SEBI Announced New Framework to Curb Excessive Speculation in Stock Market

On 1st October 2024, the Securities and Exchange Board of India (SEBI) announced 6 measures to the index derivatives trading framework to curb excessive speculation amid growing concerns about the mounting losses incurred by individual traders.

• The new framework is introduced by SEBI through a circular issued in exercise of powers given under Section 11(1) read with Section 11(2) (a) of the SEBI Act, 1992, read with Regulation 51 of Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (SECC) Regulations, 2018.
• The 6 measures are,

Note: These new measures will be implemented in a phased manner with effect from 20th November, 2024.

Key Points:

i.Earlier, the SEBI has constituted an Expert Working Group (EWG) to review the regulatory frameworks to protect investors and foster the growth of the equity derivatives market.

ii.On 30th July 2024, the SEBI had released a consultation paper based on the recommendations of EWG and subsequent discussions held by SEBI’s Secondary Market Advisory Committee (SMAC).

About the 6 Measures:

i.Upfront collection of Option Premium from options buyers: As per new framework, SEBI has mandated the collection of options premium upfront from option buyers by the Trading Member (TM) or Clearing Member (CM) and will come into effect from 1st February, 2025, in order to avoid any undue intraday leverage to the end-client, and to discourage any practice of permitting any positions beyond the collateral at end-client level.

ii.Removal of Calendar Spread Treatment on Expiry Day: Considering substantial volumes observed on expiry days compared to other future expiry days and the increased basis risk associated with such volumes,  SEBI has decided that the benefit of offsetting positions across different expiries called calendar spread will not be available on the day of expiry for contracts expiring on that day.

iii.Intraday monitoring of position limits: SEBI has directed stock exchanges to monitor existing position limits for index derivatives as there is a risk of positions being created beyond permissible limits amid large volumes on expiry day.

• According to the SEBI’s direction, stock exchanges will be required to consider at least 4 position snapshots during the day.
• This new measure will come into effect from 1st April, 2025.

iv.Reduce the Minimum Contract Size for Index Derivatives: The new framework has increased the minimum contract size for index Futures & Options (F&O) derivatives, which is currently between Rs 5 lakh and Rs 10 lakh to Rs 15 lakh at the time of its introduction in the market.

• Also, the lot size will be fixed in such a manner that the contract value of the derivative on the day of review is between Rs 15 lakh and Rs 20 lakh.
• This marks the 1st revision of contract size by SEBI since 2015.

v.Limiting Weekly Index Expiry to One Per Exchange: In order to prevent the problem of excessive trading in index derivatives on expiry day, SEBI has decided to rationalize index derivatives offered by exchanges which expire on a weekly basis.

• As per the new framework, weekly derivatives contracts will be only available on one benchmark index for each exchange, which means the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) will hold one index derivative product on one benchmark for each exchange.

vi.Increase in tail risk coverage on the day of options expiry: As per the new framework, SEBI has increased the tail risk coverage by levying an additional Extreme Loss Margin (ELM) of 2% for short option contracts.

• This new rule will be applicable for all open short options at the start of the day, as well on short options contracts started during the day that are due for expiry on that day.
• This new rule will help to prevent speculative activity around options positions and the attendant risks on the day of options contracts expiry.

Important Terms:

i.F&O derivatives: These are the financial derivatives that permit traders to speculate on asset price movements without owning the asset itself. It includes underlying assets such as: stocks, bonds, commodities, and currencies to indices, Exchange Traded Funds (ETFs), among others.

ii.ELM: It is an additional margin levied by exchanges other than the normal margin requirements. It is designed to cover the risk of losses beyond the level predicted by Value at Risk (VAR) models.

About Securities and Exchange Board of India (SEBI):
SEBI is the apex regulatory body for securities and commodity market in India. It was originally established as non-statutory body in April 1988. Later, SEBI was accorded the status of statutory body through SEBI Act, 1992 on 30th January, 1992.
Chairman- Madhabi Puri Buch
Headquarter- Mumbai, Maharashtra