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 fourth and the last article in the series.)
Remedy No. 5: Rationalization of Weekly Index derivative products: SEBI has stipulated to rationalize number of expiries based on Index derivatives. As of now, each day of the week, there is an expiry. This provides fodder for heightened speculation on daily basis. To the woes of retail investors, most of their bets in option segment go wrong resulting into hefty losses. In a recent deliberation, SEBI has said that 93 percent of retail investors have been losing money in derivative segment. This addiction is so strong that the loss-making investors continued their bet on derivative trading despite hefty losses.
Putting a check on the opportunities of losing money, SEBI has rationalized the weekly Index derivative products and said that ‘each exchange may provide derivatives contracts for only one of its benchmark indices with weekly expiry.’ This will curb excessive derivative trading to certain extent.
This measure will be effective from 20th November 2024. From this date, weekly derivatives contracts would only be available on one benchmark index for each exchange.
Remedy No. 6: Additional ELM of 2% for short options contracts: The securities market regulator SEBI has stipulated to levy additional Extreme Loss Margin (ELM) of 2 per cent for short option contracts. Selling an option contract by an option writer is called short option contracts. It requires huge margin, if sold blank. In short option contracts, profit is limited but loss is unlimited. Therefore, SEBI has taken a view to rein in short option contracts through imposition of additional ELM of 2 per cent. It is worth mention that Extreme Loss Margin (ELM) is levied to cover tail risk (tail risk is the chance of loss occurring due to a rare event) outside the scanning risk (scanning risk is a worst-case portfolio loss based on the net position).
The additional levy of 2 per cent additional Extreme Loss margin (ELM) would be applicable to all open short option contracts at the start of the day. It will also be applicable to short option contracts initiated during the day that are due for expiry on that day. In my view, the additional levy of 2 per cent ELM is too low. It should be increased to minimum 5 percent. Generally, retail investors are buyers of option and institutions are option sellers. Since institutions enjoy money muscle, it will hardly impact their trading strategy.
This measure will be implemented form 20th November 2024.
