Sebi Tightens Norms On F&O Trading: What Does This Mean For Retail Investors?

The Securities and Exchange Board of India (Sebi) has introduced new regulations to tighten the norms on Futures and Options (F&O) trading in a move to protect retail investors and ensure market stability. As derivatives have often been labelled as a “new lottery” for many retail traders, these new measures are poised to significantly how they engage with the derivative markets.

Here’s a look at what the new norms entail and what their implication will be for retail investors:

1. Reduction of Expiries To Weekly Basis: Sebi has reduced the expiries of derivatives contracts to one per exchange per week. To put it simply, the market regulator has mandated that exchanges can now only offer derivative contracts for one index with weekly expiries. Currently, some stock exchanges offer derivative contracts with daily expiries which, as Sebi has noted, led to “hyperactive trading on expiration days, creating heightened volatility.”

2. Higher Minimum Contract Size: The minimum trading amount for derivatives has been increased from Rs 5-10 Lakh to Rs 15 Lakh, with the size of contracts being viewed to keep their value between Rs 15 Lakh and Rs 20 Lakh.

“Given the inherent leverage and higher risk in derivatives, this recalibration in minimum contract size, in tune with the growth of the market, would ensure that an inbuilt suitability and appropriateness criteria for participants is maintained as intended,” Sebi noted in its release.

For retail investors, this means they need to allocate more capital as margin, potentially discouraging speculative short-option trades

The measure will come into effect for all new index derivatives contracts introduced after November 20, 2024.

3. Upfront Collection of Premium: Starting from February 5, 2025, brokers will be required to collect the entire options premium upfront. Currently, margins are collected upfront, but the premium is collected later in the day giving room to intraday leverage.

"In order to avoid any undue intraday leverage to the end-client, and to discourage any practice of allowing any positions beyond the collateral at the end-client level, it has been decided to mandate the collection of options premium upfront from option buyers by the Trading Member (TM)/ Clearing Member (CM),” Sebi stated in its release.

4. Increased Margin Requirement: A significant change introduced by Sebi is the additional 2 per cent ‘Extreme Loss Margin’ that will be imposed on all open short options at the start of the day, as well as on short options contracts initiated during the day that are due for expiry on that day. This margin is intended to cover extreme market events and address the high-risk nature of short trading.

5. Removal of Calender Spread Benefit: Calender spreads, a low-risk strategy, allows traders to offset positions across different expiries. Sebi in these new measures has noted that Calender spreads will not be available for contracts that are expiring on that day.

“Given the relatively very large volumes witnessed on the expiry day vis-à-vis future expiry days, and the enhanced basis risk that it represents, it has been decided that the benefit of offsetting positions across different expiries ('calendar spread') shall not be available on the day of expiry for contracts expiring on that day,” Sebi noted in its release.

6. Intraday Monitoring of Position Limits: Sebi has asked exchanges to monitor intraday position limits for equity index derivatives. Position limits, which cap the number of derivative contracts a trader can hold, were previously monitored only at the end of each trading day.

“Stock Exchanges shall consider a minimum of 4 position snapshots during the day. The number of snapshots may be decided by the respective Stock Exchanges subject to a minimum of 4 snapshots in a day. The snapshots would be randomly taken during pre-defined time windows,” the market regulator stated in its official press release.

It further noted, “To provide sufficient time for implementation, the measure shall be effective for equity index derivatives contracts from April 01, 2025.”

Why has Sebi decided to do this? The move is supposed to prevent traders from exceeding permissible limits during volatile intraday sessions.

How would this impact retail traders?

These new measures along with higher taxation will keep retail investors away from new form of lottery (Derivative Trading). The new rules intend to monitor the highly speculative nature of trading on index derivatives, particularly on expiry day of the contracts.