SEBI New Rules on Index F&O: How it Can Change the Game for Traders?

VMPL
New Delhi [India], November 19: SEBI's new rules on equity index derivatives are all set to hit the market on November 20, 2024. The three new rules on index options and futures have been introduced to protect the small traders who have made alarming losses in the past. So, let's know in detail about the new rules applying from this November on the F&O market and their expected impact on the traders.
One Weekly Index F&O Expiry Contracts
From November 20, 2024 onwards, NSE and BSE will only have a one-benchmark weekly expiry contract. Highlighting this, only Nifty 50 and Sensex will remain active and the rest of the 6 index derivatives' weekly expiry will not be available. For the one expiry per week, the Nifty 50 expiry is scheduled for Thursday, and the Sensex expiry is set for Friday.
NSE has to let go of its most traded weekly contract which is Nifty Bank. Bank Nifty option contract comprises 47.5% share in the weekly turnover of the NSE options in the first half (H1) of FY25. NSE's other 3 dropped weekly expiry contracts are Midcap Select, Financial Services, and Nifty Next 50. BSE's weekly F&O contracts will now be suspended for Bankex and Sensex 50.
What does it mean for traders?
Traders are actively involved in the index derivatives on or near the expiry day leading to higher volatility in the market. With various expiry of weekly contracts, the fluctuations tend to escalate. This move by SEBI will reduce this volatility and traders might be safeguarded from the potential huge losses.
As per the SEBI report, high trading activity leads to a high percentage of loss-makers in the market. Out of all the high-value traders (with a combined premium turnover of more than Rs1 crore), 95% of them made losses between FY22 and FY24. This change can move the traders to monthly expiry contracts which are more stable and can reduce the chances of huge and sharp losses. While there may be a downfall in the trading volumes of index F&O with the closure of weekly Bank Nifty, the traders can find their way in the long run.
Increase in Contract Size of Index Derivatives
SEBI has mandated the exchanges to increase the contract size for index derivatives from November 20, 2024. The present rule for the contract size is between Rs5 lakhs - Rs10 lakhs. With the upcoming rule, the index futures and index options contracts should have a minimum value of Rs15 lakhs when they get floated. On the day of review, the lot size of these contracts has to be in the range of Rs15 lakhs - Rs20 lakhs.
To undertake this, the NSE Nifty 50 lot size will be increased from 25 to 75, while the BSE Sensex lot size will rise from 10 to 20. Nifty Bank and BSE Bankex's lot size will increase to 30 (up 2 times).
What does it mean for traders?
The higher risk in derivatives and inherent leverage will expose small traders to huge losses.
In FY24, more than 75% of individual F&O traders (i.e., 65.4 lakh people) reported a yearly income of less than Rs5 lakh.
In the F&O space, 91.1% of individual traders i.e., about 73 lakh traders faced losses in FY24. Over 75% of the loss-making traders keep on trading in the F&O despite such large losses in the last two years (FY22 to FY24). With the increase in lot size of index derivatives, only the traders with a substantial sum of money and the potential to take the underlying risk might enter the F&O market.
Additional ELM (Extreme Loss Margin)
To lessen the high volatility on expiry days of options contracts, SEBI has introduced the additional ELM on the short options contracts on the day of expiry. Suppose an index options contract's weekly expiry is on the 11th of the month. Another weekly or monthly expiry of the same contract is on the 20th and 29th. The trader has to keep an extra ELM of 2% for the option contract expiring on the 11th with the implementation of the new rule.
What does it mean for traders?
By applying the extra ELM on the short contracts on the expiry day, the traders have to maintain the additional margin but it will help in covering the risk of losses beyond a level. It will also reduce the speculation activity due to higher margins and dampen the volatility in the market. This measure can safeguard traders from deep market fluctuations, particularly at the time of high-volume trading.
Conclusion
Overall, these changes might impact the small and retail traders to trade in equity index derivatives but at the same time, it protect the ones who had made huge losses. With the increase in transaction cost due to ELM rise and lot size push, only the traders who can surely bear the risk are expected to trade.
Despite the report on huge losses, index options' average daily turnover has increased by 7.13% from FY24 to FY25 (till September 2024) while index futures' average daily turnover has increased by 26.66%. So, investors are not taking the back seat and are continuously trading in index F&Os by opening Demat account. You can also open Demat account by downloading the SMC ACE App from Playstore/ App Store. To know more about the financial news, stocks, mutual funds, and F&O market happenings, explore SMC Global Securities Financial blogs.
Disclaimer: This article is only for informational purposes and does not intend to advise or recommend any sort of investment or platform.
About the Author: I am Sheetal Goel, working as a content writer at SMC Global Securities. I hold 5+ years of experience in financial research and writing. As an Economics graduate and MBA (Finance), I possess the right skills to craft valuable blogs and make finance easy for readers.
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