SEBI Tightens Derivatives Rules: 4 Important Changes for Investors - Read Here

The Securities and Exchange Board of India (SEBI) has introduced stricter rules for the derivatives market to protect small investors and curb speculation. These new measures affect the equity derivatives segment, also known as F&O (futures and options). Here are four key takeaways from these changes:

1. Increase in Contract Size to Reduce Speculation
   One of the most significant changes is the increase in the size of futures and options contracts. The minimum contract size for index options and futures will rise from the current range of ₹5 lakh to ₹15 lakh. Experts believe that this increase will help reduce speculation among small retail investors who often take unnecessary risks and end up with losses. By raising the contract value, SEBI aims to limit the activity of inexperienced traders in the F&O market.

2. Fewer Weekly Contracts for Greater Stability
   Another important change is the reduction in the number of weekly option contracts. SEBI will limit each exchange to one benchmark index for weekly contracts, resulting in just six weekly contracts per month instead of the current 18. This change will likely have a significant impact, as it will reduce the opportunities for uncovered or naked option selling. Fewer contracts mean less risky trading behavior and a more stable market.

3. New Margin Requirements Affect Retail Traders
   SEBI has also introduced changes to margin requirements. The new rules will withdraw cross-margin benefits for calendar contracts on the last trading day. This means that traders will have to make decisions earlier rather than waiting until expiry day. Although this is intended to reduce speculation on expiry day, some analysts believe the margin increases were not as high as expected. This might soften the impact on retail participation in options trading.

4. Phased Implementation for Better Market Health
   The new rules will be implemented in phases over the next few months. The first three changes, including the reduction in weekly contracts and increased margins, will significantly impact retail traders. Other measures, such as upfront collection of premiums and removing calendar spreads, will be introduced later, from February and April 2025. Experts view this phased approach as a positive move because it helps prevent sudden shocks in the market and allows for a gradual adjustment to the new rules.

In conclusion, SEBI's stricter norms for the derivatives market aim to protect small investors and create a more stable trading environment. While these changes may pose challenges for retail traders, they are designed to improve overall market health and reduce risky trading behaviors.