As per the latest update, the Securities and Exchange Board of India (SEBI) is set to implement new measures to address speculative trading in index derivatives. This includes limiting option contract expiries and increasing contract sizes. These changes in F&O trading aim to improve investor protection and promote market stability.
Retail investors in India often engage in risky speculative trading in derivatives. SEBI’s suggestions are the result of increased participation and high trading volume on expiry days. The availability of short-term index options contracts have also contributed to this.
What are these latest changes as per SEBIs latest stock market study?
Let us take a look!
SEBI’s Latest Market Study – 2024
SEBI’s recent study showed that 92.5 lakh retail traders and proprietorship firms lost ₹51,689 crore in FY24.
Out of these 92.5 lakh investors, 14.22 lakh made a net profit. This means that approximately 85 out of 100 traders faced a net trading loss.
- SEBI found that:
- Loss-makers spent an extra 23% of their losses on transaction costs.
- Profit-makers spent an extra 15% of their profits on transaction costs in FY22.
- After accounting for transaction costs, the situation for FY24 is expected to be similar to FY22, where nine out of ten traders lost money.
- The total net trading loss in FY24 from future and options was over 32% of the net inflows into growth and equity-oriented mutual funds for the same year.
SEBI’s New Measures to Tackle Speculative F&O Trading
Until last year, SEBI focused on investor protection regarding the growing interest in options trading. However, it’s now seen as a bigger issue, said SEBI Chairperson Madhabi Puri Buch. Based on an expert panel’s suggestions, SEBI has proposed seven key measures for trading stock options.
Stock exchanges and clearing corporations must adopt these 7 key changes:
1. Rationalizing Strike Prices for Options Trading
SEBI plans to make changes to how strike prices are set.
“The gap between strike prices will be the same near the current index price, about four percent,” SEBI said.
“As the prices move further from the current level, the gap will increase to between four and eight percent.” SEBI also mentioned that no more than 50 strike prices will be available for an index derivatives contract when it first launches.
2. Payment of Options Premium in Advance
Options prices change in a non-linear way, depending on their moneyness. This means they have high implicit leverage, which can lead to very rapid changes in price. Because these are timed contracts, their prices can go up or down quickly. The new measure aims to prevent excessive intraday leverage and to stop the practice of holding positions beyond what’s backed by collateral.
Thus, SEBI has suggested that buyers should pay the options premium upfront.
3. Intraday Monitoring of F&O Position Limits
With the market changing, SEBI wants position limits for index derivative contracts to be monitored. The clearing corporations and stock exchanges must do it throughout the day. This will involve short-term fixes and a gradual full implementation. However, it is subject to necessary changes in the technology.
4. Removing Calendar Spread Benefits on Expiry Day
As per the latest F&O update, the trading volumes on option contract expiry days are much higher compared to non-expiry days. The new changes in future and options trading are due to this volume difference and the risks involved.
Thus, SEBI has decided that no margin benefits will be given for calendar spread positions if any contracts expire on the same day.
5. Increasing Minimum Contract Size
The minimum option contract size for index derivative contracts will increase in two phases:
- Phase 1: Minimum value between ₹15 lakhs to ₹20 lakhs.
- Phase 2: After six months, minimum value between ₹20 lakhs to ₹30 lakhs.
6. Optimizing Weekly Index Offerings
Weekly option contracts expire on all five trading days. Thus, there’s been increased volatility on expiry days, especially towards the end of the day. As per SEBI, it’s clear that these conditions create opportunities for speculative trading. This has led to poor outcomes for individual investors in the F&O segment. To address this, SEBI thinks it’s necessary to simplify and improve the way these weekly options contracts are offered.
7. Increasing Margin Near Contract Expiry
There is always a high implicit leverage in options contracts, especially near expiry. Thus, SEBI has proposed raising the Extreme Loss Margin (ELM) by 3% to 5%. This change aims to reduce the high risk involved for those trading options.
Tax Hikes on F&O Trading: Budget 2024
Finance Minister Nirmala Sitharaman announced a major increase in the Securities Transaction Tax (STT) in the Union Budget 2024.
- The STT has been raised from 0.01% to 0.02%.
- This change means that equity and index traders will face double the tax on futures and options (F&O) trades.
- The new STT rate will be effective from October 1, 2024.
What Do These Latest Changes in Futures and Options Trading Mean for You?
SEBI’s new measures for options and futures trading could significantly impact retail investors. For investors, this means more stable markets, but it could also reduce opportunities for speculative gains. Overall, these changes are designed to protect investors and ensure fairer trading practices.
Source: https://www.livemint.com
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