Understanding SEBI’s Six Major Rules for F&O Trading

SEBI’s decision, backed by the Expert Working Group (EWG), will be implemented gradually starting November 20, 2024. Let’s take a closer look at the six measures that are set to change the landscape of F&O trading in India

1.    Upfront Collection of Option Premium

One of the most important measures involves the upfront collection of option premiums. To avoid intraday leverage at the client level and prevent any undue risk, SEBI has made it mandatory for trading members (TMs) and clearing members (CMs) to collect option premiums upfront from buyers. This rule, effective from February 1, 2025, is aimed at curbing practices where traders take excessive risks by not paying premiums upfront.

This is a game-changer, especially for retail traders, as it enforces financial discipline. The new rule will ensure that traders only take positions that they can back up with actual funds, reducing the chances of facing massive losses due to speculative bets.

2. No More Calendar Spread Treatment on Expiry Day

SEBI has also decided to remove the calendar spread benefit on expiry days. Calendar spreads allow traders to hold positions across different expiry dates to hedge risks. However, on expiry day, this benefit will no longer be available, starting from February 1, 2025.

This is a direct response to the huge volumes seen on expiry days, which often lead to higher risks. By removing the calendar spread treatment, SEBI is aligning this rule with the cross-margin framework and ensuring that traders cannot exploit the system on expiry days.

3. Intraday Monitoring of Position Limits

To further reduce the risk of traders exceeding position limits, SEBI has mandated a minimum of four position snapshots during the trading day. This rule, effective from April 1, 2025, will help exchanges keep a real-time check on traders who may be crossing permissible limits, especially on high-volume days like expiries.

This step will enhance transparency and accountability in the market, ensuring that no trader exceeds their risk thresholds.

4. Increase in Contract Size for Index Derivatives

Starting from November 20, 2024, the minimum contract size for index futures and options will be increased from Rs 5-10 lakh to Rs 15 lakh. This means that retail traders will need higher capital to trade in these instruments, effectively reducing the number of people taking unnecessary risks in the F&O market.

This move will make F&O trading less accessible for smaller retail investors, which is a double-edged sword. While it may limit opportunities for some, it’s also a necessary step to ensure that only those who understand the risks and have sufficient capital participate in the F&O market.

5. Limiting Weekly Index Expiry to One per Exchange

In an effort to curtail excessive speculative activity, SEBI has decided that only one weekly index expiry will be allowed per exchange, effective from November 20, 2024. Both BSE and NSE will now have to choose one index derivative product for weekly expiries, as opposed to the current practice of allowing multiple index derivatives to expire in a week.

This will simplify the market structure and reduce the speculative frenzy seen around multiple expiry days, helping bring more stability to the market.

6. Increase in Tail Risk Coverage on Expiry Day

To manage the heightened risk around options expiry, SEBI has introduced an additional Extreme Loss Margin (ELM) of 2% for all short options contracts. This margin will apply to contracts that are due for expiry on a given day. This measure will help reduce the risk exposure for traders holding short options positions on expiry day.

By adding this extra margin, SEBI aims to curb speculative activity and ensure that traders are prepared to handle any unexpected market moves on expiry days.

What This Means for Retail Traders

These new regulations are largely a response to SEBI’s own findings that retail traders incurred a whopping Rs 1.81 lakh crore in net losses in the last three financial years. The F&O market has increasingly become a battleground for speculative trading, and household savings are being misdirected into high-risk investments.

SEBI’s new framework, while strict, is designed to protect retail investors from falling into these speculative traps. By increasing the capital requirements, enforcing upfront premium payments, and limiting speculative opportunities on expiry days, SEBI is ensuring that only serious, well-capitalized traders remain in the F&O market.

Conclusion

SEBI's new regulations for F&O trading mark a crucial step in safeguarding retail investors from excessive risk and speculation. By tightening rules around premium collection, contract sizes, and position limits, SEBI aims to bring more stability and responsibility to the market. These changes will reshape the landscape of F&O trading, making it safer for those who have the knowledge and capital to navigate it wisely.

If you’re looking to understand these changes in more detail and want to adapt your trading strategies in line with SEBI’s new regulations, it’s time to sharpen your knowledge. At Risevestors Stock Market Institute in Meerut, we offer in-depth courses on options trading, technical analysis, and fundamental analysis, tailored for traders like you. Whether you’re a beginner or an intermediate trader, our Master Trader Program will equip you with the skills you need to navigate this new regulatory environment.

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Disclaimer

The information provided in this blog is for educational purposes only. Trading in Futures and Options carries significant risk and may not be suitable for all investors. Before engaging in F&O trading, it's recommended to consult with a certified financial advisor. Risevestors Stock Market Institute or any affiliates are not responsible for any trading losses or financial decisions made based on the content of this blog.