SEBI issues measures to strengthen Equity Index Derivatives Framework

On 1-10-2024, the Securities and Exchange Board of India (‘SEBI’) laid down measures to strengthen Equity Index Derivatives Framework for increased investor protection and market stability on the recommendation of Expert Working Group (‘EWG’) on derivatives.

Key Points:

1. Need for derivatives market assist:

   • Better price discovery;

   • Help improve market liquidity;

   • Allow investors to manage their risks better.

2. EWG on derivatives was formed by SEBI to:

   • To review the existing regulatory measures for investor protection;

   • To ensure orderly development and strengthening of equity derivatives market;

   • To identify measures to assist stock exchanges;

   • To suggest measures for investor protection and market stability.

3. Upfront collection of Option Premium from options buyers:

   • Effective from- 1-2-2025

   • Reason for the measure taken- To avoid any undue intraday leverage to the end client and to discourage any practice of allowing any positions beyond the collateral at the end client level.

   • Hence, it has been decided that upfront margin collection requirement will also include net options premium payable at client level.

4. Removal of calendar spread treatment on the Expiry Day:

   • Effective from- 1-2-2025

   • Reason for the measure taken- There is significant basis risk at the expiry day where the value of contract expiring on the day can move differently from the value of similar contracts expiring in future.

   • Hence, it has been decided that the benefit of offsetting positions across different expiries will not be available on the day of expiry for contracts expiring on that day.

   • Benefits- align calendar spread treatment with cross margin framework on correlated indices having different expiries, wherein cross- margin benefit is fully revoked at the start of the first of the expiring correlated indices.

5. Intraday monitoring of position limits:

   • Effective from- 1-4-2025

   • Reason for the measure taken-

     • To address the risk where on the expiry day, due to large volumes of trading, there is a possibility of undetected intraday positions beyond permissible limits during the day;

     • To avoid the risk of position creation beyond permissible limits.

6. Contract size for index derivatives:

   • Effective from- 20-11-2024

   • Last time the limit for Contract size was set in the year 2015 and since then broad market values and prices have increased around 3 times.

   • Benefit: Recalibration in minimum contract size in tune with the growth of market will ensure that an inbuilt suitability and appropriateness criteria for participants will be maintained as intended.

7. Rationalization of Weekly Index derivatives products:

   • Effective from- 20-11-2024

   • Reason for the measure taken- to address the issue of excessive trading in index derivatives on expiry day it was decided to rationalize index derivatives products offered by exchanges which expire on weekly basis.

   • Hence, each exchange will provide derivatives contracts for only one of its benchmark index with weekly expiry.

8. Increase in tail risk coverage on the day of options expiry:

   • Effective from- 20-11-2024

   • Reason for the measure taken- to avoid the heightened speculative activity around options positions and the attendant risks.

   • Hence, it was decided to increase the tail risk coverage by levying an additional Extreme Loss Margin of 2% for short options contracts.