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Investors in the market are optimistic for modifications in Sebi’s derivatives strategies

The Securities and Exchange Board of India (Sebi) recently closed the window for public comments on its discussion paper titled “Measures to strengthen index derivatives framework for increased investor protection and market stability.” This paper has sparked a debate among market participants, with various stakeholders putting forth their suggestions and concerns.

One of the key recommendations proposed by Sebi’s Secondary Market Advisory Committee (SMAC) is to increase the initial margin required to trade in index derivatives. This margin consists of Span and extreme loss margin (ELM), with the potential for a significant increase in margin requirements for writing options on the expiry day. This move aims to enhance risk management and protect retail investors from excessive leverage.

Rajesh Baheti, director of Crosseas Capital, has suggested imposing a minimum cash requirement of ₹5 lakh for trading options to safeguard retail investors. He also proposed having multiple index products expire on the same day instead of the current practice of having five indices expire each day of the week. These measures are aimed at reducing market volatility and enhancing market stability.

Another important recommendation is to increase the contract size from ₹5-10 lakh to ₹25-30 lakh. This adjustment could potentially impact trading volumes, with estimates suggesting a significant decrease in NSE’s volumes and a slight increase in BSE’s volumes. The rationale behind this move is to align contract sizes with the risk profile of investors and prevent excessive speculation in the market.

In addition to these measures, Sebi is considering other changes such as increasing strike intervals in options, removing calendar spread benefits on the expiry day, collecting upfront margin from option buyers, and enforcing stricter position limits on an intra-day basis. These measures aim to enhance market integrity and prevent market manipulation.

The proposed changes come in the wake of a significant increase in securities transaction tax (STT) on sellers of futures and options contracts in the FY25 Union budget. This move is intended to discourage speculative trading and promote long-term investment in the market. While some market participants believe that these measures may reduce derivative trading volumes in the short term, others argue that it will lead to a more sustainable and stable market environment in the long run.

Overall, the proposed measures by Sebi aim to strike a balance between protecting retail investors and ensuring market stability. By implementing these changes, Sebi hopes to create a more transparent and efficient trading environment that benefits all market participants. It remains to be seen how these recommendations will be implemented and the impact they will have on the Indian derivatives market.

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