The Securities and Exchange Board of India (SEBI) has introduced new rules for futures and options (F&O) trading to help protect retail traders from significant losses. This move comes after a report showed that retail investors collectively lost a whopping ₹1.81 trillion in F&O trading from March 2021 to March 2024. While retail traders faced gross losses of ₹524 billion, professional traders and foreign investors made profits of ₹330 billion and ₹280 billion, respectively.
The number of retail traders has surged recently, jumping from 5.1 million in FY22 to 9.6 million in FY24. This sharp increase has raised concerns that household savings are being diverted into high-risk F&O trading instead of productive investments. SEBI’s new measures aim to guide retail investors towards more responsible trading practices. Here’s a breakdown of the key changes:
Upfront Premium Payments: Traders must now pay the full premium when placing an order instead of at the end of the trading day. This makes speculative trading more expensive and encourages traders to only engage if they have sufficient funds.
Removal of Calendar Spread Benefits on Expiry Day: Previously, traders could offset margins on different expiry contracts. By eliminating this on expiry day, SEBI makes it more expensive to hold speculative positions, promoting better trading discipline.
Intraday Monitoring of Positions: Instead of monitoring positions only at the end of the day, SEBI will now check them throughout the trading day. This helps prevent traders from taking on too much risk in a single day.
Increased Contract Sizes for Index Derivatives: The minimum contract size for index derivatives has been raised, making it less accessible for small traders. This aims to prevent overexposure to the market and encourages only informed participants to trade.
Limiting Weekly Expiries: SEBI will now allow only one weekly index expiry per exchange, down from multiple expiries. This is meant to reduce speculative trading and increase market stability.
Higher Tail Risk Coverage on Expiry Days: On options expiry days, brokers must maintain a higher margin to protect against sudden price swings. This aims to shield retail traders from extreme market volatility.
Impact on Retail Traders:
These new rules are expected to significantly affect retail traders, especially those without enough capital or knowledge about derivatives. Many may find it harder to participate in the F&O market due to the increased costs and stricter risk controls. This could lead to less speculative trading and redirect savings into more stable investments, aligning with SEBI’s goal of a healthier financial environment.
Conclusion:
SEBI’s recent changes to F&O trading rules are crucial for improving market integrity and safeguarding retail investors from excessive risk. While these regulations may feel restrictive at first, they ultimately aim to create a more sustainable trading environment. By encouraging disciplined trading and minimizing speculative behavior, SEBI is working towards a balanced market that benefits all participants.
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