Capital markets regulator Securities and Exchange Board of India (SEBI) has mandated a new framework for India’s booming equity derivates market and announced sweeping changes to curb the rush in futures and options (F&O) trading.
Commenting on the market watchdog’s new norms for traders, Deepak Shenoy, founder and chief executive officer (CEO) of SEBI-registered Portfolio Management Service (PMS) Capitalmind.in, said that SEBI has now changed the F&O game.
The uninteresting stuff: Upfront payment options Buyers of options are required to pay option premiums. It may seem apparent, however at the moment, the exchanges just restrict the broker’s collateral for options purchased within the day, making it possible for someone to buy and sell within the day utilizing the collateral of another.
There must be a small number of brokers who offered this feature, enabling crazy intraday options buying positions. This will stop in February 2025; customers will need to pay with their own funds for these kinds of purchases. No calendar spread on expiry day: You can purchase futures or options with a later expiry (e.g., sell weeklyies and hold a monthly buy at a different strike or something similar) and sell an option on expiry day.
A benefit of this is a “calendar spread” that can lower margins by as much as 50%. A trader with X lakh rupees in margin can now take twice as many positions as he would have without the calendar spread benefit thanks to the reduced margin. SEBI is not fond of it either.
Therefore, the spread benefit has only been eliminated on the day of expiry (assuming only one leg of a spread is expiring on that particular day). Given the volume of retail scalping that occurred on daily options expiries, particularly in the sale of straddles, this is not a terrible notion.
Systemic risk exists if the offsetting calendar option, which makes sense on expiry day because maximum trading occurs, doesn’t move near the expiring one (which can happen in the event of abrupt surges).