Sebi’s 6 new rules for F&O trading: What it means for retail investors

In a move aimed at safeguarding small investors and enhancing market stability, the Securities and Exchange Board of India (Sebi) has unveiled a series of new measures to strengthen the index derivatives framework.
With the introduction of these rules, the landscape of equity derivatives trading in India is set to undergo notable changes, particularly for retail participants.
Here’s a comprehensive look at the key changes and what they mean for investors.
Reduction of weekly expiries: Starting November 20, 2024, Sebi will reduce the number of weekly expiries for index derivative contracts to one per benchmark index per exchange. This means that exchanges will now offer only six weekly contracts each month instead of the current 18. The goal is to curb speculative trading and limit the risks associated with uncovered or naked option selling.
Increased contract sizes: The minimum trading amount for derivatives will rise from the current range of Rs 5–10 lakh to Rs 15 lakh. This increase aims to ensure that investors take on appropriate risks while participating in the derivatives market. Sebi has stated that the contract value will be adjusted to fall between Rs 15 lakh and Rs 20 lakh in the future.
Higher margin requirements: To address the high volatility observed on expiry days, Sebi will implement an additional extreme loss margin (ELM) of 2% for all open short options on the day of expiry. This measure is intended to protect investors from extreme market fluctuations, particularly during high-volume trading sessions.
Upfront collection of premiums: Effective February 1, 2025, brokers will be required to collect option premiums upfront. This shift is aimed at discouraging excessive intraday leverage among investors and ensuring that they have sufficient collateral to cover their positions.
Removal of calendar spread benefits: The long-standing practice of calendar spreads—offsetting positions across different expiries—will be eliminated for contracts expiring on the same day. This change is intended to reduce the potential for speculative trading that has been rampant on expiry days.
Intraday monitoring of position limits: From April 1, 2025, stock exchanges will begin intraday monitoring of position limits for equity index derivatives. This means that position limits will be checked multiple times throughout the trading day, reducing the risk of traders exceeding permissible limits unnoticed.
These changes are particularly significant for retail investors who often engage in derivatives trading. Here’s how these new measures will impact them:
Curbing speculation: The increase in contract sizes is expected to deter speculative trading, especially among small retail participants who may not have the financial capacity to absorb larger losses.
Lower participation in options trading: The reduction in the number of weekly expiries and the removal of calendar spread benefits are likely to decrease retail participation in options trading. Analysts believe this may help stabilise the market by reducing high-frequency trading and speculative behaviour.
Gradual implementation for market stability: The phased rollout of these measures is designed to prevent sudden shocks to the market, allowing participants to adapt to the changes over time. This gradual tightening could lead to a healthier market environment overall.
Impact on trading strategies: Retail investors will need to reassess their trading strategies in light of these new rules, particularly regarding the timing of rollovers and the management of margin requirements.
Simply put, Sebi’s recent measures to tighten the rules around equity derivatives are a clear indication of the regulator’s commitment to protecting small investors and maintaining market integrity.
While these changes may present challenges for some retail participants, they are ultimately aimed at fostering a more stable and sustainable trading environment.