Sebi Proposes Measures to Tame Speculative Trading in Index Derivatives: Higher Contract Sizes, Fewer Weekly Options

The Securities and Exchange Board of India (Sebi) has suggested new rules to reduce speculative trading in index derivatives, particularly targeting individual investors. These changes include increasing the minimum contract size, reducing the number of weekly index product offerings, and making options trading more expensive.

Changes to Contract Size

Sebi proposes to raise the minimum contract size for index derivatives like Nifty and Sensex from the current ₹5-10 lakh to between ₹30 lakh. Initially, it will increase to ₹15-20 lakh, and after six months, it will go up to ₹20-30 lakh. The aim is to discourage retail investors from taking high risks, as larger contract sizes will make it harder for them to participate.

The last time the minimum contract size was set was in 2015, and since then, the market indices have nearly tripled in value. Chandan Taparia from Motilal Oswal Financial Services believes that increasing the lot size will likely deter retail traders because the contracts will become more expensive.

Sebi’s goal is to reduce the trading volume in the derivatives market, which has grown significantly compared to the cash market. Indian markets are responsible for a large portion of global derivative trades, according to Sebi’s recent discussion paper.

Weekly Options

Currently, weekly derivative contracts exist for various indices. Sebi plans to limit these contracts to only one benchmark index per exchange, which would reduce the number of weekly expirations and speculative trading. There has been a significant increase in retail trading in index options, jumping from 2% in FY18 to 41% in FY24.

The focus on fewer expirations should help brokers concentrate better on specific products, said Taparia. The regulator wants to discourage retail traders from engaging in risky trades, particularly on weekly expiration days when many tend to lose money.

Collecting Options Premium Upfront

Sebi also suggests that brokers should collect the full premium on options from clients upfront. This measure is intended to prevent excessive leverage and ensure that clients do not exceed their collateral limits.

In addition, margins on options will increase on the day of expiry and the day before. Nithin Kamath, founder of Zerodha, mentioned that these changes might not significantly impact index options trading volumes but could reduce futures trading.

Other Proposals

Sebi also wants to streamline the way strike prices are introduced, setting a uniform strike interval near the current index price. At launch, no more than 50 strike prices will be offered for an index derivatives contract.

In summary, these proposals aim to curb risky speculation and bring down the overall volume of derivatives trading. The changes are expected to push some futures traders toward options, where leverage is more limited.