SEBI clampdown on F&O: How will it impact you?

As much as ₹51,689 crore — that was the loss incurred by individuals and proprietary firms from trading index derivatives in FY24. And that doesn’t include transaction costs. The latest consultation paper floated by market regulator Securities and Exchange Board of India (SEBI) highlights this.

In FY24, the notional turnover of index derivatives stood at ₹79,927 lakh crore. A small cluster of investors have, thus, taken speculative activity to disproportionate levels.

The above numbers were clocked even after SEBI, in January 2023, noted in a report that nine out of 10 traders lost money in trading futures and options (F&O).

So, it is quite obvious that the speculative fire has been well fanned, especially with options expiring on all weekdays, practically offering ‘zero days to expiration’ (0-DTE) options. Whether such contracts should have been launched in the first place is a moot question; SEBI now seems to be attempting a course correction by introducing measures to make index derivatives trading difficult and clamping down on speculation.

• Also read: Taxing April. Options writers make huge losses on freak spikes in indices

Speculation is required to bring some counterbalance to price movements, but when left unchecked it can cause imbalances in the financial system. To that extent the new measures proposed by SEBI are justified and welcome.

How will it impact traders? Read on to find out.

Margins obligation can shoot up

Among the slew of measures that SEBI intends to bring, the most concerning for traders could be the increase in the value of index derivative contracts. According to the consultation paper, the value is proposed to be trebled from ₹5-10 lakh to ₹15-20 lakh in the first phase. In the second phase, about six months later, the value would be increased to ₹20-30 lakh.

• Also read: Understanding the differences: Stock derivatives vs Index derivatives 

To illustrate, if the current contract value of Nifty futures is around ₹6.2 lakh — that is, the current value of 24,930 multiplied by the lot size of 25. To increase the contract value to ₹15-20 lakh, the lot size can be increased to 75. So, at the current market price, the contract value could be nearly ₹19 lakh (24,930 multiplied by 75) in the first phase. In the second phase, the lot size could rise to 100, pushing up contract value to about ₹25 lakh.

SEBI is likely to consider a range of lot sizes to maintain the proposed contract value range.

Therefore, the margin obligation can increase anywhere between 3 and 6 times, depending on the lot size. Here’s a comparison.

For futures, traders need to pay the initial margin, which is the sum of SPAN margin and exposure margin. For index futures, it is 11 per cent. This can vary depending on market conditions. Hence, for the existing contract value of ₹6.2 lakh, the initial that margin traders should pay is nearly ₹69,000 (₹6.2 lakh multiplied by 11 per cent).

If the contract value rises to ₹19 lakh and ₹25 lakh, the margin requirement to initiate futures trade in indices will increase to ₹2.1 lakh and ₹2.7 lakh, respectively.

This will have an impact on options, too. For instance, the August expiry 25,000-strike call option’s premium is at ₹300. So option buyers will pay ₹7,500 (₹300*25) currently. If the lot size rises to 75 and 100, the premium to be paid will increase to ₹22,500 and ₹30,000, respectively. That said, overall, futures participants appear to take more brunt than option traders.