SEBI Enhances Equity Index Derivatives Framework with New Reforms

The Securities and Exchange Board of India (SEBI) has implemented several measures to enhance the Equity Index Derivatives Framework, prioritizing investor protection and market stability. These reforms were recommended by the Expert Working Group (EWG) on derivatives, which SEBI established to evaluate and improve regulatory safeguards, ensure orderly market development, and propose strategies for better risk management and investor protection. Below is a summary of these measures:

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​Purpose of the Derivatives Market

The derivatives market plays a critical role in:

1. Better Price Discovery: Facilitating the identification of fair market value.

2. Improved Market Liquidity: Enhancing trading opportunities.

3. Risk Management: Allowing investors to effectively hedge their exposures.

Key Reforms and Their Implementation

1. Upfront Collection of Option Premium from Buyers

• Effective From: February 1, 2025

• Objective: To prevent undue intraday leverage for clients and restrict positions exceeding collateral limits.

• Measure: Upfront margin collection now includes the net options premium payable at the client level.

2. Removal of Calendar Spread Benefit on Expiry Day

• Effective From: February 1, 2025

• Objective: To address basis risk on the expiry day, where contract values expiring on the day can diverge from similar future contracts.

• Impact: Offset benefits across expiries will not apply on expiry days, aligning the calendar spread treatment with the cross-margin framework.

3. Intraday Monitoring of Position Limits

• Effective From: April 1, 2025

• Objective: To prevent undetected intraday positions exceeding permissible limits during high trading volumes on expiry days.

4. Recalibration of Contract Size for Index Derivatives

• Effective From: November 20, 2024

• Reason: The last revision in 2015 no longer reflects market growth, with broad market values having tripled since then.

• Benefit: Ensures the minimum contract size remains appropriate and aligns with market growth, maintaining suitability criteria for participants.

5. Rationalization of Weekly Index Derivative Products

• Effective From: November 20, 2024

• Objective: To address excessive trading on expiry days, exchanges will offer weekly expiry derivatives for only one benchmark index.

6. Increased Tail Risk Coverage on Options Expiry Days

• Effective From: November 20, 2024

• Objective: To mitigate speculative risks around options expiry, an additional Extreme Loss Margin (ELM) of 2% will be levied on short options contracts.

Benefits of These Measures

• Enhanced market stability through stricter risk management protocols.

• Improved alignment with modern market dynamics.

• Strengthened safeguards for investors, reducing speculative excesses.

• Increased efficiency in derivatives trading and position monitoring.

These reforms reflect SEBI’s commitment to fostering a robust, transparent, and investor-friendly derivatives market.