sebi new rules for option trading 2024 : SEBI and its functions
What is SEBI ?
SEBI or the Securities Exchange Board of India is the Indian government body that is in charge of all the markets in securities. SEBI was set up in 1988 and got statutory power by SEBI Act 1992 SEBI aims to promote investors’ interest, regulate free and fair securities business and to facilitate the securities market.
Functions of SEBI :
Regulating the Stock Markets: SEBI lays down rules for stock exchange operations to act responsibility and avoid undesirable practices, and to see that all members of the stock market operate within the confines of the law. It has to provide a most favorable trading environment.
Investor Protection: SEBI, among other things, acts to safeguard the rights of investors usually in the capital markets. It supervises and regulates stockbrokers, investment advisors and several other intermediaries that deal with the management of investors’ funds to guard against fraud, silliness or any other unscrupulous undertaking that can compromise investor’s interests. The knowledge creation is also done by SEBI in the area of financial literacy of the investors.
Supervising Intermediaries: SEBI is also responsible for regulating intermediaries like brokers and underwriters, merchant bankers and portfolio managers by forming rules and regulations for carrying out the businesses in the corporate market. They work to ensure compliance to the code of conduct and check on some standards being met by these entities.
Regulation of Mutual Funds and IPOs: SEBI monitors mutual funds in terms of registration and operations in an exemplary manner making sure that the mutual funds adhere to set standards. It also administers initial public offerings, in order to check that companies give the correct information to investors.
Enforcement and Inspection: SEBI has the authority to investigate or inspect markets that are participants if there is any such incident of insider trading or price control among others. It can also fine an entity, suspend trading or even bar companies that are involved in unlawful business.
Market Development: SEBI has been striving to bring change in the securities market in India and makes changes like moving toward the use of electronic facilities for trading and the attempts towards formulation of new financial instruments that can do a lot to enhance the efficiency of the market.
SEBI New Rules for Option Trading
| Rule | Details |
| Direct Payout of Securities | From October 14, 2024, securities will be directly credited to investors’ demat accounts after trade, reducing brokers’ role in settlements. |
| Margin Trading Facility (MTF) | Brokers will no longer manage pledges for unpaid securities; instead, clearing corporations will handle the pledge process. |
| Auction Settlement Changes | Brokers no longer participate in auction settlements for short deliveries; clearing corporations will manage auctions directly. |
| Extreme Loss Margin (ELM) on Expiry Day | From November 20, 2024, SEBI will impose a 2% Extreme Loss Margin on all short options positions on expiry day to reduce speculative risks. |
| Phase-wise Implementation of Direct Credit | Phase 1 begins on October 14, 2024, for equity cash segments, and Phase 2 on January 14, 2025, for all securities transactions. |
| Pledge Changes in MTF | Clearing corporations will mark unpaid securities as pledged directly in investors’ demat accounts, providing a more secure transaction process. |
Recent years have been marked by the growth of reckless behavior of participants in the stock market and increased volatility in options trading; as a result, SEBI has made changes to options trading rules. From November 2024, these regulations will alter the structure of the derivatives market gradually over 2025, and will affect many of the retail participants involved in options trading.
1. Reduced Weekly Expiries:
SEBI New rules is the weekly roll off for the index derivative contracts from the settlement of the immediately succeeding 5 business days, will start in November 2024 to be less. Exchanges will now provide only one weekly expiry for each benchmark index at a given week which will replace the current multiple expiries. It is expected that such a change will help to discourage aggressive behavior and avoid volatility that arises with high frequency of options’ expiration. Fewer expiries will also reduce chances of trading by these short-term speculators who make their money from the existing contracts.
2. Increased Minimum Contract Size:
SEBI new rules has increased the minimum contract size for option trading in the Indian market. Earlier ranging from ₹5–10 lakh to ₹5 lakh which cater for the niche investors, the minimum value will rise to ₹15 lakh. Some form of adjustment is expected to let investors have ample capital that can be used in underwriting losses. It also has a negative impact on a lower number of retail investors who might be interested in options trading as the size of the contract is much larger as compared to fossils.
3. Upfront Collection of Premiums:
One of the more substantial changes made by SEBI new rules for f&o is that brokers will have to obtain option premiums in advance starting from February of 2025. Before, the premiums can be paid at a future date more specifically, during exercise. This will ensure traders keep their cash flows in check to avoid over leveraging during the day hence reduce the risks associated with uncovered or naked option selling.
4. Higher Margin Requirements:
SEBI levels have new rules for margin in relation to short options especially during expiry period. An additional allowance of 2% of an extreme loss margin (ELM) will be provided for the open short positions in order to guarantee traders hedging from market price swings. The intended aim is to mitigate the effect of sudden development or fluctuosity, which results in massive loss, particularly, retail traders .
5. Removal of Calendar Spread Benefits:
SEBI will also remove so called calendar spread benefits for contracts which mature on the same date. Calendar spread which involves putting on an offsetting position in different expiry dates has by far been a preferred choice among the different traders. This change should greatly lessen certain forms of manipulation, which rely upon discrepancies in expiration dates in order to create significant fluctuations in prices at contract renewal times.
