CIRCULAR
SEBI/HO/MRD/TPD-1/P/CIR/2024/132 October 01, 2024
To
All Stock Exchanges
All Clearing Corporations
(Except Commodity Derivatives Exchanges and Clearing Corporations)
Sir/Madam,
Measures to Strengthen Equity Index Derivatives Framework for Increased
Investor Protection and Market Stability
1. Derivatives market assist in better price discovery, help improve market liquidity
and allow investors to manage their risks better. Stock Exchanges and Clearing
Corporations together provide the platform and products for trading in derivatives
market, while ensuring online real time risk management, adequate surveillance,
as well as smooth settlement of trades.
2. The role of product offering, risk management, and surveillance by Stock
Exchanges and Clearing Corporations is crucial in ensuring integrity of securities
market ecosystem. This is particularly heightened in view of the changing market
dynamics in derivatives segment in recent years, with increased retail participation,
offering of short tenure index options contracts, and heightened speculative trading
volumes in index derivatives on expiry day. Regulation 28 (2) read with Part–C of
Schedule II of the Securities Contracts (Regulation) (Stock Exchanges and
Clearing Corporations) Regulations, 2018 (SECC Regulations, 2018), considers
Risk Management, Surveillance, and Product development functions of Stock
Exchanges and Clearing Corporations as core functions. In addition, Clearing and
Settlement is considered as a core function of Clearing Corporations.
Page 1 of 8
3. The Securities and Exchange Board of India Act, 1992 (“SEBI Act”), inter alia,
mandates SEBI to protect the interest of investors in securities and to promote the
development of, and to regulate the securities market, by such measures as it
thinks fit. One of the measures to achieve the aforesaid mandate as provided in
the SEBI Act is to regulate the market through measures that may enable
regulating the business of Stock Exchanges.
4. In order to review the existing regulatory measures for investor protection while
ensuring the orderly development and strengthening of equity derivatives market,
as well as to identify measures to assist stock exchanges in carrying out their
aforementioned core functions, SEBI formed an Expert Working Group (EWG) on
derivatives, to suggest measures for investor protection and market stability.
5. On the basis of the measures recommended by the EWG and subsequent
deliberations in the Secondary Market Advisory Committee (SMAC) of SEBI, a
consultation paper was issued by SEBI on July 30, 2024, in the matter. The
comments received were examined by SEBI, and the matter was further discussed
with Stock Exchanges and Clearing Corporations, subsequent to which it has been
decided to put in place the following measures to strengthen the equity index
derivatives framework.
5.1. Upfront collection of Option Premium from options buyers
5.1.1. Options prices move in a non-linear way and carry very high implicit
leverage. These are timed contracts with the possibility of fast-paced price
appreciation or depreciation. In order to avoid any undue intraday leverage
to the end-client, and to discourage any practice of allowing any positions
beyond the collateral at the end-client level, it has been decided to
mandate collection of options premium upfront from option buyers by the
Trading Member (TM)/ Clearing Member (CM).
5.1.2. Clause 14.3 of Chapter 5 of SEBI Master Circular for Stock Exchanges
and Clearing Corporations dated October 16, 2023, stipulates TMs to
collect Initial Margin (IM) and Extreme Loss Margin (ELM) upfront from
Page 2 of 8
their clients. In view of the above, it has been decided that the upfront
margin collection requirement shall also include net options premium
payable at the client level. The same may be included in the intraday
snapshots conducted by Clearing Corporations for verification of upfront
collection of margins, and for imposition of penalty in the event of non-
compliance.
5.1.3. In order to provide sufficient time to implement the aforesaid measure,
this requirement would be applicable for equity derivatives segment from
February 01, 2025.
5.2. Removal of calendar spread treatment on the Expiry Day
5.2.1. Expiry day can see significant basis risk, where the value of a contract
expiring on the day can move very differently from the value of similar
contracts expiring in future. Given the relatively very large volumes
witnessed on the expiry day vis-à-vis future expiry days, and the enhanced
basis risk that it represents, it has been decided that the benefit of
offsetting positions across different expiries ('calendar spread') shall not
be available on the day of expiry for contracts expiring on that day. This
would also align calendar spread treatment with cross-margin framework
on correlated indices having different expiries, wherein such cross-margin
benefit is fully revoked at the start of the first of the expiring correlated
indices.
5.2.2. On the day of expiry, the worst scenario loss as specified at Clause 14.3
of Chapter 5 of SEBI Master Circular for Stock Exchanges and Clearing
Corporations dated October 16, 2023 shall be calculated separately for
contracts expiring on the given day and for the rest of the contracts. Given
that the worst scenario loss is calculated separately, and hence calendar
spread benefit is not available for contracts on the day of expiry, an
additional calendar spread margin will not be applicable for contracts
expiring on a given day (as illustrated at clause 1.2.5.10 of Chapter 5 of
the aforesaid SEBI Master Circular). Further, the ELM for calendar spread
Page 3 of 8
positions on futures, if one of the legs is expiring on the same day, shall
be computed without considering such futures positions as an offsetting
calendar spread position.
5.2.3. It is clarified that the existing margin calculations for calendar spread
positions (i.e. worst scenario loss, calendar spread margin and ELM) shall
remain unchanged for calendar spread positions involving all expiries other
than the contracts expiring on a given day. As an illustration, if monthly
expiries are on 29th (current month), 30th (next month) and 31st (far month)
respectively, then calendar spread positions involving positions expiring
on 29th (current month) and 30th (next month), or 29th (current month) and
31st (far month), shall not be provided calendar spread treatment on 29th
(current month expiry). However, calendar spread positions involving
positions expiring on 30th (next month) and 31st (far month) shall continue
to receive calendar spread treatment on 29th (current month expiry).
