SEBI mulls measures to curb speculative trading in Index Derivatives

The Securities and Exchange Board of India (SEBI) has proposed tightening rules for index derivatives to curb speculative trading. The new measures include revising the minimum contract size and requiring the upfront collection of option premiums.

This proposal follows the government's decision in the Union Budget to raise the securities transaction tax (STT) on futures and options trades starting October 1, addressing concerns about excessive speculative activity in the derivatives market. The Economic Survey also raised alarms about the surge in retail investors' interest in derivatives, suggesting that speculative trading has no place in a developing country and attributing the increase to a gambling instinct among humans.

In its consultation paper, SEBI has outlined several measures:

Minimum Contract Size: The minimum value for index derivative contracts will be revised in two phases. Initially, the minimum contract size will range from Rs 15 lakh to Rs 20 lakh. After six months, it will increase to between Rs 20 lakh and Rs 30 lakh. The current minimum contract size, set in 2015, ranges from Rs 5 lakh to Rs 10 lakh.

Options Strikes Rationalisation: A uniform strike interval of 4 per cent around the prevailing index price will be implemented, with expanded intervals beyond the initial coverage. A maximum of 50 strikes will be introduced initially, with new strikes added daily to maintain these intervals.

Upfront Collection of Option Premiums: Members will be required to collect option premiums from clients upfront.

Calendar Spread Benefits: No margin benefit will be provided for calendar spread positions on contracts expiring on the same day.

Intraday Monitoring of Position Limits: Position limits for index derivatives will be monitored intraday by clearing corporations and stock exchanges.

Weekly Options Contracts: Weekly options contracts will be limited to a single benchmark index of exchange. The Extreme Loss Margin (ELM) will be increased by 3 per cent the day before expiry and by 5 per cent on the expiry day.

These proposals aim to enhance investor protection and promote market stability in derivative markets. While derivatives assist in better price discovery, improve market liquidity, and allow investors to manage risks, speculative hyperactivity, especially by individual traders, can threaten investor protection and market stability.

A SEBI study in January 2023 revealed that 89% of individual traders in the equity F&O segment incurred losses. For FY2023-24, 92.50 lakh unique individuals and firms traded in NSE's index derivatives, resulting in a cumulative trading loss of Rs 51,689 crore, excluding transaction costs. About 85 per cent  of these traders made net losses.

((With PTI inputs)