SEBI has proposed a raft of measures to curb retail frenzy in the derivatives market. The regulator plans to increase the contract size for options contracts 3-6x times in phases — between ₹15 lakh and ₹20 lakh in the first phase and ₹20-30 lakh six months later.

“The minimum contract size requirement for derivative contracts of ₹5-10 lakh was last set in 2015. During the last nine years, the benchmark indices have gone up nearly three times. Given the inherently higher risk in derivatives and the large amount of implicit leverage, increase in minimum contract size would result in reverse sachetisation of such risk-bearing products,” the consultation paper said.

Weekly options contracts will be provided on a single benchmark index of an exchange. “Expiry day trading is almost entirely speculative. Given there is an expiry of weekly contracts on all five trading days of the week combined with previous findings on increased volatility on expiry day and increased volatility, rationalisation is warranted in the product offering,” the paper observed.

Large open interest and abnormal trading activity close to expiry can create undue stress in the market ecosystem in the event of an extreme black swan event, the paper warned.

Option premiums will have to be collected upfront from clients. The extreme loss margin at the start of expiry day and the day before expiry may be increased 5 per cent and 3 per cent, respectively.

Nithin Kamath, CEO, Zerodha, said the suggested measures, even with the STT increase, won’t really change options volumes. “These changes will incentivise futures traders to move to options. If the intent is to reduce speculation, the solution is to make it harder for non-serious people to trade by having a product suitability framework,” he said.

Other proposals

Existing strike price introduction methodology may be rationalised. Strike interval to be uniform near prevailing index price (4 per cent around prevailing price) and the interval to increase as the strikes move away from prevailing price (around 4-8 per cent). Not more than 50 strikes to be introduced for an index derivatives contract at the time of contract launch.

The margin benefit for calendar spreads would not be provided for positions involving contracts expiring on the same day. A calendar spread is an options or futures strategy where an investor simultaneously enters long and short positions on the same underlying asset but with different delivery dates.

“Removing the calendar spread margin benefit will have a significant impact on delta hedging and volumes on the expiry day,” said a broker.

The position limits for index derivative contracts will be monitored by the clearing corporations and stock exchanges intra-day, with a short-term fix, and a glide path for implementation.

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