6. Intraday Monitoring of Position Limits:
From April 2025, T+1, position limits for equity index derivatives will be monitored intraday beginning with stock exchanges. It has been proposed that a new rule should be established to avoid traders from going over the limit during the trading period with an overall enhanced structure of the market. This change will make traders more cautious in monitoring their lots during the trading sessions of the day.
Effect on retail investors and Investing strategies
To the general public of retail investors, these new laws are a drastic change in the manner that options trading will be undertaken. Well, it is high frequency low cost trades with high margins used by many of the small traders and SEBI’s changes will force traders to go for more safer strategies. Here are some ways retail traders might adapt:
Shift to Positional Trading: Due to the restriction in regard to the weekly expiries, a number of traders may prefer to engage in position trading, instead of the high-frequency day trading that they are used to. Positional trading thus helps traders, majorly those with a trading timeframe of weeks or months, have ample of time to study the markets to enable them make appropriate decisions in the volatile times.
Diversification: One thing here that indicates that retail investors might have to look beyond options trading is that their needs may not entirely be addressed by trading options. Investing in other forms of asset classes such as stocks or mutual funds or bonds will help to offset the risk that comes with the new F&O regulations. Diversification is also beneficial because it saves the practitioner from risks of accumulating too much of one kind of financial product alone.
Hedging: It will also be seen that hedging will grow in more significance in the new trading environment. For example protective puts and covered calls are efficient to reduce the loss exposure but also provide a scope for gain. Hedging does not remove risk but does reduce the impact that unfavorable market forces may exert within the organization.
Better Cash Flow Management: As we saw, premiums are now taken upfront, which means that traders will have to think twice about their cash position. As such, it will be important for traders depending on option trading revenue to ensure that they have adequate cash to meet these initial expenses.
Reduced Speculative Trading: The higher margin requirements and larger contract sizes have the effects of demoting the retail trader to specific types of trades, specifically, high-frequency speculation. Accommodationist traders who used to achieve gains through numerous rounded up position buying and selling will now have to think of mid and long term trading or bear the brunt of loss through higher costs and risks.
Broader market implications
All these regulatory changes made by SEBI New rules for options trading have a larger aim of minimizing speculation and stabilizing the Indian derivatives market. While the exact study held by SEBI is internal and not available to the public, statistics indicate that a vast majority of retail investors actually suffered losses in options trading over the past three financial years which in turn informed the adoption of these protective measures. With this announcement, SEBI seeks to reduce cases of persons engaging in trading with aims of making mere profits within a short time with the view of adversely affecting other qualified investors especially the retail ones who hardly have adequate experience on how the market works.
I can definitely agree with the opinion that some of the reformed measures such as weekly expiries’ restrictions, increased contract sizes, and upfront premium collections will definitely not help to enhance liquidity in the market – at least in the short term. This could ultimately mean that only institutional investors will stay and further push out the small players thus increasing costs and risks. On the other hand, this may also contribute to a ‘safer’ market, which would probably be less risky in direction than in the longer run; thus interesting more conservative players at that stage.
Conclusion
SEBI new rules for options trading in 2024 are quite transformational in the derivatives markets in India. Even though these changes will prove disadvantageous to the retail investors, foremost those who engage in high frequency intraday trading for higher risk and volatility, to the same traders it will be an opportunity to embrace a more conservative and diversified approach. Also as traders adapt to this new environment the market will be more stable and safer for all the retail as well as institutional investors.
All these changes indicate that SEBI is keen with the changes that are made to make the derivatives market healthier and self-sustainable where the retail investor protection is achieved as well as market manipulation. Some traders with trading strategies that don’t align with the market’s current trends will have to start changing their approach, though overall, they should be able to find quite a lot of success with the right approach.
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FAQ'S
What is SEBI ?
SEBI is the regulatory authority for securities markets in India. It was established in 1988 and given statutory powers through the SEBI Act of 1992. SEBI’s primary role is to protect the interests of investors, regulate securities markets, and ensure their proper functioning.
What are the main functions of SEBI ?
SEBI’s key functions include:
Regulating stock exchanges and securities markets.
Protecting investor interests.
Promoting transparency and fairness in the market.
Preventing fraudulent practices and insider trading.
Registering and regulating intermediaries like brokers and merchant bankers.
What are SEBI's powers ?
SEBI has several powers to enforce regulations, including:
- The power to make and enforce rules pertaining to markets in securities.
- The competence to carry out investigations, checks and evaluations of market participants.
- The capacity to assess sanctions with regards to infringements committed by the individuals in the organisation
- The power to issue directives and enforce measures to ensure market stability.
When will these rules take effect?
It should also be noted that the changes will be implemented gradually. The change in decrementing weekly expiries is going to be implemented from the fiscal year 2024-25 starting from November 20, 2024, while the upfront collection of option premiums is going to be implemented from the financial year 2025-26 starting from February 01, 2025. Intraday monitoring of position limits will be carried from 1st of April 2025.
What are SEBI's new rules for F&O trading ?
F&O segment has hardly been gazetted since the time SEBI stepped in to increase the prudential measures in the market and bring about some required changes like the following:. Measures include the contract value increasing from ₹₹5,00,000 to ₹15,00,000, daily expiries limited to one benchmark index per exchange and the addition of the 2% extreme loss margin (ELM) on short options for each expiry day.
