The Securities and Exchange Board of India (SEBI) has proposed new measures for derivatives trading that are set to make a big impact on the market. One of the major changes includes the removal of 12 out of 18 weekly option contracts. According to brokerage firm Jefferies, these changes could affect up to 35 percent of the industry premiums.
On Tuesday, SEBI released a discussion paper detailing seven key proposed changes aimed to enhancing investor protection and market stability. The most significant change is reducing the number of weekly option contracts to just one benchmark index per exchange, resulting in a total of six weekly contracts per month, down from the current 18. The monthly contracts, scheduled for the fourth week of the month, will remain unchanged.
Jefferies warned that these changes would heavily impact exchanges and retail-focused brokers. BSE might manage to mitigate the impact and could potentially benefit if trading volumes shift from the discontinued products. Discount brokers like Zerodha, Angel One, and Paytm Money are expected to feel a significant impact due to the tightening of the F&O market and recent orders on transaction charges. Traditional brokers, such as Motilal Oswal Financial Services (MOFSL), IIFL Securities, and ICICI Securities, will also face significant impact from the tightening of the F&O market, but less so from recent transaction charge orders.
Jefferies outlined some key issues that might arise from these amendments.
Reduction in Weekly Options:
Currently, weekly premiums constitute 65 percent of the overall industry premiums. Depending on which index the exchanges choose to continue, 35 percent of the industry premiums could be removed. Jefferies noted that the spillover of trading activity from the discontinued products into the two remaining ones could limit the overall impact to 20-25 percent. Additionally, phased increases in lot sizes (by 3-4 times) and higher margins near expiry could affect retail traders.
Higher Lot Sizes Could Impact Retail Participation:
SEBI highlighted that around 9.2 million unique individuals and proprietorship firms incurred a cumulative loss of ₹51,700 crore in FY24, with only 15 percent of traders (1.4 million) making net profits. Larger non-individual players like HFTs/algo-traders/FPIs generally offset these losses with profits. SEBI has proposed increasing lot sizes by 3-4 times over six months, leading to higher ticket sizes even on expiry days. Although small retail traders (with less than ₹10 lakh in monthly premiums) make up less than 3 percent of system premiums, their reduced participation could disproportionately impact the overall market, as they might contribute significantly to the profit pool.
Higher Margins Affect Option Sellers:
Jefferies noted that the proposed increase in margins (by 8 percentage points) near expiry will reduce leverage for option sellers and affect product profitability. While larger institutional players may absorb this impact due to high leverage, HNI/retail individuals with low to no leverage will feel more pressure and might reduce volumes in the absence of additional margin money or assets. Other measures, such as rationalizing strike prices, upfront collection of premiums, removal of calendar spreads, and intraday monitoring of limits, are incremental and will improve premium quality over the long term.
Also read: HDFC Bank FY25 Q1 Result: Net Profit Decreases QoQ 2% to Rs. 16174.75 Cr.
Divergent Impact on Market Players:
Jefferies anticipates that exchanges and retail-focused brokers will be most affected by these changes. Clearing members like Nuvama, which cater to institutional players (HFTs/FPIs), will see less impact but might experience some secondary effects. For BSE, the removal of the Bankex weekly contract could impact EPS by 7-9 percent over FY25-27E. However, gains from the spillover of trading activity from discontinued products could offset this EPS impact and, in the event of a moderate industry-wide impact from SEBI measures, could even drive EPS upgrades.
SEBI’s Seven Proposals:
1. Rationalization of Weekly Index Products: Weekly options contracts will be limited to a single benchmark index per exchange.
2. Minimum Contract Size: The minimum contract size for index derivatives will be revised in phases:
Phase 1: Minimum value between ₹15 lakh and ₹20 lakh at the time of introduction.
Phase 2: Minimum value between ₹20 lakh and ₹30 lakh after six months.
3. Increase in Margin Near Contract Expiry: Margins will be increased on expiry day and the day before expiry:
– 3% increase at the start of the day before expiry.
– Additional 5% increase at the start of the expiry day.
4. Rationalization of Option Strikes: The strike scheme for weekly/monthly index options contracts will have:
– Uniform strike intervals up to a fixed percentage around the prevailing index price (4%).
– Expanded strike intervals beyond the initial threshold.
– No more than 50 strikes at the time of introduction.
– New strikes are introduced daily as required.
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5. Upfront Collection of Option Premium: Members must collect option premiums upfront from clients.
6. Removal of Calendar Spread Benefit on Expiry Day: Margin benefits for calendar spread positions will not apply to contracts expiring on the same day.
7. Intraday Monitoring of Position Limits: Position limits for index derivative contracts will be monitored intraday by clearing corporations/stock exchanges, with a short-term fix and a glide path for full implementation.
