‘SEBI changes F&O game, not a bad idea on expiry day’: Capitalmind’s Deepak Shenoy on new derivates framework | Stock Market News

Capital markets regulator Securities and Exchange Board of India (SEBI) mandated a new framework for India’s booming equity derivates market and announced sweeping changes to curb the rush in futures and options (F&O) trading. Commenting on the market watchdog’s F&O norms, Deepak Shenoy, founder and chief executive officer (CEO) of SEBI-registered Portfolio Management Service (PMS) Capitalmind.in, said SEBI “changes the F&O game”

Taking to microblogging platform ‘X’ (formerly Twitter), Shenoy pegged the mandate of options to be paid upfront as “the boring stuff.” “Option premiums have to be paid by options buyers. Currently, intraday, the exchanges just block the broker’s collateral for options bought, allowing one person to effectively buy and sell intraday using another person’s collateral,” said Shenoy.

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“This must be a few brokers that provided this facility to allow mad intraday options buy positions. From Feb 2025, this won’t happen – clients will have to pay up from their money for such purchases,” said Shenoy.

Shenoy added, “No Calendar spread on expiry day: You can sell an option on expiry day and buy a futures or options for a later expiry (like sell weeklies, keep a monthly buy on a different strike or so).” According to the market expert, this provides a “calendar spread” benefit that reduces margins by as much as 50 per cent.

“This lower margin allows a person with X lakh rupees in margin to take two times the position as he would without the calendar spread benefit. And SEBI doesn’t like it. So they’ve removed the spread benefit only for expiry day (if one leg of any spread expires that day only),” said the expert.

According to Shenoy, this is not a bad idea, as there was a large amount of retail scalping happening on daily options expiries, especially selling straddles. There is systemic risk in case the offsetting calendar option doesn’t move anywhere close to the expiring one (can happen in case of sudden spikes) – which makes sense on expiry day because max trading happens there.

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To be clear, the regulator’s calendar spread benefit meant that on expiry day, a client not having enough margin to sell Nifty 50 or Sensex options would sell them at the current expiry and buy the same options at the next expiry. 

This would reduce the margin needed to be placed to sell the options in the current expiry as the purchase of the same options in the next weekly expiry would effectively become a hedged position. But that benefit has now been changed to prevent systemic risk in the event of sudden adverse movement of markets on expiry day.

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SEBI announces steps to curb rush in F&O trading

The capital market regulator implemented six out of seven measures recommended by an expert panel to cool the exuberance in India’s derivatives market. Over the years, countless investors chasing easy money have burned their fingers. Market participants said the measures, which will be implemented in a phased manner, could dent derivatives volumes by 20-30 per cent.

Out of the six, the ones that could impact volumes the most are the reduction in weekly expiries per exchange from five or more to just one each, the increase in lot size to ₹15-20 lakh from ₹5-10 lakh, and the removal of the calendar spread benefit on expiry day. The first two will take effect on November 20, and the third on February 1, 2025.

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The other three measures include intra-day monitoring of position limits effective 1 April 2025 to ensure that the position limit per client is not exceeded during a trading session, upfront collection of option premia from buyers from February 1, 2025, and the increase in extreme loss margin on the day of expiry from November 20.

On Monday, September 30, one of SEBI’s board meeting decisions said asset management companies can now offer riskier strategies, like long-short equity, to high-risk investors with a minimum investment of ₹10 lakh. 

Positioned between tightly regulated MFs and lighter-touch portfolio services, this class will give high-net-worth (HNI) investors exposure to equity derivatives. This is a new investment product under the existing mutual fund framework to bridge the gap between mutual funds and PMS regarding flexibility in portfolio construction.

“The introduction of the new asset class (NAC) by SEBI is a highly commendable move. It provides an excellent opportunity for HNIs with high-risk appetites to capitalize on strategies such as long-short and inverse exchange-traded funds, which can significantly enhance their portfolios,” said Rahul Jain, President & Head, Nuvama Wealth.

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“Currently, these strategies are unavailable through traditional mutual funds. Importantly, these strategies will be managed by professionals in accordance with regulations set by the regulator. The NAC will benefit investors by eliminating the need to use unregulated and unauthorized products to access these strategies,” added Jain.