SEBI’s tighter F&O rules may result in a 15-20 per cent drop in option premium collections and a 35-40 per cent reduction in the number of F&O orders, according to market watchers. Revenues of exchanges may take a 15-20 per cent hit, whereas discount brokers’ toplines may erode by 25 per cent.
The contract size for index derivatives has been raised to ₹15-20 lakh from ₹5-10 lakh earlier. This may bump up the lot size for Nifty from 25 to 75, for Bank Nifty from 15 to 30 and for FinNifty from 25 to 75, said experts.
Weekly expiry
Each exchange will now be able to provide derivatives contracts for only one of its benchmark indices with weekly expiry. This would mean only two weekly expiries instead of five at present.
“Single index expiry for weekly contracts per exchange will limit uncovered/naked options selling due to fewer avenues. Withdrawing cross margin benefit for calendar contracts on the last day, will force players to do rollovers early and not wait till expiry day, easing expiry day “basis” speculation,” said Kunal Sanghavi, Chief Strategy and Transformation Officer, HDFC Securities
“Basis” is the difference between the futures price and stock price which gets extensively impacted during rollovers eventually impacting underlying asset price leading to undesired movement in prices of all derivatives instruments of the respective underlying asset.
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Trading impact
Monitoring of position limits intra-day as opposed to end-of-day may impact proprietary trading desks, high-frequency traders and foreign portfolio investors (FPIs). Currently, position limits are specified by SEBI at the client level for index derivatives contracts. Many players breach this limit intraday but get back to allowed limits before markets close. “Since these limits are large, this should impact prop traders and FPIs much more than individual investors,” said Ashish Nanda, President and Head of digital business, at Kotak Securities.
Options premiums now have to be paid upfront. Currently, exchanges block the broker’s collateral for options bought intraday, which allows one person to effectively buy and sell intraday using another person’s collateral. For example, if a client has a margin of ₹100, he is allowed to buy ₹400 of option premium, provided he has created a stop loss order where the maximum loss is within the client capital of ₹100.
Risk mitigation
SEBI has done away with the calendar spread on expiry day, which will reduce systemic risk. One can sell an option on expiry day and buy a futures or options for a later expiry. This provides a “calendar spread” benefit that reduces margins by as much as 50 per cent, said experts. This lower margin allows a person to take twice the exposure as he would without the calendar spread benefit.
“This also is a step to reduce systemic risk where post expiry, we see a few unhedged positions in client accounts without relevant margins in place,” said Nanda.
Rohit Agarwal, CEO-Funds Business at Dovetail Capital believes that limiting weekly expiries to a single index on NSE and BSE could encourage a shift in trading volumes towards GIFT City, which still offers a wider range of weekly options. “From an FPI perspective, this creates an attractive opportunity for those seeking flexibility in trading strategies. However, the transition will largely depend on how well GIFT City can build its liquidity and market depth to support this shift.”
NSE averaged 10.8 billion equity derivatives contracts monthly in FY24. GIFT City represents less than 1 per cent of NSE’s volume with around 2 million contracts traded monthly, said Agarwal.