SEBI initiates a crackdown on F&O issues, proposing 7 measures to protect retail traders.

Amid fears that young people are risking their family funds in the high-risk, high-reward world of derivative trading, markets regulator SEBI suggested seven actions on Tuesday, including raising the minimum contract size for F&O to Rs 20 lakh and capping weekly options contracts.

While noting that 92.5 lakh retail traders and proprietorship businesses suffered a trading loss of Rs 51,689 crore in FY24, the regulator issued a consultation paper on recommendations to improve the index derivatives framework for greater investor protection and market stability.

1) Rationalization of Option strikes

SEBI has advocated rationalizing the present strike price introduction technique. The strike interval should be consistent around the prevalent index price (4%), and it should grow as the strikes move away from the prevailing price (about 4% to 8%), according to the statement.

2) Premium choices are collected beforehand.

To minimize excessive intraday leverage for end customers and to discourage any market-wide practice of permitting positions beyond collateral at the end client level, it is preferable to require the collection of options premium upfront from the options buyer.

3) Removing the calendar spread advantage on the expiration date

Given the skew in volumes seen on the expiration day compared to other non-expiry days, as well as the inherent basis and liquidity risk associated with it, the margin advantage for calendar spread positions would not be offered for positions involving any of the contracts ending on that same day.

4) Intraday monitoring of position restrictions.

Given the changing market structure, clearing corporations/stock exchanges must monitor position limits for index derivative contracts on an intraday basis, with an appropriate short-term fix and a glide path for full implementation, assuming the need for corresponding technology changes.

5) Minimum contract size.

The minimum value of a futures contract should be raised from Rs 5-10 lakh to Rs 15-20 lakh in the first phase, and Rs 20-30 lakh in the second phase.

6) Rationalizing Weekly Options

Given that weekly contracts expire on all five trading days of the week, the regulator has suggested that weekly options contracts be based on a single exchange benchmark index.

7) Increase in margin when contract expires

To address the problem of large implicit leverage in options contracts nearing expiration, which creates a significant risk on a notional basis for companies dealing in options, SEBI recommended increasing the Extreme Loss Margin (ELM) by 3-5%.

F&O mess at Dalal Street

While the derivatives market improves price discovery, risk management, and liquidity, increased involvement by ordinary traders and investors has raised concerns among regulators. Retail demand is so strong that Indian marketplaces account for 30% to 50% of worldwide exchange-traded derivative trading. According to a previous poll conducted by SEBI, 89% of them are losing money.

Retail traders and prop desks lost Rs 51,689 crore in index derivatives during FY24, accounting for more than 32% of net inflows into growth and equity-oriented mutual fund schemes.

Earlier this month, the Economic Survey advised against F&O trading, claiming that such speculative trading has no place in a growing economy like India and even compares it to gambling.

Last week, Finance Minister Nirmala Sitharaman increased the securities transaction tax (STT) on securities to 0.02% in futures and 0.1% in options.

Madhabi Puri Buch, the SEBI's chairwoman, has expressed worry that family savings are being used for speculative purposes rather than capital building.

"It has now reached a scale where we feel the micro-objective of protecting the individual investor has changed to ...thinking about this being a macro issue," she said a week ago.