SEBI’s 7 Big Steps to Tame Out-of-Control Stock Market Trading

The Securities and Exchange Board of India (SEBI) has unveiled new rules to control retail speculation in derivatives like futures and options. This move aims to stabilize the market and protect investors. Here are the key points:

Why SEBI is Concerned:

• Huge Growth in Derivatives: Trading in index options on the NSE soared from ₹10.8 trillion in FY20 to ₹138 trillion in FY24. In contrast, the cash market turnover increased only moderately.
• Investor Losses: Around 9.25 million traders on NSE lost a total of ₹51,689 crore in FY24. Notably, 85% of these traders incurred losses, while only 1.42 million made a profit.

Key Measures Proposed by SEBI:

1. Increase Contract Value: Raise the contract value from ₹5-10 lakh to ₹15-20 lakh initially, and then to ₹20-30 lakh after six months. This means the margin for trading Nifty futures could go up to ₹3 lakh.
2. Raise Upfront Margins: Increase the margin requirement on the day before and the day of expiry. This could raise total margins to 13% and 15%, respectively.
3. Limit Weekly Expiries: Cut down the number of weekly expiries to one per exchange. Currently, NSE and BSE have multiple weekly expiries for different indices.
4. Widen Price Intervals: Make it harder for retail investors to buy out-of-the-money options by widening the price intervals.
5. Remove Calendar Spread Margin Benefit: Eliminate this benefit on the day of weekly expiry to reduce speculative trading.
6. Monitor Position Limits Intraday: Ensure traders do not exceed position limits during a trading session.
7. Collect Margin Upfront for Options Buyers: Brokers must collect margins from options buyers upfront, not at the end of the day, to prevent extra leverage.

Additional Measures and Future Plans:

• Securities Transaction Tax (STT): A 60% increase in STT on futures and options will take effect in October 2024.
• Product Suitability Framework: In the next phase, SEBI may introduce a framework to assess if investors are suitable for trading derivatives.
• Mandatory Certification: A future phase may include a mandatory certification program to educate investors on the risks of derivatives trading.

Industry Reactions:

• Volume Impact: Experts like Chandan Taparia predict a 25-30% drop in derivatives volumes if these measures are implemented.
• Brokerage Views: Opinions vary, with some like Nithin Kamath of Zerodha suggesting these changes might push traders from futures to options.

SEBI’s measures aim to reduce speculative trading and ensure that the market serves its original purpose of risk management and hedging.