India's capital market authority, the Securities and Exchange Board of India (SEBI) has been consistently working to manage high-risk derivative trading for retail investors. In the past year, SEBI introduced a series of regulatory measures to remove extra speculation in the futures and options (F&O) trading segment. The outcomes of these regulations have affected retailer’s participation adversely with a significant decline in derivative trading numbers.  The new rules imposed by SEBI in the previous year are to take away Indian retail investors from high-risk derivative trading activity. These regulations by SEBI on F&O trading led to a drop of  more than 20% fall in retail premium turnover and traders.

Monthly Fall of Retailers in F&O Segment

This new framework by SEBI in F&O segment had introduced to address various issues such as investor protection, market stability and risk management. Simultaneously new framework is meant to give transparency, more stability and investor friendly F&O market with minimizing risk for participants.  Below are the updates which proposed by SEBI to regulate F&O market.

1. Increase Value of the Contract

As per the new norms of the NSE circular, the minimum derivative contract size has a value not less than ₨15 lakhs. The previous size for derivative was between 5-10 lakhs. Further, the lot size (the number of units in the contract) will be set in a manner that the value of the derivative contract on the day stays between 15 lakhs to 20 lakhs. The revised lot sizes for NSE and BSE are below.

NSE

BSE

Outcomes

After the new measures by SEBI, now investors requires higher margin to execute their trades. It will limit their trade activity or investment choices because increase in need for capital requirements.

2. Extreme Loss Margin (ELM)

To increase the tail risk coverage on the expiry day of option contracts, an additional Extreme Loss Margin (ELM) of 2% will be levied on short index options contracts. This extra ELM of 2% will be applicable for short index options contracts during the day as well as for all open short index options at the start of the day which are due for expiry on that day. This 2% additional margin (ELM) apply on contract value that increasing the margin requirement.

Outcomes

New changes in the ELM (Enhanced Leverage Margin) framework give less available leverage to customers and also adversely affect the ability of customers to take larger positions without increasing their capital amount. The availability to deploy shares as margin increased. The cash component margin requirement with brokers will also rise.

3. No Margin Benefits On Expiry Day

There are no margin benefits for calendar spreads on expiry day from the date of 10 February, 2025. In this SEBI There are no margin benefits for calendar spreads on expiry day from the date of 10 February 2025. In this, SEBI wants to avoid manipulation in the F&O segment through increasing margin requirements on expiry day. For example, if a person has a short option expiring on 31 March 2025 with a margin of ₨ 1 lakh and also has a long option which will expire on 30 April 2025. Now your short position is hedged by your long position then you will get margin benefits in this situation and require ₨50,000 instead of ₨ 1 lakh. Therefore it was giving more concession in margin requirement for investing. But from the date of 31 January (expiry day), this margin benefit is not available to investors and now they require a full ₨ 1 lakh margin.

Example:

Outcomes

Due to non hedge benefits traders requires more capital available in their account to maintain these positions. After increasing the margins significantly traders might find calendar spread less attractive because more capital is locked up. Along with it cash component margin deployed with broker will also increase.

4. New Exchange transaction charges

There is a change in transaction fees in the NSE & BSE market from 1 October 2024. In this transaction fees in the cash market have been reduced to fix rate of ₨2.97 per lakh of traded value, low from ₨ 2.97 to 3.22 lakh. In equity futures currently fees at ₨ 1.73 per lakh of traded value decrease from ₨1.73 to ₨1.88 per lakh. Whereas equity options charge at ₨35.03 per lakh of premium value, earlier it was ₨29.50 to 49.50 lakh. In the MCX market transaction fees for future contracts are ₨2.10 per lakh for turnover value and options contracts have fees of ₨41.80 per lakh of premium turnover. There is no change in the BSE market.

Outcomes

The impact of these changes affected retailers adversely as those retail traders who engage in high frequency trading because of substantial increase in costs. Hedged strategies like iron condors, straddles and strangles which require multiple legs to be traded have carried higher truncation costs. This also stimulated retailers to shift toward long term strategies to avoid increased burden of taxes and transaction charges.

5. Changes in weekly index derivative

The NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) have made important changes related to their weekly derivatives contracts for futures and options trading which started in the previous year in November month. The major update is that only one weekly index derivative is available per exchange which includes offer only expiry of Nifty50 & Sensex30 by NSE and BSE respectively. In this retailers can only trade in one weekly contract in the nifty or nifty bank (which trade is on depending on the exchange) for a given week.

Outcomes

After this change traders who execute strategies based on different expiry dates have faced fewer options. It has also created close bid-ask spread making it easier for retailers to enter or exist in trade at favorable position but it also created higher volatility for that single contract because of more concentrated trading activity in market.