SEBI new rules on Derivatives

SEBI Introduced new Equity Index Derivatives Framework for Increased Investor Protection and Market Stability

Derivatives market assist in better price discovery, help improve market liquidity and allow investors to manage their risks better. Stock Exchanges and Clearing Corporations together provide the platform and products for trading in derivatives market, while ensuring online real time risk management, adequate surveillance, as well as smooth settlement of trades.

As per SEBI Act, key functions of SEBI is to protect the interest of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. One of the measures to achieve the aforesaid mandate as provided in the SEBI Act is to regulate the market through measures that may enable regulating the business of Stock Exchanges.

SEBI has taken following actions after examining of comments received from Secondary Market Advisory Committee (SMAC) of SEBI to strengthen the equity index derivatives

Let us see look into key actions of the SEBI:

1. Upfront collection of Option Premium from options buyers – In order to avoid any undue intraday leverage and to discourage any practice of allowing any positions beyond the collateral at the end-client level, it has been decided to mandate collection of options premiums upfront from option buyers by the Trading Member (TM)/ Clearing Member (CM). the upfront margin collection requirement shall also include net options premium payable at the client level. All this action will be implemented equity derivatives segment from February 01, 2025
2. Removal of calendar spread treatment on the Expiry Day – The market regulator announced the removal of calendar spread treatment on expiry day, banning offsetting positions across different expiries to mitigate basis risk.
3. Intraday monitoring of position limits – To curb the aforesaid risk of position creation beyond permissible limits, it has been decided that existing position limits for equity index derivatives shall henceforth also be monitored intra-day by exchanges. Stock Exchanges shall monitor minimum 4 position snapshots during the day. It may consider more than 4 positions as may be decided by Stock exchange.
4. Contract size for index derivatives- The lot size shall be fixed in such a manner that the contract value of the derivative on the day of review is within Rs. 15 lakhs to Rs. 20 lakhs as compared to existing contract size between Rs. 5 lakhs and Rs. 10 lakhs. All other contract sizes will remain same. This revised Contract lot size shall ensure to inbuilt suitability and appropriateness criteria for participants is maintained.
5. Rationalization of Weekly Index derivatives products- At maximum time, option trading on expiry day, when option premiums are low, is speculative. Accordingly, in order to specifically address this issue of excessive trading in index derivatives on expiry day, it has been decided to rationalize index derivatives products offered by exchanges which expire on weekly basis. Henceforth, each exchange may provide derivatives contracts for only one of its benchmark index with weekly expiry.
6. Increase in tail risk coverage on the day of options expiry- Normally ELM is levied with the view to cover tail risk. SEBI has decided to increase the tail risk coverage by levying an additional ELM of 2% for short options contracts. This will be applicable for all open short options at the start of the day and contracts initiated during the day.

Above all actions shall come into force from following time period

The SEBI circular is available on SEBI website at www.sebi.gov.in for more information

Please note,

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