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Informist, Tuesday, Jul 30, 2024

 

--SEBI releases consultation paper on index derivatives framework 

--SEBI paper proposes changes to strike price methodology

--SEBI proposes members collect option premiums upfront from clients

--SEBI proposes clearing corps to monitor position limits intraday

--SEBI proposes stock exchanges to monitor position limits intraday

--SEBI proposes to revise minimum contract size for index derivatives

--SEBI proposes 3% upward revision in margin day before expiry

--SEBI proposes 5% upward revision in margin on expiry day 

 

MUMBAI – The Securities and Exchange Board of India, in a consultation paper today, proposed measures to strengthen the index derivatives framework for increased investor protection and market stability in derivative markets. Some of the proposals include changes to the strike price introduction methodology, making clearing corporations and exchanges monitor position limits on an intraday basis instead of at the end of the day, and revising the minimum contract size for index derivatives. The market regulator has sought public comments on the proposed measures by Aug 20.

 

SEBI has proposed in the paper that the minimum contract size for index derivative contracts be raised to 1.5-2.0 mln rupees from the current range of 500,000-1 mln rupees which was set in 2015. After six months of raising the minimum contract size, the SEBI paper stated that it be increased to 2-3 mln rupees as part of the second phase.

 

In another major proposal by the market regulator, the paper stated that weekly options contracts be provided by an exchange only on one of its benchmark indices. Currently, NSE offers weekly expiry options on Nifty 50, Nifty Bank, Nifty Midcap Select, and Nifty Financial Services indices on different days of the week, while the BSE offers the same in Sensex and Bankex indices on two different days of the week. The SEBI paper said that these derivatives contracts expire "on all five trading days of the week across different indices or exchanges, mirroring the zero-day-to-expiry construct, which results in speculative money moving from one expiry of the index to another every single day."

 

SEBI proposed rationalising the existing strike price introduction methodology by keeping the strike interval uniform near the prevailing index price, which is to be around 4% of the prevailing price. Further, it proposed to increase the interval to 4-8% as strike prices move away from the prevailing price. Not more than 50 strikes should be introduced for an index derivatives contract at the time of the contract launch, SEBI paper said. Currently, the options strikes are introduced at uniform price intervals around the prevailing index value by exchanges.

 

SEBI also proposed that members should collect option premiums from clients on an upfront basis. Currently, there is no explicit stipulation of upfront collection of options premium from buyers by members. Further, it proposed that clearing corporations and stock exchanges should monitor the position limits for index derivative contracts on an intraday basis. Currently, they monitor position limits at the end of the day.

 

The market regulator said that there was a skew in the derivatives volumes on the expiry day compared with other days and this posed basis and liquidity risks. To address this, it proposed that the margin benefit for calendar spread position should not be provided for positions involving any of the contracts expiring on the same day.

 

Next, the regulator proposed increasing the extreme loss margin by 3% at the start of the day before expiry, and by 5% on expiry day. The SEBI paper stated that this will address the issue of high implicit leverage in options contracts near expiry, which creates a high risk on a notional basis for entities dealing in options. End

Reported by Alina Geogy

Edited by Akul Nishant Akhoury

 

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