5.2.4. The aforesaid would be applicable for calendar spread positions in the
equity index derivatives and shall be effective from February 01, 2025.
5.3. Intraday monitoring of position limits
5.3.1. The position limits for index derivatives contracts as specified by SEBI
from time to time are being monitored by Stock Exchanges/ Clearing
corporations at the end of day. Particularly amidst the large volumes of
trading on expiry day, there is a possibility of undetected intraday positions
beyond permissible limits during the course of the day. To address the
aforesaid risk of position creation beyond permissible limits, it has been
decided that existing position limits for equity index derivatives shall
henceforth also be monitored intra-day by exchanges.
5.3.2. For this purpose, Stock Exchanges shall consider minimum 4 position
snapshots during the day. The number of snapshots may be decided by
the respective Stock Exchanges subject to a minimum of 4 snapshots in a
Page 4 of 8
day. The snapshots would be randomly taken during pre-defined time
windows.
5.3.3. To provide sufficient time for implementation, the measure shall be
effective for equity index derivatives contracts from April 01, 2025. Further,
the existing framework of penalty structure for breach of end of day
position limit shall be extended by exchanges for intraday position limit
breaches as well.
5.4. Contract size for index derivatives
5.4.1. Clause 1.1.4 and Clause 2.1.4 of Chapter 5 of SEBI Master Circular for
Stock Exchanges and Clearing Corporations dated October 16, 2023,
stipulates contract size for index futures and index options respectively.
The current stipulation is for such contracts to have a value between Rs. 5
lakhs and Rs. 10 lakhs. This limit was last set in 2015. Since then, broad
market values and prices have increased by around three times. Given
this, it has been decided that a 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. All
other stipulations for contract size of index derivatives as mentioned in the
Master Circular referred above shall remain unchanged.
5.4.2. Given the inherent leverage and higher risk in derivatives, this
recalibration in minimum contract size, in tune with the growth of the
market, would ensure that an inbuilt suitability and appropriateness criteria
for participants is maintained as intended.
5.4.3. The measure shall be effective for all new index derivatives contracts
introduced after November 20, 2024.
Page 5 of 8
5.5. Rationalization of Weekly Index derivatives products
5.5.1. Expiry day trading in index options, at a time when option premium are
low, is largely speculative. Different stock exchanges offer short tenure
options contracts on indices which expire on every day of the week. The
SEBI consultation paper has noted that there is hyperactive trading in
index options on expiry day, with average position holding periods in
minutes, accompanied by increased volatility in the value of the index
through the day and at expiry. All this has implications for investor
protection and market stability, with no discernable benefit towards
sustained capital formation.
5.5.2. Accordingly, in order to specifically address this issue of excessive
trading in index derivatives on expiry day, it has been decided to rationalize
index derivatives products offered by exchanges which expire on weekly
basis. Henceforth, each exchange may provide derivatives contracts for
only one of its benchmark index with weekly expiry.
5.5.3. This measure shall be effective from November 20, 2024., i.e. from this
date weekly derivatives contracts would only be available on one
benchmark index for each exchange.
5.6. Increase in tail risk coverage on the day of options expiry
5.6.1. ELM is levied with the view to cover tail risk outside the scanning risk.
On the day of options contracts expiry, given the heightened speculative
activity around options positions and the attendant risks, it has been
decided to increase the tail risk coverage by levying an additional ELM of
2% for short options contracts.
5.6.2. This would be applicable for all open short options at the start of the day,
as well on short options contracts initiated during the day that are due for
expiry on that day. For instance, if weekly expiry on an index contract is on
7th of the month and other weekly/monthly expiries on the index are on
Page 6 of 8
14th, 21st and 28th then, for all the options contracts expiring on 7th, there
would be an additional ELM of 2% on 7th.
5.6.3. This measure shall be effective from November 20, 2024.
6. Out of the six measures proposed at para 5.1 to 5.6, four measures (i.e. para 5.2,
5.3, 5.5 and 5.6) are intended to address heightened activity in index options on
expiry day, one measure (i.e. para 5.4) ensures continued suitability and
appropriateness of index derivatives segment for investors, and the other measure
(i.e. para 5.1) is to ensure basic risk hygiene.
7. Applicability:
The aforementioned measures shall come into effect from the following dates:
Sr. Measure Effective From
no.
1. Upfront collection of Option Premium from buyers February 01, 2025
2. Removal of Calendar spread treatment on the Expiry February 01, 2025
Day
3. Intraday monitoring of position limits April 01, 2025
4. Contract size for index derivatives November 20, 2024
5. Rationalization of Weekly Index derivatives November 20, 2024
products
6. Increase in tail risk coverage on the day of options November 20, 2024
expiry
8. Stock Exchanges and Clearing Corporations are directed to take necessary steps
to put in place systems for implementation of this Circular, including necessary
amendments to the relevant bye-laws, rules and regulations, if any.
9. This circular is being issued in exercise of powers conferred under Section 11(1)
read with Section 11(2)(a) of the SEBI Act, 1992, read with Regulation 51 of SECC
Regulations, 2018, to protect the interests of investors in securities and to promote
the development of, and to regulate the securities market.
Page 7 of 8
10. This circular is available on SEBI website at www.sebi.gov.in under the category
“Legal Circulars”.
Yours faithfully,
Ansuman Dev Pradhan
General Manager
Technology, Process Re-engineering, Data Analytics
Market Regulation Department
+91-22-26449622 Email: ansumanp@sebi.gov.in
Page 8 of 8