SEBI Tightens Derivatives Trading Rules to Mitigate Investor Losses

SEBI introduces new measures including increasing minimum contract size and reducing contract expiries to curb retail investor losses in equity derivatives trading. These steps follow an SEBI study showing significant losses for individual traders in the F&O segment.

The Securities and Exchange Board of India (SEBI) has unveiled a series of measures aimed at bolstering the derivatives trading framework, in an attempt to mitigate escalating losses among retail investors. The regulatory body announced that the minimum contract size for equity index derivatives will be raised, setting a new threshold of Rs 15 lakh—up from the previous range of Rs 5 lakh to Rs 10 lakh, instituted in 2015. This adjustment comes as market values have surged approximately threefold since then.

In addition to raising contract sizes, SEBI is enforcing a reduction in the expiries of derivatives contracts to one per exchange per week. "Expiry day trading in index options, especially when premiums are low, is largely speculative," SEBI noted. Stock exchanges have also been instructed to monitor intraday position limits and implement stricter measures for equity index derivatives, including the collection of options premiums upfront from buyers starting February 2025. Furthermore, SEBI has mandated an additional margin requirement of 2 percent for short options contracts on expiry days.

These steps are part of a broader initiative to bolster investor protection and ensure the orderly development of the equity derivatives market. The measures were developed based on recommendations from an Expert Working Group (EWG) and subsequent discussions within SEBI's Secondary Market Advisory Committee (SMAC). The final measures, detailed in a consultation paper released on July 30, 2024, will be rolled out in phases beginning November 20.

The urgency for reform is underscored by recent findings from a SEBI-conducted study, which revealed that 93 percent of individual traders in the F&O segment incurred significant losses, collectively exceeding Rs 1.8 lakh crore over three years. Despite these losses, more than 75 percent of these traders continued to participate in F&O trading, highlighting a critical need for regulatory intervention.

(With inputs from agencies.)