures to address concerns about the sharp increase in speculative trading in the index derivatives market, particularly among individual investors.

Proposed Measures by SEBI:

• Increase in Contract Size: SEBI suggests raising the minimum contract size for index derivatives from the current range of Rs 5-10 lakh to Rs 15-20 lakh, with the possibility of further increasing it to Rs 20-30 lakh after six months.
• Upfront Premium Collection: Brokers will be required to collect option premiums from clients upfront.
• Intraday Position Monitoring: Market Infrastructure Institutions (MIIs) will need to monitor position limits for index derivative contracts throughout the trading day.
• Weekly Options Restriction: Exchanges will be limited to offering only one weekly options contract on a single benchmark index.
• Removal of Calendar Spread Benefits: On the expiry day, calendar spread benefits will be eliminated for positions involving contracts expiring on that day.
• Options Strikes Rationalization: Strike prices will be rationalized with a uniform interval up to 4% around the prevailing index price, with wider intervals as strike prices move further away.
• Increased Expiry Day Margins: Margins will be raised on the expiry day and the day before to address the issue of high implicit leverage in options contracts nearing expiry.

Reason for the Proposed Measures:

• The goal of these measures is to protect investors and maintain market stability in the derivatives segment, especially in light of the sharp rise in futures and options (F&O) trading volumes by individual investors.
• The Union Budget 2024-25 also doubled the Securities Transaction Tax (STT) on F&O trades to 0.02% and 0.1%, respectively, starting from October 1, 2024.
• Data from FY 2023-24 shows that 92.50 lakh unique individuals and proprietorship firms traded in the NSE index derivatives segment, with cumulative trading losses amounting to Rs 51,689 crore.
  • Only about 15% of these investors made a net profit.

Way Forward:

• Enhancing Investor Education: To reduce the risks associated with speculative trading in index derivatives, comprehensive investor education programs are necessary.
• Strengthening Regulatory Oversight: SEBI should improve its regulatory framework by implementing strong monitoring systems to ensure compliance with these proposed measures.