The long-awaited prescription for F&O addicts came up on 1st October 2024 from the Market Regulation lab of SEBI. The market regulator has stipulated six-point remedy program for Rs. 2 lakh Crore loss to retail investor in F&O segment. Prima facie, the remedies sound good. We can classify these remedies into three segments: measures to curb heightened activity in index options on expiry day, suitability of index derivative products for investors and maintenance of risk mechanism. We will discuss these remedies in a series of articles. (This is third article in the series.)
Remedy No. 3: Intraday monitoring of position limits: The stock exchanges have pre-defined limits to index based future and option position. These limits have been set client wise, trading member wise and clearing member wise. In certain cases, you would have seen unavailability of a particular strike price with your trading member. This may be due to exhaustion of trading member-wise position limit at that strike price. On the day of expiry, the positions at index-based option strikes change so swiftly that verification of position limits becomes difficult to track. SEBI had said in its F&O consultation paper that most of the option positions are squired off within minutes on the day of expiry in last half an hour. Rapid changes in position limits go undetected during this period. There has been a provision of penalty for violation of end-of-the-day position limits.
The capital market regulator has said that index derivative positions will be monitored continuously on expiry day. It has directed stock exchanges to take at least four random snapshots of positions from each trading member to detect violation of position limits. Real time monitoring of position limits has not been stipulated in the circular. It has said that the penal provisions applicable to breach of end-of-the-day position limit will be applicable to intra-day violation of position limits as well. This measure is a deterrent one. It will discourage and disallow ‘zero or hero’ speculative position at the fag end of expiry day. Trading members will be cautious enough to disallow any such violation to save penalty. This provision has the potential risk of shifting stock exchange-based position to grey market Dabba traders.
This measure will be effective from 1st April 2024.
Remedy No. 4: Rationalization of contract size for index derivatives: The securities market regulator SEBI has increased the value of index-based derivatives contracts. It has said that ‘derivative contract shall have a value not less than Rs. 15 lakhs at the time of its introduction in the market. Further, the lot size shall be fixed in such a manner that the contract value of the derivative on the day of review is within Rs. 15 lakhs to Rs. 20 lakhs. Earlier the value was between 5 to 10 lakh per contract. It was set in the year 2015. SEBI has said that broad market values and prices have increased by around three times since 2015 and therefore revision in contract size has a rationale. Currently the index derivative contracts have a value between Rs. 5 lakhs and Rs. 10 lakhs.
This is a well thought out deterrent measure stipulated by SEBI. Revision in contract value and calibration of related contract size will deter small players from speculative trade.
The measure shall be effective for all new index derivatives contracts introduced after November 20, 2024.
