SEBI - Securities and Exchange Board of India is the principal regulator of the Indian stock market. As a watchdog, SEBI is critical in ensuring market integrity, transparency, and efficiency, thereby building investor confidence. Recently, SEBI has proposed some measures to curb futures and options speculation.
Futures and Options are types of financial derivatives (a kind of financial contract that derives its value from the underlying asset, such as stocks, commodities, and currencies, allowing investors to invest at a pre-determined price) trading in a share market.
In this blog by NIWS, our experts will explain all the measures proposed by SEBI to curb Futures and Operations Speculations. We are one of the best stock market institutes in Jaipur and Delhi, with our 10+ years of experienced stock market traders teaching advanced stock market strategies. We teach not just bookish knowledge but also practical sessions, delving into the real-world market for better clarity.
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Futures and Options are two different derivatives. An investor enters into a contract in the future and options based on their expectations of future price movements. These derivatives help individuals reduce future risks by entering into an agreement based on predetermined prices. However, losses and profits cannot be certain as price movements cannot be predicted.
The following measures aim to ensure sustained capital formation by shielding against speculative hyperactivity.
SEBI has suggested that market infrastructure institutions monitor the position limits for index derivative contracts on an intraday basis. Currently, the stock exchange monitors position limits at the end of the day.
The real-time monitoring and stricter reporting requirements will help detect and prevent speculative trading practices.
SEBI's proposal suggests increasing the margin requirements for F&O contracts to address the issue of high implicit leverage in options contracts near expiry.
Margins are the collateral traders deposit to open and maintain a futures or options position.
When margins are raised, the initial amount required to enter a trade also increases. This higher cost can prevent traders from engaging in speculative activities. This will act as a financial barrier to entry becomes more significant.
SEBI has proposed rationalising weekly index products to reduce speculative trading. Currently, options are monitored at the end of the day, which can lead to undetected intraday positions beyond permissible limits. To avoid this, a weekly index of products has been proposed.
The strike price is the price for the options where the call option can be exercised. SEBI has suggested that strike intervals should be uniform up to a fixed coverage of 4 per cent near the prevailing index price and increase as the strikes move away from the prevailing price (around 4 per cent to 8 per cent).
SEBI has proposed increasing the minimum contract size for futures and options from Rs 5-10 lakh to Rs 15-20 lakh. After six months, this can be further increased to Rs 20-30 lakh.
SEBI has proposed that contracts that expire on the same day will not be provided with the margin benefit for calendar spread positions.
Brokers can collect the premium from their clients. There is no explicit condition for upfront collection of options premium from options buyer by member. This has been suggested to avoid any undue intraday leverage to the end client and to discourage any market-wide practice of allowing positions beyond the collateral at the end client level.
SEBI has proposed these measures to ensure fair practice and reduce speculative trading. SEBI can manage market integrity by increasing contract expiry, monitoring intraday positions, and removing the calendar spread benefit on expiry day.
With the guidance of our expert team at NIWS, we can help you navigate these proposed norms and any other stock market regulations. Contact us to learn more.
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