Consultation Paper on Measures to strengthen index derivatives framework for

increased Investor protection and Market stability

1. Objective
Derivatives market assist in better price discovery, help improve market liquidity
and allow investors to manage their risks better. However, bursts of speculative
hyperactivity in derivative markets, particularly by individual players, can detract
from sustained capital formation by endangering both investor protection and
market stability. Given the changing market dynamics in equity 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 date, this consultation paper seeks to introduce measures to
enhance investor protection and promote market stability in derivative markets,
while ensuring sustained capital formation.

2. Background
2.1. Changing Market Dynamics – Trading Product mix
2.1.1. Equity derivatives contracts generally have minimum tenure of a month.
An exception in this regard is options contracts on an index (benchmark/
sectoral/etc.) wherein the contract tenure and expiry of contracts thereof
is every week. From introduction of weekly options contracts by NSE in
May 2016 on a sectoral index to introduction of weekly contracts in
February 2019 on benchmark index by same exchange, the expiry date of
all such weekly contracts was on a single day of the week till 2022 (other
equity exchange i.e. BSE also had weekly expiry derivatives contract albeit
with very less liquidity / activity).

2.1.2. Within the Regulatory ambit, the modalities around broad specifications
of such weekly options contracts including deciding the expiry day is left to
individual exchange. After reintroduction of weekly index derivatives
contracts on BSE in May 2023, there has been shuffling by exchanges in
terms of choosing expiry dates of the contract – to the extent that as of
now there is expiry of weekly index derivatives contracts on all five trading
days of the week.

Page 1 of 18
 2.1.3. Admittedly, the weekly index derivatives products have found favour with
market participants especially around expiry of such contracts – viz.
evident by extent of hyperactive trading activity happening on expiry day
of such contracts when compared to other trading days. For illustration,
consider the Table-1 below for proportion of notional turnover happening
on the expiry day of the contracts for various index derivatives contracts
compared to turnover 5 days before expiry (including expiry day).

Table-1 : Trend in Notional Turnover near contract expiry for a weekly expiry in
July 2024
Notional Turnover SENSEX BANKEX NIFTY BANKNIFTY
Last 30 mins as % of expiry day 27% 20% 16% 13%
Last 60 mins as % of expiry day 40% 36% 28% 26%
Expiry day as % of 5 days
before (incl. expiry day) 96% 97% 64% 62%
Source : Exchange data
2.2. Changing Market Dynamics – Trading Turnover
2.2.1. Derivatives market turnover in India has significantly surpassed cash
market turnover. Reports suggest that Indian markets account for 30% to
50% of global exchange-traded derivative trades, aided by technology,
increasing digital access and varied product offering. Post covid era has
seen a generally heightened activity from retail investors. The total number
of demat accounts in India rose to 15.8 crore as at the end of May-24, of
which 12.2 crore accounts were opened since April-2020. With launch of
weekly derivatives contracts on benchmark index by NSE in February
2019, there has been a shift in trading activity towards index options
contracts. The trend witnessed in gross turnover in F&O segment vis-à-vis
cash market segment has been tabulated in Table-2 below.
Table-2 : Trend in Annual Turnover in F&O segment
Turnover - Market wide FY18 FY19 FY20 FY21 FY22 FY23 FY24
(Fig. in Rs. Lakh Cr.)
Index Futures 48 55.5 67 90.5 84.5 95 74
Stock Futures 156 161.5 148.5 181 210.5 190.5 255.5
Index Options (Premium) 4.5 6.5 11 26.5 58.5 109.5 138
Stock Options (Premium) 1.5 2 2.5 6 10.5 9.5 14
Total turnover (Premium) 210 225.5 228.5 303.5 363.5 405 481.5
Notional Turnover 1650 2376 3445 6436 16952 38223 79927
Turnover in Cash Market 83.2 87.2 96.6 164.4 179.1 143.3 217.3

Page 2 of 18
 Turnover - Market wide FY18 FY19 FY20 FY21 FY22 FY23 FY24
(Fig. in Rs. Lakh Cr.)
Ratio of F&O turnover 2.5 2.6 2.4 1.8 2.0 2.8 2.2
(Premium) to Cash turnover
Ratio of F&O turnover 19.8 27.2 35.7 39.1 94.7 266.7 367.8
(Notional) to Cash Market
turnover
Nifty 50 Index 10,211.80 11,623.90 8,597.75 14,690.70 17,464.75 17,359.75 22,326.90

Source: Exchange data

From the above table, it may be seen that recent growth in derivatives has
been primarily driven by growth of index options as over the years primarily
only index options segment has shown real growth in turnover (when
compared with increase in benchmark index-last row of Table-2).

