Sebi-Appointed Group Proposes To Increase Lot Size In F&O Trading: Know All Proposals And Larger Market Impact

Here are changes in futures and options trading proposed by Sebi appointed expert derivative panel. Read on to know its larger impact on financial markets.
Sebi-Appointed Group Proposes To Increase Lot Size In F&O Trading
Sebi-Appointed Group Proposes To Increase Lot Size In F&O Trading

To address regulatory issues and protect small investors from risks in index and stock options trading, a Securities and Exchange Board of India (Sebi) appointed expert group on exchange-traded derivatives proposed increasing lot sizes of futures and options from the current Rs 5 lakh to Rs 25 lakh. Other proposed measures include raising margins around expiry dates, limiting weekly options to only one expiry per stock exchange per week, and rationalising strike prices.

The strike price is the agreed-upon price at which the buyer and seller of an option decide on a contract or exercise a valid and unexpired option. The other three proposals by the committee were an upfront collection of option premiums from buyers of options, intra-day monitoring of position limits, and a hike in margin requirements near contract expiry.

The group is considering tightening the norms as it found nine out of ten small investors lose money in F&O. The Secondary Market Advisory Committee will consider the recommendations of this group for a final decision, according to sources who told PTI.

Options give the holder the right (but not the obligation) to buy or sell an asset at a specified price within a certain period. Futures obligate the parties to buy or sell an asset on a specific future date at a predetermined price.

Impact On Markets

Deepak Shenoy, founder, of finance advisory firm Capital Mind, took to social media platform X: “These will help, undoubtedly, in reducing the froth in this market. I like the increase in contract size, which means more serious players will come in and you get a lot less of the gambler territory.”

He mentioned that having one expiry per week is a good way to reduce speculative interest, but he was doubtful because it means two days, and there has been significant interest even with just one day of expiry earlier. "All this, and higher margins will reduce liquidity, which will increase volatility. We deservedly should see an increase in Implied Volatility (IV)," he added.

Also, Shenoy added that Sebi is expected to release a discussion paper, gather public input, and then only release a circular to implement this, which he expects will take at least six months from now. The committee's recommendations coincide with similar calls from the Sebi Chairperson, exchanges etc. The Sebi Chairperson recently said that the rise in trading does not pose systemic risk due to the robust margining system, however, there are anecdotal reports about individuals borrowing money to trade options, potentially leading to severe social repercussions, Buch said.

Further Union Finance Minister Nirmala Sitharaman had also two months earlier suggested the need to curtail retail participation in the F&O segment to prevent future challenges for investor sentiments and household finances.

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