SEBI’s measures to protect investors in the Futures and Options (F&O) trade are set to be phased in over the next 3-6 months, according to a report by Jefferies, an investment banking company. These measures are aimed at preventing systemic shocks and leading to a calibrated market tightening. The market regulator announced six key measures on October 1 to strengthen the derivatives framework, including raising the minimum contract size from Rs 5 lakh to Rs 15 lakh.
The six measures include the upfront collection of options premiums, removing calendar spread benefits on expiry day, increasing the contract size for index derivatives, intraday monitoring of position limits, rationalising weekly index derivatives to one benchmark per exchange, and enhancing margin requirements on options expiry days. These measures are set to be implemented in a phased manner between November 20th, 2024, and April 1st, 2025. The upfront collection of premiums and removal of calendar spreads will be implemented from February 1, 2025, while intraday monitoring of position limits will take effect from April 1 of the same year.
Jefferies noted in their report that the reduction in weekly contracts, additional margin, and higher lot size will have a bigger impact on retail participation. Currently, weekly premiums make up approximately 65 percent of overall industry premiums, and depending on the choice of one index by exchanges, contracts amounting to around 35 percent of industry premiums can be removed. The report also mentioned that the latter three measures will have a more significant impact on institutional players such as HFTs/Algos.
The reduction in the expiry date per week, from the existing 5 days to 2 days, will induce trading behavior changes for both individual and institutional participants. The report stated that the outcome of these measures will also drive the regulatory direction on further measures, if required. Retail-focused discount brokers and exchanges are expected to be most affected due to the shrink in system premiums. BSE is expected to face a 10 percent cut in EPS assuming the discontinuance of the Bankex product, with focus remaining on volume impact on continuing products post-implementation of the new regulations.
Traditional brokers are expected to see relatively lower impact as the lower margin hikes will aid their HNI client base. Clearing members catering to institutional players such as HFTs / FPIs are expected to have a marginal impact, if any. Other market participants like AMCs, wealth managers, and depositories are expected to remain unaffected by these regulatory changes. Overall, the phased implementation of SEBI’s measures aims to create a healthier market environment while protecting investors and preventing systemic shocks in the F&O trade.