2.2.2. Within this sub-segment of Index options, there has been an influx of
individual investors observed post Covid phase who have contributed an
increasing share of turnover in the index options segment. The same has
been tabulated in Table-3 below:

Table-3: Trend in Annual Turnover of Individual Investors in F&O segment

Gross turnover - Individual Investors

FY18 FY19 FY20 FY21 FY22 FY23 FY24
(Fig. in Rs. Lakh Cr.)
Total Gross turnover for individuals in
65.8 65.7 62.6 90.1 87.2 101.3 117.4
F&O - premium basis
% Index Futures 24% 28% 35% 39% 29% 30% 19%
% Stock Futures 74% 68% 59% 49% 45% 29% 36%
% Index Options 2% 3% 5% 9% 23% 38% 41%
% Stock Options 1% 1% 1% 2% 4% 3% 3%
Gross Individual Turnover In Cash
27.9 31.1 34.9 69.3 67.4 48.6 71.3
Market
Ratio of gross Individual F&O turnover
on premium basis to their Cash Market 2.4 2.1 1.8 1.3 1.3 2.1 1.6
turnover

Source : Exchange Data. Individuals include individual/ sole proprietorship firm, HUFs and NRIs

From the above table, it may be seen that for every ₹100 traded by individual
investor in FY 2018, only ₹2 went in to index options segment. This number
rose to ₹41 in FY 2024.

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2.3. Illustration - Behavioral Analysis of market around contract expiry
2.3.1. As per examination of data from June 2023 to July 2024, NIFTY was
seen more volatile on the expiry day (i.e. High Low variation being highest
on Thursdays for 6 months out of 12) compared to non-expiry days.
2.3.2. The data on intraday price variation for NIFTY and BANKNIFTY has
been presented below at Table-4 from Jan 01, 2024 to July 04, 2024. It is
observed that barring opening time movement, the last half an hour of
continuous trading is most volatile on expiry days compared to non-expiry
days. Also, last half an hour of expiry day happens to be more volatile than
other half an hour movement on expiry day (barring opening time
movement).
Table-4 : Intraday NIFTY movement (Thursday Expiry)
NIFTY Monday Tuesday Wednesday Thursday Friday
09:15-10:00 0.53% 0.42% 0.49% 0.51% 0.45%
10:00-10:30 0.28% 0.25% 0.33% 0.35% 0.27%
10:30-11:00 0.22% 0.23% 0.29% 0.30% 0.23%
11:00-11:30 0.23% 0.19% 0.26% 0.27% 0.22%
11:30-12:00 0.21% 0.18% 0.27% 0.26% 0.23%
12:00-12:30 0.18% 0.18% 0.22% 0.22% 0.22%
12:30-13:00 0.18% 0.21% 0.21% 0.26% 0.24%
13:00-13:30 0.17% 0.19% 0.19% 0.25% 0.20%
13:30-14:00 0.21% 0.18% 0.24% 0.28% 0.24%
14:00-14:30 0.20% 0.23% 0.25% 0.27% 0.24%
14:30-15:00 0.26% 0.20% 0.27% 0.32% 0.24%
15:00-15:30 0.28% 0.25% 0.28% 0.33% 0.28%

Intraday BANKNIFTY movement (Wednesday Expiry)

BANKNIFTY Monday Tuesday Wednesday Thursday Friday
09:15-10:00 0.68% 0.67% 0.77% 0.68% 0.57%
10:00-10:30 0.38% 0.35% 0.53% 0.47% 0.38%
10:30-11:00 0.26% 0.31% 0.44% 0.37% 0.29%
11:00-11:30 0.34% 0.26% 0.37% 0.37% 0.30%
11:30-12:00 0.27% 0.26% 0.33% 0.30% 0.30%
12:00-12:30 0.29% 0.24% 0.31% 0.30% 0.28%
12:30-13:00 0.24% 0.28% 0.26% 0.36% 0.31%
13:00-13:30 0.25% 0.25% 0.26% 0.28% 0.29%
13:30-14:00 0.30% 0.25% 0.29% 0.36% 0.32%
14:00-14:30 0.28% 0.34% 0.32% 0.33% 0.36%
14:30-15:00 0.33% 0.27% 0.37% 0.38% 0.34%
15:00-15:30 0.38% 0.31% 0.43% 0.37% 0.38%
Source : Exchange Data

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2.3.3. From the preceding paragraphs, it is noted that significant trading activity
happens on the day of contract expiry which happens to be more volatile
day compared to other days.

