Understanding SEBI’s New Rules for Index Derivatives: What’s Changing for Traders?
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We had on 28th August 2024 published a Blog titled “SEBI’s Consultation Paper on Index Derivatives Framework” which talked about the proposed measures SEBI is considering to restrict retail trading in Options
On October 1, 2024, SEBI released a circular that changes a few things for index derivatives. Here’s a breakdown of all the changes and their impact. Starting November 20, 2024, SEBI will introduce several important changes for derivative traders in an effort to increase investor protection and improve market stability. If you’re a trader dealing with index derivatives like Nifty, Sensex, BankNifty, FinNifty, Bankex, MidcpNifty, NiftyNXT50 these changes will directly impact how you trade options and futures. In this blog, we’ll explain these updates in simple terms, use examples, and provide a summary in tabular form for easy understanding.
Key Changes in SEBI’s Derivatives Regulations
Based on SEBI’s recent circular, the upcoming changes focus on margin requirements, contract sizes, expiry day trading, and more. Here’s what will change:
1. Removal of Calendar Spread Margin Benefit on Expiry Day
As of February 1, 2025, the calendar spread margin benefit will no longer be available for positions that expire on that day. Calendar spreads typically reduce margin requirements when traders hold positions in different expiries (e.g., one near-term and one far-term). However, due to heightened risk on expiry day, SEBI will remove this margin benefit.
🔹 Example: Suppose you are holding a Nifty future expiring today and another Nifty future for the next month. Previously, you received a margin offset due to the spread. Now, you’ll need to maintain full margin for both positions on expiry day.
2. Revised Contract Size for Index Derivatives
SEBI has increased the minimum contract size for index derivatives to ₹15 lakhs, up from the previous range of ₹5 to ₹10 lakhs. This change will take effect from November 20, 2024, ensuring contract sizes align with current market levels. As indices have grown in value, the contract size adjustment reflects this change.
🔹 Example: If the Nifty is trading at 25,000, the lot size will be adjusted so that the value of one contract equals at least ₹15 lakhs. This means you’ll be trading 60 contracts in a lot (25,000 x 60 = ₹15 lakhs), compared to the previous lower sizes.
3. Rationalization of Weekly Expiry Products
SEBI will restrict weekly expiry contracts to one benchmark index per exchange. This aims to reduce speculative trading and volatility on expiry days. For example, the BSE has already chosen the Sensex as the index for weekly expiries, while NSE is likely to continue offering Nifty 50 options for weekly expiry.
🔹 Example: NSE will offer Nifty 50 weekly options for expiry. BSE has chosen the Sensex (currently trading at 82,000) for its weekly expiry.
4. Increased Tail Risk Coverage on Expiry Day
To cover the risk of volatile price movements on expiry day, SEBI will require traders holding short positions to maintain an additional 2% Extreme Loss Margin (ELM) on expiry day. This new rule will be effective from November 20, 2024.
🔹 Example: If you’re holding a short Nifty option with a margin of ₹1,00,000 on expiry day, an additional 2% margin (₹2,000) will now be required to account for tail risk.
5. Upfront Collection of Options Premium
From February 1, 2025, traders will need to pay the full options premium upfront for buying options. Previously, traders could leverage smaller upfront margins to take larger positions, especially intraday. Now, traders must pay the entire premium at the time of the trade, reducing the excessive leverage some traders used.
6. Intraday Monitoring of Position Limits
From April 1, 2025, exchanges will begin to monitor position limits intraday rather than just at the end of the day. This means your positions will be checked at least four times daily to ensure they do not exceed permissible limits.
🔹 Example: If the limit for Nifty options is 1,000 contracts, the exchange will check your positions multiple times during the day. If your positions exceed this limit, you’ll need to bring them back within the limit or face penalties
Summary of Key Changes
| Measure | Effective Date | Impact on Traders |
|---|---|---|
| Revised Contract Size for Index Derivatives | November 20, 2024 | Contract value increased to at least ₹15 lakhs. |
| Rationalization of Weekly Expiry Products | November 20, 2024 | Only 1 Index for weekly expiry from NSE and BSE |
| Increased Tail Risk Coverage on Expiry Day | November 20, 2024 | Additional 2% margin required for short options on expiry day. |
| Upfront Collection of Options Premium | February 1, 2025 | Full premium required at the time of trade. |
| Removal of Calendar Spread on Expiry Day | February 1, 2025 | No margin benefit for spreads involving expiring contracts. |
| Intraday Monitoring of Position Limits | April 1, 2025 | Position limits will be monitored throughout the trading day. |
Impact on Traders and Examples
1. Reduced Leverage for Option Buyers
With the requirement to pay full premium upfront, traders will need more capital to take positions. This move limits excessive leverage and ensures better risk management.
2. Higher Margins on Expiry Days
On expiry days, traders will need to maintain higher margins as the calendar spread benefit is removed and additional tail risk coverage is introduced. This will require careful capital management to avoid margin calls.
3. Adjusted Contract Sizes
With Nifty trading at 25,000 and the contract size increasing to ₹15 lakhs, the number of contracts in each lot will increase to 60 (from lower levels), making it more capital-intensive for small traders to trade index derivatives.
4. Reduced Speculative Trading on Expiry
By offering only one weekly expiry index per exchange, SEBI aims to reduce speculation. With BSE choosing the Sensex (82,000) for weekly expiries, traders will need to adjust their strategies and focus on one index at a time.
How to Adapt to These Changes
To stay ahead of these new rules, traders should:
🔸 Plan ahead for expiry days, ensuring sufficient capital to cover increased margins.
🔸 Monitor position limits throughout the trading day to avoid penalties.
🔸 Adjust to the new contract sizes by trading more strategically or reducing position sizes.
🔸 Focus on Nifty weekly options on NSE and Sensex weekly options on BSE for expiration trades.
Conclusion
SEBI’s new regulations aim to make the index derivatives market safer and more stable by addressing excessive leverage, tightening margins, and reducing speculative volatility on expiry days. Traders will need to be more strategic in managing their positions, ensuring they have enough capital to meet the new margin requirements, and carefully selecting the right contracts.
With the changes coming into effect from November 20, 2024, now is the time to start adjusting your strategies and preparing for the new trading landscape.
By staying informed and adapting to these new rules, traders can continue to participate effectively in the derivatives market while navigating the tighter regulations.
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