Sebi proposes changes to index derivative framework to reduce speculation

The Securities and Exchange Board of India (Sebi) has suggested new regulations for derivatives to enhance market stability and safeguard small investors. The proposals, outlined in a consultation paper released on July 30, include increasing contract sizes up to four times, collecting options premiums upfront, and reducing the number of weekly contracts.

Previously on July 9, the proposed framework follows recommendations from the Working Committee on Futures and Options. An expert committee was appointed by Sebi last month to address the rise in speculation driven by high retail participation.

Key suggestions from the consultation paper include limiting weekly option contracts. Currently, index-based contracts expire daily. The proposal suggests allowing weekly contracts for one index per exchange, resulting in two expiries per week.

Additionally, Sebi recommends significantly increasing the contract size to deter retail investors, described as "reverse sachetization" of high-risk products. The current minimum contract size is Rs 5-10 lakh, set in 2019. The new proposal increases it to Rs 15-20 lakh initially, and Rs 20-30 lakh in a second phase.

Sebi also proposes mandatory upfront payment of option premiums. While 100 percent margin collection is already required for trades, there is no specific rule for upfront option premium collection. The paper argues that options prices, due to their non-linear movement, carry high implicit leverage and should be paid in full upfront to prevent undue intraday leverage.

To reduce speculative betting on far-off strike prices, the paper suggests several measures:

• Uniform strike intervals near the prevailing index price (within 4 percent) and increased intervals for strikes further from the prevailing price (4 to 8 percent).
• Limiting the number of strikes introduced for an index derivatives contract to 50 at launch.
• Introducing new strikes daily to maintain these limits.
• Ensuring exchanges uniformly implement these principles after joint discussion.

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