In a significant move to safeguard retail investors from potential losses, the Securities and Exchange Board of India (SEBI) announced new regulations regarding Futures and Options (F&O) on October 1. The circular highlights several key changes, including an increase in contract sizes for index derivatives and limitations on weekly expiries, set to take effect in phases starting November 20.

Key Changes to Futures and Options Regulations

1. Increased Contract Size for Index Derivatives
   SEBI has raised the minimum contract size for index futures and options from ₹5-10 lakhs to ₹15 lakhs. This adjustment aims to ensure that contracts reflect a more substantial investment, potentially reducing speculative trading.
2. Limiting Weekly Index Expiry
   To mitigate excessive trading on expiry days, SEBI will restrict exchanges to offering only one index derivative product per week. This change is expected to streamline trading activity and enhance market efficiency.
3. Intraday Monitoring of Position Limits
   SEBI has directed stock exchanges to closely monitor existing position limits for equity index derivatives to prevent excessive risk-taking, especially on expiry days. This regulation will be effective from April 1, 2025.
4. Enhanced Tail Risk Coverage
   Acknowledging the risks associated with increased speculative trading, SEBI will implement a 2% additional Extreme Loss Margin (ELM) on short option contracts, effective November 20, 2024. This measure aims to provide better protection against potential losses on high-risk trading days.
5. Removal of Calendar Spread Treatment
   SEBI will eliminate the calendar spread treatment on expiry days, starting February 1, 2025, further refining the trading landscape for options.
6. Upfront Collection of Option Premiums
   From February 1, 2025, option buyers will be required to pay option premiums upfront, a move designed to strengthen margin requirements and ensure that investors are adequately prepared for the risks involved.

Addressing Retail Investor Risks

SEBI’s intervention comes in response to alarming data indicating that approximately 90% of retail traders in the F&O segment incur losses. An analysis revealed that between FY22 and FY24, over 93% of individual traders faced a collective loss of ₹1.8 lakh crores, averaging around ₹2 lakh per trader.

Understanding Futures and Options

Futures and Options are financial instruments that allow investors to take substantial positions in stocks, commodities, and currencies with minimal capital. These derivatives are subject to price fluctuations based on the underlying stock prices and have specific timeframes for trading.

By implementing these regulations, SEBI aims to create a safer trading environment for retail investors, encouraging informed participation in the F&O market.