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Writer's pictureAbhinand PS

SEBI Proposals on Index Derivatives: Comprehensive Guide for Investors

All You Need to Know About SEBI Proposals on Index Derivatives

Introduction

The Securities and Exchange Board of India (SEBI) has recently unveiled a series of proposals aimed at strengthening the framework for index derivatives, addressing rampant speculation, and bolstering market stability. As derivatives trading continues to grow, understanding these changes is crucial for investors and traders alike. This article provides a detailed analysis of SEBI's proposals, their potential impacts, and expert opinions.




SEBI's Seven Key Proposals

1. Rationalization of Strike Prices for Options

Current Practice: Nifty and Bank Nifty options offer extensive strike prices to cover market movements, with up to 70 strikes for Nifty and 90 for Bank Nifty.

Proposed Change: Limit the number of strikes to 50 at contract launch with uniform intervals, adjusting for up to 8% of the index movement.

2. Upfront Collection of Options Premium

Current Practice: Margins are collected for futures and short options positions, but not for options buyers.

Proposed Change: Require upfront premium collection from options buyers to mitigate risk.

3. Removal of Calendar Spread Benefit on Expiry Day

Current Practice: Calendar spread margins apply even on the expiry day, reducing margin requirements.

Proposed Change: Eliminate calendar spread margins for contracts expiring on the same day to prevent undue advantages.

4. Intraday Monitoring of Position Limits

Current Practice: Position limits are monitored daily by Market Infrastructure Institutions (MIIs).

Proposed Change: Implement intraday monitoring with short-term fixes and a glide path for full implementation.

5. Minimum Contract Size

Current Practice: Set at Rs 5-10 lakh since 2015.

Proposed Change: Increase the minimum contract size to Rs 15-20 lakh initially, moving to Rs 20-30 lakh after six months.

6. Rationalization of Weekly Index Products

Current Practice: Weekly expiries for various indices occur throughout the week.

Proposed Change: Restrict weekly expiries to one benchmark index per exchange.

7. Increase in Margin Near Contract Expiry

Current Practice: No additional margins are required in the last two trading days.

Proposed Change: Introduce a 3% Extreme Loss Margin (ELM) on the penultimate day and increase to 5% on the last day of the contract expiry.

Implications of SEBI's Proposals

SEBI's measures aim to curb excessive speculative trading, particularly among retail investors who account for 50% of trading volumes in index derivatives. By imposing stricter regulations and higher margins, SEBI intends to redirect household savings towards more productive investments like IPOs and mutual funds.

Expert Opinions

Dhiraj Relli, MD & CEO of HDFC Securities, supports SEBI's proposals, noting that rationalizing weekly expiries will impact trading volumes. Jefferies, a foreign investment firm, anticipates diverse impacts, with retail-focused brokers and exchanges being the most affected.

Conclusion

SEBI's proposed changes to the index derivatives framework are set to reshape the trading landscape, enhancing stability and investor protection. These measures are designed to reduce speculative trading and ensure that capital is used more productively within the economy. Investors and traders must stay informed and adapt to these changes to navigate the evolving market dynamics effectively.

FAQs

1. What are index derivatives?Index derivatives are financial contracts whose value is derived from stock market indices like Nifty or Bank Nifty.

2. Why is SEBI proposing these changes?SEBI aims to curb speculative trading, protect investors, and promote market stability.

3. How will the changes affect retail investors?Retail investors might face higher costs and stricter regulations, potentially reducing speculative activities.

4. What is the new minimum contract size?The minimum contract size will increase to Rs 15-20 lakh initially, and then to Rs 20-30 lakh after six months.

5. When will SEBI's proposals be implemented?The proposals are currently open for public comments and suggestions until August 20, 2024.

By understanding and adapting to SEBI's proposals, investors can better navigate the evolving landscape of index derivatives trading, ensuring more informed and strategic decisions.

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