Measures to Strengthen Equity Index Derivatives Framework for Increased Investor Protection and Market Stability

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.... platform and products for trading in derivatives market, while ensuring online real time risk management, adequate surveillance, as well as smooth settlement of trades. 2. The role of product offering, risk management, and surveillance by Stock Exchanges and Clearing Corporations is crucial in ensuring integrity of securities market ecosystem. This is particularly heightened in view of the changing market dynamics in derivatives segment in recent years, with increased retail participation, offering of short tenure index options contracts, and heightened speculative trading volumes in index derivatives on expiry day. Regulation 28 (2) read with Part-C of Schedule II of the Securities Contracts (Regulation) (Stock Exchanges and Clearing C....

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....o which it has been decided to put in place the following measures to strengthen the equity index derivatives framework. 5.1. Upfront collection of Option Premium from options buyers 5.1.1. Options prices move in a non-linear way and carry very high implicit leverage. These are timed contracts with the possibility of fast-paced price appreciation or depreciation. In order to avoid any undue intraday leverage to the end-client, and to discourage any practice of allowing any positions beyond the collateral at the end-client level, it has been decided to mandate collection of options premium upfront from option buyers by the Trading Member (TM)/ Clearing Member (CM). 5.1.2. Clause 14.3 of Chapter 5 of SEBI Master Circular for Stock Ex....

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....iring correlated indices. 5.2.2. On the day of expiry, the worst scenario loss as specified at Clause 14.3 of Chapter 5 of SEBI Master Circular for Stock Exchanges and Clearing Corporations dated October 16, 2023 shall be calculated separately for contracts expiring on the given day and for the rest of the contracts. Given that the worst scenario loss is calculated separately, and hence calendar spread benefit is not available for contracts on the day of expiry, an additional calendar spread margin will not be applicable for contracts expiring on a given day (as illustrated at clause 1.2.5.10 of Chapter 5 of the aforesaid SEBI Master Circular). Further, the ELM for calendar spread positions on futures, if one of the legs is expiring on t....

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....o address the aforesaid risk of position creation beyond permissible limits, it has been decided that existing position limits for equity index derivatives shall henceforth also be monitored intra-day by exchanges. 5.3.2. For this purpose, Stock Exchanges shall consider minimum 4 position snapshots during the day. The number of snapshots may be decided by the respective Stock Exchanges subject to a minimum of 4 snapshots in a day. The snapshots would be randomly taken during pre-defined time windows. 5.3.3. To provide sufficient time for implementation, the measure shall be effective for equity index derivatives contracts from April 01, 2025. Further, the existing framework of penalty structure for breach of end of day position limit ....

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.... time when option premium are low, is largely speculative. Different stock exchanges offer short tenure options contracts on indices which expire on every day of the week. The SEBI consultation paper has noted that there is hyperactive trading in index options on expiry day, with average position holding periods in minutes, accompanied by increased volatility in the value of the index through the day and at expiry. All this has implications for investor protection and market stability, with no discernable benefit towards sustained capital formation. 5.5.2. Accordingly, in order to specifically address this issue of excessive trading in index derivatives on expiry day, it has been decided to rationalize index derivatives products offered ....

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....ess of index derivatives segment for investors, and the other measure (i.e. para 5.1) is to ensure basic risk hygiene. 7. Applicability: The aforementioned measures shall come into effect from the following dates: Sr. no. Measure Effective From 1. Upfront collection of Option Premium from buyers February 01, 2025 2. Removal of Calendar spread treatment on the Expiry Day February 01, 2025 3. Intraday monitoring of position limits April 01, 2025 4. Contract size for index derivatives November 20, 2024 5. Rationalization of Weekly Index derivatives products November 20, 2024 6. Increase in tail risk coverage on the day of options expiry November 20, 2024 8. Stock Exchanges....