SEBI new futures & options regulation trigger liquidation of FII positions

SEBI has converted its consultation paper into regulation by adopting almost every point to discourage F&O trading in its recent regulation.

Indian derivatives market is primarily index options where nearly 98% volumes happen in Index options. We believe the recent steps will be able to curb the volumes in index options by more than 30% in short term.
Among major actions, primary action taken by SEBI was restricting just one weekly expiry per exchange. Currently, NSE has 4 weekly expiries, and BSE has 2 weekly expiries. As per new regulation, both exchanges will have just 1 weekly expiries. We believe NSE will continue with NIFTY while BSE has already announced its intentions to keep SENSEX for its weekly contracts. NSE will have discontinue Midcap Select, Financial Nifty and Bank Nifty indices. Removal of weekly Bank Nifty expiries itself may reduce the option volumes by more than 20% for NSE.

SEBI has also announced to increase minimum derivatives contract values to 15 lakh from current 5 lakh. Currently contract value of Nifty is nearly Rs 6.5 lakh with lot size of 25. We believe it to be increased to 75 to comply with the regulation. This is likely to keep out the small retail participants from low ticket options
Imposing additional 2% extreme loss margin (ELM) on open short options on expiry days. Due to extreme movements seen on expiry days in the last hour of the trade, this extra margin requirement should force lower volume by option writers. Although this 2% EML appears low, but it could impact the volume nearly by 6-8% as the margin requirement goes up from nearly 12% to 14%.

Elimination of Calander Spread benefits for contracts expiring on the same day. Calendar spreads have been used quite often to reduce margin requirements on the day of settlement. With removal of margin benefits, it might also hamper the option writer’s ability of large volumes. While the exact impact is difficult to ascertain but it will impact the derivatives volumes adversely.