BSE shares surge 8% after SEBI proposes stricter rules for index F&O contracts

BSE shares surge: Shares of BSE Ltd. surged by 8 per cent to hit an intraday high of Rs 2,607, following the Securities and Exchange Board of India’s (SEBI) proposal to tighten rules for trading index futures and options contracts. Analysts believe that these tighter regulations could potentially shift trading volumes towards BSE, as most index derivative contracts are currently traded on the National Stock Exchange.

On Tuesday, SEBI suggested revising the minimum contract size for index derivatives and mandating upfront collection of option premiums. These measures aim to curb speculative trading, in line with recent concerns raised by the government and economic analysts. Earlier this month, government increased the securities transaction tax (STT) on futures and options trades starting October 1, citing the need to manage the hyperactivity in the derivatives segment.

The Economic Survey also flagged the rising interest of retail investors in derivative trading, highlighting that speculative activities are not conducive for a developing economy. The survey noted that the surge in retail investor participation in F&O trading might be driven by gambling instincts.

SEBI's consultation paper proposes several measures, including rationalising weekly index products, implementing intra-day monitoring of position limits, and adjusting strike prices. Additionally, SEBI suggests removing the calendar spread benefit on expiry days and increasing margins as contracts near expiration.

Public comments on these proposals are invited until August 20. SEBI has outlined a two-phase approach for revising the minimum contract size for index derivatives, with initial contracts ranging from Rs 15 lakh to Rs 20 lakh, and after six months, increasing to Rs 20 lakh to Rs 30 lakh. The last revision of the minimum contract size was set between Rs 5 lakh and Rs 10 lakh in 2015.

Further, SEBI suggests a uniform strike interval of 4 per cent around the prevailing index price, with a maximum of 50 strikes at the time of introduction. Option premiums should be collected from clients upfront, and no margin benefits should be granted for calendar spread positions on contracts expiring on the same day. Additionally, position limits for index derivatives should be monitored intraday by clearing corporations and stock exchanges.

The proposal also includes providing weekly options contracts on a single benchmark index and increasing the Extreme Loss Margin (ELM) by 3 per cent before expiry and by 5 per cent on expiry day. These measures aim to enhance investor protection and market stability, as SEBI found that 89 per cent of individual traders in the equity F&O segment incurred losses in a study conducted in January 2023.

For FY2023-24, 92.50 lakh unique individuals and firms traded in NSE's index derivatives, resulting in a cumulative trading loss of Rs 51,689 crore, excluding transaction costs, with 85 per cent of traders making net losses. Futures and options trading, though useful for hedging, speculation, and arbitrage, come with significant risks, including leverage and market volatility, which can lead to substantial losses.

In a related development, SEBI has approved stricter norms for the entry of individual stocks into the derivatives segment, aiming to exclude stocks with consistently low turnover from the F&O segment.