2.3.4. Further, in the subsequent table, it is illustrated that on the day of

contract expiry, significant speculative activity happens around the
contract expiry period which also happens to be a more volatile time period
(Table 4 above).
For this purpose, the 3-minute interval Open Interest (OI) and volume data
for NIFTY was analyzed (Table-5). It can be observed that participants are
initiating and squaring off positions in a time-span of less than 3 minutes,
thereby speculating significantly, minutes before contract expiry.
Table-5: Trading summary in near money NIFTY options expiring on July 04,
2024
Volume as
S Interval Interval
OI Volume Change in OI multiple of
No Start End
change in OI
1 14:45 14:48 21,91,87,100 10,76,86,850
2 14:48 14:51 21,61,15,875 16,48,51,775 -30,71,225 54
3 14:51 14:54 21,16,03,925 26,95,93,600 -45,11,950 60
4 14:54 14:57 21,19,06,950 24,90,35,500 3,03,025 822
5 14:57 15:00 21,52,64,000 20,88,58,000 33,57,050 62
6 15:00 15:03 21,76,87,625 25,23,37,350 24,23,625 104
7 15:03 15:06 21,58,39,200 19,96,69,750 -18,48,425 108
8 15:06 15:09 21,01,16,350 23,55,68,850 -57,22,850 41
9 15:09 15:12 19,95,58,325 29,68,36,050 -1,05,58,025 28
10 15:12 15:15 19,35,46,300 25,30,07,600 -60,12,025 42
11 15:15 15:18 18,77,06,225 18,62,03,750 -58,40,075 32
12 15:18 15:21 17,82,92,650 19,41,86,575 -94,13,575 21
13 15:21 15:24 16,58,16,450 17,49,86,400 -1,24,76,200 14
14 15:24 15:27 14,96,96,550 9,63,31,075 -1,61,19,900 6
15 15:27 15:30 13,77,88,700 4,81,21,525 -1,19,07,850 4
*NIFTY moved in the range of 24298 to 24346 and hence near money range of 24100 to 24500 was considered
Source : Exchange Data

2.3.5. A high figure in the last column in Table-5 depicts the quantum of intra
interval volume which cannot be attributed to closure of open positions and

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 hence may be considered speculative in nature, very near to contract
expiry.

2.3.6. It is pertinent to note that mathematically, everything else being constant,

option premiums reduce sharply as one approaches expiry. Illustratively,
thirty minutes before expiry, ceteris paribus, the option premium of a
comparable at-the-money strike could be just a fifth or less of the closing
premium of the day before expiry. Similarly, five to ten minutes before
expiry, ceteris paribus, the premium could be as low as a tenth or less of
the premium of the day before. This lower premium on expiry day likely
makes F&O trading on that day an accessible, cheap, and enticing lottery
ticket for some individuals to purchase, sell, and speculate on, irrespective
of how low the odds of success may be. It is very difficult to attribute any
kind of benefit to the overall securities market ecosystem and capital
formation from such concentrated hyperactivity in derivatives on expiry
date. This issue is further elaborated at para 3.6 of the paper.

2.3.7. In this regard, reference is made to study conducted by SEBI in January

2023, on “Analysis of Profit and Loss of Individual Traders dealing in Equity
F&O segment”. The said study found that 89% of individual traders in the
equity F&O segment incurred losses. The same study also highlights that
trading in derivatives has proliferated beyond tier 1 cities in past 3-4 years.

2.3.8. For FY 2023-24, 92.50 lakhs unique individuals and proprietorship firms
traded in index derivatives segment of NSE and cumulatively incurred a
trading loss of ₹51,689 cr. This figure doesn’t include transaction costs.
Further, of these 92.50 lakhs unique investors, 14.22 lakhs investors made
net profit i.e. approximately 85 out of 100 made a net trading loss (source:
NSE data). The SEBI study, referred to above, found that over and above the
trading losses, the loss makers expended an additional 23% of trading
losses as transaction costs, while profit makers spent additional 15% of
their trading profits as transaction costs during FY22. After considering the
transaction costs, the outcome for FY24 will likely be very comparable to

Page 6 of 18
 our FY 22 study, which found 9 out of 10 losing money. On the other side,
it has been observed that larger non-individual players that are high-
frequency algo-based proprietary traders and/ or Foreign Portfolio
Investors (FPIs), are, in general, making offsetting profits.

