Phased implementation of SEBI's F&O measures is a big positive for market health: Jefferies

New Delhi [India], October 3 (ANI): The phased implementation of SEBIs measures to protect investors in the Futures and Options (F&O) trade will prevent systemic shocks and lead to a calibrated market tightening, says investment banking company Jefferies in a report.

"We see phased implementation over the next 3-6 months as a big positive for market health as it prevents any systemic shocks and leads to a calibrated tightening of the market," said Jefferies report.

The market regulator on October 1, announced as many as six measures to strengthen the derivatives framework, including raising the minimum contract size from Rs 5 lakh to Rs 15 lakh.

These six measures include the upfront collection of options premiums, removing calendar spread benefits on expiry day, increasing the contract size for index derivatives, intraday monitoring of position limits, rationalising weekly index derivatives to one benchmark per exchange, and enhancing margin requirements on options expiry days.

These six measures are to be implemented in a phased manner between November 20th, 2024, and April 1st, 2025.

However, the upfront collection of premiums and removal of calendar spreads will be implemented from 1st Feb'25 and intraday monitoring of position limits will be effective from April, 1 next year.

Going further, Jeffries added in the report that the reduction in weekly contracts, additional margin, and higher lot size have a bigger impact on retail participation.

"Currently, weekly premiums (weeks 1-3) make up ~65 per cent of overall industry premiums, and depending on the choice of one index (to be continued) by exchanges, supply of contracts amounting to ~35% of industry premiums can be removed. Spillover of trading activity (if any) from these into the two continuing products can limit the impact to 20-25 per cent for the system," said the report.

The report adds that the latter three measures are more consequential to institutional players (HFTs/Algos).

It says that a reduction in the expiry date per week, from the existing 5 days to 2 days, will induce trading behavior changes for both individual and institutional participants.

"Spillover of trading activity (if any) from discontinued products into continuing products can reduce the overall systemic impact on premiums. Outcome of these measures will also drive the regulatory direction on further measures, if required," it added.

Additionally, the report mentions that retail-focused discount brokers and exchanges will be most affected due to the shrink in system premiums.

"For BSE, we have recently cut our EPS by 10 per cent assuming discontinuance of Bankex product and focus will remain on volume impact on continuing product (Sensex) post implementation of new regulations," the report added.

However, the report says that the traditional brokers will be less impacted as the lower margin hikes will aid their HNI client base.

"Traditional brokers should see relatively lower impact as the lower margin hikes aid their HNI client base (which tend to have higher mix of option sellers). Clearing members like Nuvama Asset Services that cater to institutional players (HFTs / FPIs) will have marginal impact, if any. Other market participants like AMCs, wealth managers and depositories remain unaffected," said the report. (ANI)