On October 1, 2024, SEBI released a circular introducing significant changes to index derivatives trading in India. These updates will affect how traders approach futures and options (F&O) contracts, with changes ranging from increased contract sizes to new margin requirements. This blog breaks down the new rules and their impact on traders.
Key Changes and Implementation Dates
SEBI’s changes to index derivatives focus on improving market stability while managing risk more effectively. Below is a summary of the measures and their respective implementation dates:
| Measure | Effective from |
|---|---|
| Increase in contract size | November 20, 2024 |
| Limiting weekly expiry contracts | November 20, 2024 |
| Additional margins on expiry day | November 20, 2024 |
| No calendar spread benefits on expiry day | February 1, 2025 |
| Upfront collection of premium while buying options | February 1, 2025 |
| Intraday monitoring of position limits | April 1, 2025 |
Let’s explore each of these changes in detail.
1. Increase in Contract Size
Starting from November 20, 2024, SEBI will increase the contract value for index F&O contracts from the current range of ₹5 lakh–₹10 lakh to ₹15 lakh–₹20 lakh. This change will increase the lot size for index derivatives, which in turn will raise margin requirements for traders.
Impact on Traders
This adjustment means that traders will need to maintain larger margins for the same positions. Additionally, any existing long-term positions might be affected by the new contract sizes, particularly for Nifty options, which may no longer align with the new lot size, creating odd lots.
| Index | Current Lot Size | New Lot Size (Rounded Off) |
|---|---|---|
| NIFTY | 25 | 60 |
| BANKNIFTY | 15 | 30 |
| FINNIFTY | 25 | 65 |
| MIDCPNIFTY | 50 | 115 |
| SENSEX | 10 | 20 |
2. Limiting Weekly Expiry Contracts
Currently, both NSE and BSE offer weekly expiry contracts on multiple indices. However, under the new rules, exchanges will only be allowed to offer weekly expiry contracts on one benchmark index from November 20, 2024. This means:
- NSE must choose between Nifty 50 or Bank Nifty.
- BSE must choose between Sensex or BankEx.
All other indices will only have monthly expiries.
Why the Change?
This move aims to manage volatility and reduce speculative trading around weekly expiries. By limiting weekly contracts to just one index, SEBI intends to promote more stable trading patterns.
3. Additional Margins on Expiry Day
Effective from November 20, 2024, traders will face an additional 2% Extreme Loss Margin (ELM) on short positions (option sellers) on the day of expiry. This additional margin is designed to cover risks associated with increased volatility on expiry days.
Example
Let’s say you have a short position in a Nifty 27,000 call option expiring on October 30th, with a margin of ₹1 lakh. On expiry day, you will need to add an extra 2% margin, or ₹12,500, calculated as:
ELM = (Strike Price × Lot Size × 2%)
This additional margin ensures that traders are better prepared for price fluctuations on expiry day.
4. No Calendar Spread Benefits on Expiry Day
Traders often hedge their positions using calendar spreads, which offer margin benefits by reducing the overall margin required. Starting from February 1, 2025, SEBI will no longer allow margin benefits for calendar spreads on expiry day.
Example
If you have a short option expiring on 31st January and a long option expiring on 28th February, you currently enjoy a margin benefit. However, on the expiry day of the short option, this benefit will no longer apply, and you’ll need to maintain the full margin.
5. Upfront Collection of Premium While Buying Options
SEBI has mandated that the entire option premium must be collected upfront when buying options, effective February 1, 2025. While this doesn’t change much for Zerodha clients (as the platform already collects full premiums upfront), it ensures there is no additional leverage offered to option buyers across the market.
6. Intraday Monitoring of Position Limits
Currently, exchanges monitor position limits for traders and brokers at the end of each trading day. Starting April 1, 2025, these limits will be monitored throughout the trading day. The maximum position limits remain:
- 5% for clients (of all derivative contracts on the same underlying).
- 15% for brokers.
What Does This Mean?
This change will help exchanges react to potential breaches of position limits more quickly, thus reducing market manipulation risks.
Conclusion: How Will These Changes Affect You?
SEBI’s new rules for index derivatives trading focus on reducing market volatility, improving risk management, and ensuring stability. For traders, this means adjusting to larger lot sizes, preparing for increased margins on expiry days, and adapting to new restrictions on weekly expiries and calendar spreads.
As always, staying informed and planning your trading strategies around these changes will help you navigate the new regulations effectively. Keep an eye on the implementation dates and ensure your portfolio is well-prepared for these upcoming shifts.