2.3.9. To put these numbers in perspective, the absolute value of the net
trading loss borne by individuals during FY24 in index derivatives, as
described above, in index derivatives is over 32% of the net inflows into
the Growth and Equity oriented schemes of all Mutual Funds during FY24.
It is also over 25% of the average annual inflows into all Mutual Funds
across all schemes over the past five years.

Separately, large OI and hyperactive and abnormal trading activity close

to expiry have implications for market stability, as elaborated at para 3.6.

2.4. In view of the aforesaid findings around increased speculative/ trading

hyperactivity in index options segment combined with poor profitability
outcome for individual investors, SEBI, with an objective of actively enhancing
investor protection and ensuring market stability, created an Expert Working
Group (EWG) to examine the matter further. The EWG comprised of
individuals from various fields such as Academicians, Market Participants,
Intermediaries, Market Infrastructure Institutions etc. The broad Terms of
Reference of the EWG included suggesting near term and medium term
measures to Enhance investor protection in Derivatives segment, improve Risk
metrics & Risk Architecture in Derivatives segment with a view to enhance
market development and market regulation. The immediate near term
recommendations of EWG were deliberated by the Secondary Market Advisory
Committee (SMAC) of SEBI.

2.5. Pursuant to the recommendations of the SMAC, SEBI, with an objective to

strengthen the derivatives framework for enhancing investor protection and
ensuring market stability, is proposing certain near term measures in the index
derivatives segment. The objective of this consultation paper is to seek public
comments on the following proposed measures.

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3. Measures proposed to be implemented in Index Derivatives segment
3.1. Rationalization of strike price for options:
3.1.1. Existing practice:
Options strikes are introduced at uniform price intervals around
prevailing index value by exchanges. For instance, NIFTY contracts
have 35 In the Money and 35 Out of Money strikes at the time of
introduction with interval of 50 points. BANKNIFTY contracts have 45 In
the Money and 45 Out of Money strikes at the time of introduction. Due
to this, the options strikes cover roughly 7% to 8% of index movement
around prevailing index price at the time of introduction.
In addition, there are reserve strikes which enable exchanges to launch
new strikes during intraday movement in index. Further, on daily basis,
additional strikes are introduced if movement in the index warrant so.
3.1.2. Issues with existing practice:
For short tenure contracts, having a large number of strikes with very
wide coverage could scatter trading activity / liquidity across multiple
strikes which could cause sudden price movement in those options
contracts. This may also create a possibility of artificial trades in illiquid
strikes, at very low option premium.
3.1.3. Data Analysis:
3.1.3.1. The following examination was carried out for NIFTY options
contracts expiring on July 04, 2024 and were more than 5% away
from closing price of NIFTY on previous day (NIFTY closing price
around 24280).
Table-6: Traded volume in far-away options strikes on expiry day (OI)
Volume on expiry day as
No of
S No multiple of OI on Expiry-1 Max Min
strikes
day
1 Greater than 5 18 19.9 5.1
2 3 to 5 12 4.7 3.1
3 1 to 3 32 2.8 1.1
4 Less than 1 26 0.9 0.0
Source : Exchange Data

Page 8 of 18
 3.1.3.2. The above table shows that there is a significant quantum of new
positions created by participants on the day of expiry in the options
strikes which are more than 5% away, which corroborates the
observation made at para 2.3.6 of the paper in terms of buying cheap
options at far away strikes regardless of how low the odds of success
are.
3.1.3.3. On scattering of volume in far-away strikes, the average volume
in those strikes is compared with the volume in individual strikes in
Table-7.
Table-7: Traded volume in far-away options strikes on expiry day
Volume as multiple of
No of
S No average volume in these Average Min Max
strikes
strikes on Expiry day
1 Greater than 1 16 1,29,864 1.1 23.7
2 Less than 1 72 6,924 0.0 0.93
Source : Exchange Data
The above table shows scattering of volume in far-away strikes on the day
of expiry.
3.1.4. Proposal:
Existing strike price introduction methodology may be rationalized to
incorporate the following principles:
3.1.4.1. Strike interval to be uniform near prevailing index price (4%
around prevailing price) and the interval to increase as the strikes
move away from prevailing price (around 4% to 8%).
3.1.4.2. Not more than 50 strikes to be introduced for an index derivatives
contract at the time of contract launch.
3.1.4.3. New strikes to be introduced to comply with aforesaid
requirement (3.1.4.1) on daily basis.
3.1.4.4. Exchanges to uniformly implement and operationalize the
aforesaid principles after joint discussion.

