The Securities and Exchange Board of India (Sebi) on Tuesday tightened the rules for futures & options (F&O) trading by increasing the minimum trading amount, rationalising the weekly expiry contracts and mandating upfront collection of option premiums.

While the market regulator announced six measures that are aimed at curbing undue speculation in these instruments particularly from retail investors, they will be introduced in a phased manner beginning November 20, 2024.

Three steps that include increasing the contract size, levying additional extreme loss margin (ELM) of 2 per cent and rationalisation of weekly index derivatives products will be implemented from November 20.

Other steps such as upfront collection of option premiums will be with effect from February 1, 2025 and intra-day monitoring of position limits will be from April 1, 2025.

A derivative is an instrument whose value entirely comes from the underlying asset. Such an underlying asset can be securities, commodities, bullion, and currency among others. It comes in the form of futures contracts and options contract.

Both Sebi and the government have been concerned about the increased participation of retail investors (particularly after the Covid pandemic) in the options segment which is considered more riskier.

A recent study by the market regulator had found that more than 91 per cent, or 73 lakh, individual traders lost money in the F&O segment in 2023-24 with an average net loss of ₹1.2 lakh per person.

About 98 per cent of contracts in derivatives are in the options segment linked to an underlying index.

Kunal Sanghavi, chief strategy and transformation officer, HDFC Securities, said the curbs on index derivative contracts will squelch speculation by forcing players to opt for rollovers early and not wait till expiry day, easing expiry day “basis” speculation.

“Basis” is the difference between futures price and stock price which gets extensively impacted during rollovers.

To curb undue speculation, the markets regulator had come out with a discussion paper on measures to strengthen index derivatives framework for increased investor protection and market stability in July.

All of these proposals have now been accepted.

Currently the contract size for index futures and index options or in other words the minimum value for derivatives contract is between ₹5 and ₹10 lakh.

This contract size has now been increased to ₹15-20 lakh.

“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,’’ Sebi said.