F&O clampdown: How will Sebi’s new rules affect traders and brokers

The six-step framework is designed to tackle the surge in speculative trading volumes, especially on expiry days, while also acting as a potential deterrent for retail investors engaging in F&O trading.

Here’s a detailed explainer on what the new rules and how will they affect the market dynamics

1) Six F&O measures by Sebi effective between November 2024 – April 2025.

Based on a recent consultation paper floated by the regulator, Sebi announced six measures to reduce the retail interest in F&O trading. These include 1) Upfront collection of options premiums 2) intraday monitoring of position limits 3) Removing calendar spread benefits on expiry day 4) Increasing the contract size for index derivatives 5) Rationalizing weekly index derivatives to one benchmark per exchange and 6) Enhancing margin requirements on options expiry days.

2) How does rationalizing weekly index derivatives affect market dynamics?

Sebi said each exchange can offer weekly expiries on only one benchmark index. Currently, multiple indices have weekly expiries, which has led to a spike in speculative trading, particularly on expiry days when the premiums are low. For instance, NSE offers weekly options contracts for Nifty Financial index, Nifty index, Nifty Bank index and the Nifty Midcap index.

By restricting this to a single benchmark index, the regulator aims to reduce the frenzy of trading seen on multiple indices and stabilize the market.

For retail investors, this could reduce opportunities for short-term speculative trades, potentially lowering intraday volatility but also limiting their ability to profit from frequent expiries.

Experts said the curtailment of weekly options to one index per exchange will move volumes to the less volatile monthly expiries.

“Derivatives should be used for hedging exposures and not for pure gambling by speculators with little knowledge, training or experience in them. Overall a welcome step in protecting small investors and safeguarding market integrity,” said Ajay Bagga, a market veteran.

3) Raising the minimum contract size

Another significant change is the increase in the contract size for index derivatives. The minimum contract value will be raised to Rs 15 lakhs, which is aimed at reducing speculative retail participation by making it costlier to enter these trades.

This move will ensure that only investors with sufficient capital and risk tolerance engage in these high-risk instruments.

4) How does removing calendar spread removal impact derivative trading

The removal of calendar spread benefits on expiry day is another crucial change for the derivatives market. Calendar spreads allow traders to offset risk between contracts expiring on different dates, reducing margin requirements. However, Sebi has observed that on expiry days, these spreads can lead to substantial basis risk, where contract values fluctuate wildly, making risk management challenging.

By removing this benefit on expiry day, it will be ensured that traders are adequately covered by margins. This change may reduce aggressive trading strategies that exploit minimal margins, particularly on the most volatile expiry day.

5) Upfront margin collection for option buyers

Sebi’s decision to mandate upfront collection of options premiums is aimed at curbing the high leverage that retail investors often use when trading in the options segment. By requiring full premium collection before trades are executed, retail traders may be dissuaded from taking on undue leverage and exposing themselves to significant risk.

6) Experts take on the F&O measures

While some welcomed the new changes that will help curtail excessive retail trading, others pointed out the challenges.

“With lots of part timers, pass timers, and rich overnight investors coming into the markets armed with so-called knowledge obtained from random groups, these people don’t know the risks associated and enter the markets and end up losing money,” said Vivek Karwa of Vridhi Investment.

“Lot Sizes increasing from 5 lakhs to 15 lakhs is aimed at creating a barrier on entry of retail participants where the losses are happening due to lack of knowledge in derivatives, causing financial harm to them. While there surely could be a knee jerk reaction for the same in the short-term, these measures could have a positive impact on the long term from a broader perspective. We could witness a gradual shift from F&O trading to equity trading and investments, which will lead an investor on the path towards building long-term wealth,” said Sudeep Shah, Deputy Vice President and Head of Technical & Derivatives Research, SBI Securities.

“From a broking perspective, the impact on volumes will be higher for those brokers who are highly dependent on derivative volumes and participation and it would be less on those who have a healthy mix of cash and derivative volume participation,” Sudeep Shah said.

7) What are the challenges that come with the new rules

While Sebi aims to enhance market stability by safeguarding investor interests, these checks can also introduce challenges. Experts say stricter norms around leverage, transparency, and capital adequacy could limit the ability of investors to determine their own risk appetite, thereby stifling innovation in trading strategies.

“By putting guardrails around the market, Sebi may inadvertently reduce participation from those investors who could have otherwise contributed significantly to the evolution and liquidity of the market. Over-regulation in an environment that thrives on strategic flexibility and creativity could dampen the market’s dynamism, affecting India’s competitiveness in the global derivatives landscape,” said Puneet Sharma, CEO and Fund Manager at Whitespace Alpha.

“The challenge also now is for market participants to align with these enhanced compliance standards while striving to maintain innovation and growth,” Sharma added.

8) How do the new rules affect brokers

The broking industry might be in for tough times in the coming days following Sebi tightening norms in the futures and options trading segment.

For instance, Zerodha chief Nithin Kamath said the broker has been the big beneficiary of this jump in options volumes in the recent past when volumes went up from 4.6 lakh crore in 2018 to 138 lakh crore in 2024.

Sebi’s crackdown on F&O addiction among retail traders can alone lead to a 30% to 50% drop in revenue for Zerodha. “Index derivatives today are a significant portion of our revenue, and any change will impact.

Other brokers like Angel One too might face a similar hit to financials due to decline in options volumes.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)