The Securities and Exchange Board of India (SEBI) has unveiled new measures to bolster the index derivative framework, with the aim of safeguarding investors and enhancing market stability. The modifications, which encompass a reduction in expiries to a weekly basis and a tripling of contract sizes, will be implemented in stages from November 20.

What Happened: SEBI’s move is a response to the highly speculative nature of trading on index derivatives, especially on the expiry day of the contracts. The regulator has raised the minimum trading amount for derivatives from the current ₹5-10 lakhs to ₹15 lakh initially, which will subsequently range between ₹15 lakh and ₹20 lakh.

The regulator has also stipulated that each exchange can offer derivatives contracts for only one of its benchmark indices with weekly expiry. The regulator has observed that daily expiry trading in index options is predominantly speculative, resulting in heightened volatility in the index value.

Sebi noted that the current contract sizes, which were set back in 2015, have become outdated due to the market’s substantial growth since then. With market value and prices having tripled, the regulator decided that a review was necessary to ensure stability and to make sure that participants were taking on risks that were appropriate for their financial capacity.

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The new regulations introduce measures aimed at enhancing risk management in the options market. One of the key changes is the imposition of an additional Extreme Loss Margin (ELM) of 2%, which will be collected from investors for all open short options at the start of the day. This margin will also apply to short options contracts initiated during the day that are due to expire on that same day. The ELM is designed to cover tail risks, providing an additional layer of protection against extreme market movements.

Starting February 1, 2025, there will be an upfront collection of option premiums from buyers, which ensures that premium payments are secured before transactions are executed. The benefit of calendar spreads, which allows traders to offset positions across different expiries, will no longer be available for contracts that are expiring on the same day.

SEBI made this decision after observing that contracts expiring on a particular day can experience significantly different price movements compared to similar contracts with future expiry dates. This change is aimed at reducing the risks associated with such price divergences.

By April 1, 2025, intraday monitoring of position limits will be implemented. This means that investors’ open positions will be actively monitored throughout the day to ensure compliance with position limits, reducing the risk of sudden market volatility due to large, unchecked positions.

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Disclaimer: This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.