Market regulator Sebi rolls out 6 measures to rein in F&O speculation

Higher contract size, margin near expiry to deter retail investors from the index derivatives market

The Securities and Exchange Board of India (Sebi) announced on Tuesday six key changes to the index derivatives trading framework, aimed at curbing excessive speculation amid growing concerns about the mounting losses incurred by individual traders.

The measures include increasing the contract size from Rs 5 lakh to Rs 15 lakh, raising margin requirements, and mandating the upfront collection of option premiums from buyers. Additionally, the new rules will limit weekly expiries to one benchmark per exchange, bring intraday monitoring of position limits, and remove the calendar spread treatment on expiry days.

A recent study by Sebi revealed that over 93 per cent of retail traders sustained losses amounting to Rs 1.8 trillion in the futures and options (F&O) segment over the past three financial years. Concerns over household losses in this speculative segment -- which has seen its average daily turnover go past the Rs 500 trillion mark -- have been voiced by various financial regulators and stakeholders, including the Reserve Bank of India (RBI) and the chief economic advisor.

In response, the markets regulator issued a consultation paper in July outlining the proposed measures, which were subsequently reviewed by an expert working group and the secondary market advisory committee.

The measures announced on Tuesday are aimed at raising the entry barriers for retail participants and will be implemented in phases, with three of the six changes set to take effect from November 20.

“It has been decided that a derivative contract shall have a value not less than Rs 15 lakh at the time of its introduction in the market. Further, 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 lakh to Rs 20 lakh,” said Sebi in the circular. This marks the first revision of contract size in nine years.

Regarding the limitation of weekly expiries per exchange to one benchmark, Sebi highlighted that the hyperactive trading in index options on expiry days poses risks to investor protection and market stability without providing any discernible benefits for capital formation. As a result, the National Stock Exchange (NSE) is expected to retain only weekly expiries of Nifty, while its peer BSE may only hold weekly expiries for Sensex, thus removing the current trend of one expiry daily.

Furthermore, Sebi will impose an additional extreme loss margin (ELM) of 2 per cent for short options contracts, effective November 20. “This would be applicable for all open short options at the start of the day, as well on short options contracts initiated during the day that are due for expiry on that day. For instance, if weekly expiry on an index contract is on 7th of a month and other  weekly/monthly  expiries on the index are on 14th, 21st and 28th, then for all the options contracts expiring on 7th, there would be an additional ELM of 2 per cent on 7th,” noted Sebi.

The markets watchdog has also mandated that brokers (trading members) collect option premiums upfront from buyers to prevent undue intraday leverage and discourage the practice of allowing positions that exceed the collateral at the trader level. Additionally, stock exchanges have been instructed to monitor position limits for equity index derivatives on an intraday basis, with these limits designed to prevent large traders from manipulating the market. This requirement will be effective from April 2025.

However, the proposal to rationalise option strikes did not make it into the final circular.

Sebi officials previously indicated that these changes are intended as short-term measures, with the possibility of additional steps to curb speculation being developed in the future. Earlier, the market regulator also revised the eligibility criteria for stock selection in the F&O segment.