SEBI’s new rules for index derivatives

As per SEBI circular Dated 1st Oct 2024 there are going to be changes for index derivatives as follows:

Limited weekly expiry contracts

As mentioned in the aforesaid circular, it has been decided to rationalize index derivative products offered by exchanges which expire on a weekly basis. Henceforth, each exchange may provide derivatives contracts for only one of its benchmark indices with weekly expiry. In accordance with that:

• NSE has discontinued weekly expires for Bank Nifty, Nifty Financial Services, Nifty Midcap Select, and Nifty Next 50 indices will no longer have weekly expires.
• BSE has discontinued it for BANKEX and Sensex 50 indices.

Exchange Circular NSE & BSE

Available indices with Weekly expires

What you need to take care of

Post discontinuation, clients need to cross-check expiries before placing orders and also need to consider the following:

1.Margin Requirements :- With the discontinuation of weekly expiry contracts, there could be changes in margin requirements, as clients need to shift to monthly contracts. Monthly contracts could have different margin requirements than the weekly ones.

2.Strategy Modifications:- Clients who rely on short price movements and quick entry/exit might now need to modify their strategies, as they’ll have fewer weekly expiry options.

Changes in Extreme Loss Margins on expiry day

Starting November 20, 2024, an Extreme Loss Margin (ELM) of 2% will be applied to short positions (selling options) on the expiry day to cover potential risks due to increased volatility as per SEBI Mandate

Exchange Circular NSE

What you need to take care of  Ensure you have sufficient capital on the expiry day to avoid any margin shortages which might lead to penalties or RMS Square off.

No calendar spread benefits on expiry day

Traders often have different positions with different expiry dates (called calendar spreads) to reduce the margins.

On the expiry day of contracts, there's a higher chance the price of the contract expiring will move differently from contracts that expire later also since they are expiring the next day traders might have margin shortage in accounts due to non availability of Hedge Leg.

To reduce this risk, SEBI has decided that from February 1, 2025, traders won't get any margin benefits for calendar spreads on the expiry day of contracts.

For example, let’s say you have a Long option expiring on January 31st and also have a Short option expiring on February 28th with a margin of Rs 1 lac . Because the short position is protected by the long one, you only need Rs. 50,000 instead of Rs. 1 lac.

But on January 31st (the expiry day), you won't get that Rs. 50,000 benefit anymore. You’ll need to keep the full Rs. 1 lac margin.

What you need to take care of

Need to monitor calendar spread positions closely, especially as the expiry date of one leg approaches.

Make sure that adequate margin is maintained for both legs, especially on the expiry day,

If possible, consider closing or shifting positions before expiry to avoid the increased margin requirements.

In case of Margin Shortage Positions might be squared off by RMS.

Contract size revision for index derivatives

As mentioned in the aforesaid circular of SEBI  that an index derivative contract shall have a value not less than Rs. 15 lakhs at the time of its introduction in the market. Further, the lot size shall be fixed in such a manner that the contract value of the derivative on the day of review is within Rs. 15 lakhs to Rs. 20 lakhs. For computation of revised lot size, the average of the closing price of the underlying index has been taken for one month period of September 16, 2024, to October 15, 2024

To meet this criteria, NSE and BSE will revise the lot sizes for all new index F&O contracts introduced from November 20, 2024, onwards.

• Existing weekly and monthly contracts will continue with the current lot sizes until they expire.
• The revised lot size for index derivatives will be as follows

For quarterly and half-yearly contracts:

•  Quarterly and half yearly existing expiry contracts, the same shall be transitioned to the new lot size on December 24, 2024, end of the day for BANKNIFTY
•  Quarterly and half yearly existing expiry contracts, the same shall be transitioned to the new lot size on December 26, 2024, end of the day for NIFTY
• Quarterly and half yearly existing expiry contracts, the same shall be transitioned to the new lot size on December 27, 2024, end of the day for SENSEX

Exchange Circular NSE & BSE

What you need to take care of:

1.Margin Requirements: Margin requirement will be higher due to the increased lot size, make sure you have enough capital in your trading account to cover the changes.

2.For quarterly and half-yearly contracts that will be revised to new lot sizes in December 2024 ending, make sure to manage positions carefully to avoid margin shortages due to increased lot sizes . If you hold positions in these contracts.

3.Option pricing -Due to increased lot size notional value goes up and it might have impact on Option pricing thus affecting strategies.

Intraday monitoring of position limits

SEBI and exchanges have limits on the maximum positions a single client or a broker can hold for a particular contract. For clients, this limit is set at 5% of the total number of all derivative contracts of the same underlying and 15% for brokers.

Currently, these limits are monitored at the end of each day by the exchanges. Starting April 1, 2025, these will be monitored multiple times throughout the trading day.

What you need to take care of  There is no impact on the client level.

Applicability