3.2. Upfront collection of options premium:

3.2.1. Existing practice:
There is a stipulation for upfront collection of margin for futures position
(both long and short) as well as options position (only short options

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 require margin whereas long options require payment of options
premium by buyers). There is no explicit stipulation of upfront collection
of options premium from options buyer by members.
3.2.2. Issues with existing practice:
Options prices depending on the moneyness move in a non-linear way
and thus carry very high implicit leverage. These are timed contracts with
possibility of very fast paced price appreciation as well as depreciation.
In order to avoid any undue intraday leverage to end client and to
discourage any market wide practice of allowing position beyond the
collateral at the end client level, it is desirable to mandate collection of
options premium upfront by TM/ CM from the options buyer. (At present,
CCs block collateral at CM level for options buy trades).
3.2.3. Proposal:
The members to collect option premiums on an upfront basis from the
clients.

3.3. Removal of calendar spread benefit on expiry day:

3.3.1. Existing practice:
Margin requirement for an F&O position reduces significantly by
offsetting position on a future expiry as calendar spread margin applies
on such position instead of normal margin on two positions.
3.3.2. Issues with existing practice:
While there is a valid reason for aforesaid margin benefit, expiry day can
see significant basis risk where the derivative value for the contract
expiring can move very differently from the derivative value on away
month expiry. This is particularly true with the level of hyperactivity on
expiry day in contrast to the activity in the away month expiry.
The element of liquidity risk is heightened as away week/ month options
are generally not very liquid, and hence closing both legs of the calendar
spread positions could result in a net loss.
3.3.3. Data Analysis:
3.3.3.1. Considering NIFTY as the underlying, for a sample day, an
analysis was conducted for sample portfolios under a large retail

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 oriented TM, by calculating net delta equivalent positions of its clients
in weekly expiry and other expiries put together. The clients who had
positions across expiries with a different sign of delta between weekly
and other expiries were identified and SPAN margin for both set of
clients was calculated separately, thereby mimicking removal of
calendar spread benefit. The exercise resulted in increase in margin
requirements by approximately 50% for such clients. This suggests
that retail participants are taking calendar spread positions.
3.3.3.2. Additionally, as mentioned in Table-5 above, there is a significant
amount of speculative trading even minutes before expiry of options
and removal of calendar spread benefit on expiry day is likely to
enhance overall risk posture.
3.3.4. Proposal:
Given the skew in volumes witnessed on the expiry day vis-à-vis other
non-expiry days and the inherent basis and liquidity risk present
therewith, the margin benefit for calendar spread position would not be
provided for positions involving any of the contract expiring on the same
day.

3.4. Intraday monitoring of position limits:

3.4.1. Existing practice:
Position limits for various participants/ product types are specified by
SEBI. These limits are monitored by MIIs (Clearing Corporations/Stock
Exchanges) at the end of the day.
3.4.2. Issues with existing practice:
Particularly on the day of expiry, there is a possibility of undetected
intraday positions beyond permissible limits as end of day open positions
would be NIL.
In general, position limits should be complied with market participants at
all points of time and hence there should be a check for breach of
position limits intraday/real time.

Page 11 of 18
 3.4.3. Proposal:
Given the evolving market structure, the position limits for index
derivative contracts shall also be monitored by the clearing corporations/
stock exchanges on intra-day basis, with an appropriate short-term fix,
and a glide path for full implementation, given the need for corresponding
technology changes.

3.5. Minimum contract size:

3.5.1. Existing practice:
Minimum contract size requirement for derivative contracts (i.e. `5 lakhs
to `10 lakhs) was last set in 2015. During the last 9 years, the benchmark
indices have gone up by nearly 3 times.
3.5.2. Issues with existing practice:
Given the inherently higher risk in derivatives and the large amount of
implicit leverage, increase in minimum contract size would result in
reverse sachetization of such risk bearing products.
3.5.3. Proposal:
In view of growth witnessed in the broad market parameters, the
minimum contract size for index derivative contracts to be revised as
under:
3.5.3.1. Phase 1: Minimum value of derivatives contract at the time of
introduction to be between `15 lakhs to `20 lakhs.
3.5.3.2. Phase 2: After 6 months, minimum value of derivatives contract
to be between the interval of `20 lakhs to `30 lakhs

3.6. Rationalization of weekly index products:

3.6.1. Existing practice:
Weekly expiry index derivatives contracts are offered by stock exchanges
in addition to monthly contracts. There is expiry of such weekly contracts
on all five trading days of the week across different indices/exchanges
mirroring 0 DTE (Zero Day to Expiry) construct resulting in to speculative
money moving from one expiry of index to another every single day.
3.6.2. Issues with existing practice:

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 Expiry day trading is almost entirely speculative. Given there is an expiry
of weekly contracts on all five trading days of the week combined with
previous findings on increased volatility on expiry day and within that
increased volatility during closing time, speculative activity created near
contract expiry and poor profitability outcome for individual investors in
F&O segment, rationalization is warranted in the product offering.

