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SEBI’s Proposed Measures to Curb F&O Speculation
Context:
Securities and Exchange Board of India (SEBI) proposed measures to curb speculative trading in index derivatives amid rising volumes in futures and options (F&O) trading, particularly by individual investors.
Types of Derivatives:
- Futures: Contracts obligating the buyer to purchase an underlying asset at a predetermined price on a specified date.
- Options: Contracts giving the buyer the right, but not the obligation, to buy (call) or sell (put) an asset at a specified price within a set time frame.
- Forwards: Private agreements to buy or sell an asset at a future date and price, customisable and traded OTC (Over-the-Counter).
- Swaps: Contracts exchanging cash flows or financial instruments, commonly based on interest rates or currencies, traded OTC.
SEBI’s Proposed Measures:
- Increase Minimum Contract Size: Raise the minimum contract size for index derivatives from Rs 5-10 lakh to Rs 15-20 lakh, potentially increasing to Rs 20-30 lakh after six months.
- Upfront Collection of Option Premiums: Require brokers to collect option premiums from clients upfront.
- Intraday Monitoring of Position Limits: Market Infrastructure Institutions (MIIs) to monitor position limits for index derivative contracts intraday.
- Rationalisation of Weekly Index Products: Provide only one weekly options contract on a single benchmark index of an exchange.
- Removal of Calendar Spread Benefits on Expiry Day: Eliminate margin benefits for positions involving contracts expiring on the same day.
- Rationalisation of Options Strikes: Uniform strike intervals up to 4% near the prevailing index price; increased intervals as strikes move away. Limit to 50 strikes per index derivatives contract at launch.
- Increase in Margins Near Contract Expiry: Raise margins on expiry day and the previous day to address high implicit leverage.
Rationale for Measures:
- Enhance investor protection and market stability amid concerns over the rise in F&O trading volumes.
- Union Budget 2024-25 doubled the Securities Transaction Tax (STT) on F&O securities, effective October 1, 2024.
- FY 2023-24 data showed 92.50 lakh individual and firm traders in NSE index derivatives incurred a Rs 51,689 crore loss, with only 15% making a net profit.
Way Forward:
- Enhancing Investor Education and Awareness: Implement comprehensive investor education programs to mitigate risks.
- Strengthening Regulatory Oversight and Compliance: SEBI to enhance regulatory framework with robust monitoring systems ensuring compliance with proposed measures.
