SEBI cracks down on F&O trading mess, suggests contract size to strike price for retail investors; 7 key measures

SEBI cracks down on F&O trading mess, suggests contract size to strike price for retail investors; 7 key measures/PTI

Capital markets regulator Securities and Exchange Board of India (SEBI) has proposed a series of near-term measures to prevent speculative trading, such as gambling in index derivatives, which include curbing multiple option contract expiries and increasing the size of options contracts. The seven measures suggested by the market watchdog are aimed at curbing market speculation, enhancing investor protection and ensuring greater market stability.

Indian markets have often flagged risks from retail investors’ speculative trading in derivatives. SEBI’s proposals are made in light of increased retail participation, offering short-tenure index options contracts, and heightened speculative trading volumes in the index derivatives on expiry days.

Also Read: F&O trading: Sebi to discuss ways to tighten the screws on retail speculation

‘’Until last year, the regulator was approaching the growing interest in options trading as an issue related to investor protection, but it has now become a macro issue, said Madhabi Puri Buch, Chairperson, SEBI.

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SEBI revealed that around 92.5 lakh retail traders and proprietorship firms incurred a trading loss of ₹51,689 crore in FY24 and released a consultation paper on measures to strengthen index derivatives framework for increased investor protection. Based on the measures suggested by an expert panel, SEBI has proposed seven measures for stock exchanges and clearing corporations to adopt:

1.Rationalization of strike price for option

SEBI has proposed rationalising the strike price methodology. ‘’The strike interval will be uniform near the prevailing index price (four per cent around the prevailing price) and will increase as the strikes move away from the prevailing price (around four per cent to eight per cent),” said SEBI. The market regulator added that not more than 50 strikes would be introduced for an index derivatives contract at the time of contract launch.

2.Upfront collection of options premium

Options prices, depending on the moneyness, move in a non-linear way and thus carry very high implicit leverage. These are timed contracts with the possibility of very fast-paced price appreciation and depreciation. To avoid any undue intraday leverage to the end client and to discourage any market-wide practice of allowing positions beyond the collateral at the end client level, SEBI has proposed to mandate the collection of options premium upfront from the buyer of the option.

MINT

SEBI cracks down on F&O trading mess, suggests contract size to strike price for retail investors; 7 key measures