3.6.3. Data Analysis:

3.6.3.1. Other than profitability figure, sample analysis carried out by
exchanges show that an open position is on an average held by retail
investor only for around 30 minutes. Also, in many cases, the expiry
day trading in options constitutes as high as 80-90% of overall
notional turnover of the weekly index option contracts in expiry week.
3.6.3.2. The decay in options premium as one approaches expiry, with
everything else being constant, has been elaborated at para 2.3.6. To
further illustrate and to gauge the quantum of implicit leverage on
expiry day from the perspective of options writers, the premium of
combined position of nearest In the Money (ITM) call option and put
option of NIFTY is compared at different points of time on expiry day
as follows:
Table – 8 : Price of nearest ITM call and put and corresponding Time Value
Option Strike Time
Date Time NIFTY Value Premium
Type Price Value
03-Jul 15:30 24286.00 CE 24250 93.00
126.00
03-Jul 15:30 24286.00 PE 24300 83.00
04-Jul 12:30 24,339.25 CE 24300 54.55
29.20
04-Jul 12:30 24,339.25 PE 24350 24.65
04-Jul 13:30 24,345.75 CE 24300 38.15
18.75
04-Jul 13:30 24,345.75 PE 24350 30.60
04-Jul 14:30 24,335.30 CE 24300 29.15
7.65
04-Jul 14:30 24,335.30 PE 24350 28.50
04-Jul 15:00 24,309.65 CE 24300 8.00
5.80
04-Jul 15:00 24,309.65 PE 24350 47.80
04-Jul 15:15 24,300.30 CE 24300 1.65
1.20
04-Jul 15:15 24,300.30 PE 24350 49.55
Source : Exchange Data
3.6.3.3. The overall pay-off from combined position of nearest ITM call
and ITM put position on expiry would be `50 i.e. strike interval, if

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 expiry happens anywhere in that range. Hence, the additional
component of the premium over this intrinsic value is Time value of
position viz. mentioned in the last column of Table-8. In the above
table, it is seen that an option writer had Time value of Rs. 126 a day
before expiry (i.e. movement of 126 points outside the range in NIFTY
would not result in a loss for the entity) which becomes merely `5.80
at 3 PM and `1.20 at 3.15 PM on expiry day. The above data may be
juxtaposed with the quantum of speculative hyperactivity observed
from 2.45 PM to 3.30 PM on expiry day in the contracts expiring within
few minutes to gauge kind of positions created by market participants
near contract expiry with a very small premium amount resulting in to
high implicit leverage.
3.6.3.4. Large OI and hyperactive and abnormal trading activity close to
expiry carry implications for market stability. If an extreme black swan
event were to occur minutes before expiry, with heightened OI and
activity at stake, the potential stress to the ecosystem with those that
are short options rushing to hedge in cash, futures, and/or options
markets can be immense. While the Indian market ecosystem
continues to build in conservative safety buffers in terms of margins
and default management waterfalls, the daily expiry of options
contracts on different indices combined with unusual nature of
hyperactivity around expiry does pause significant risk to market
stability, as mentioned above.
3.6.4. Proposal:
In view of the data provided in the preceding paragraphs, to enhance
investor protection and promote market stability in derivative markets,
weekly options contracts to be provided on single benchmark index of
an exchange.

3.7. Increase in margin near contract expiry:

3.7.1. Existing practice:
Trading activity, quantum of open positions and volatility increase around
expiry however the same is not factored in the form of increase in the

Page 14 of 18
 margin to account for increased risk or to act as a deterrent or to build
additional buffers to absorb sudden price shock or volatile black swan
event impacting asset markets.
3.7.2. Issues with existing practice:
Near expiry the premium traded decreases thereby creating higher risk on
notional basis for entities dealing in options and additional buffers are
required.

3.7.3. Proposal:
To address the issue of high implicit leverage in options contracts near
expiry, creating a high risk on notional basis for entities dealing in options,
the margins on Expiry day and the day before expiry to be increased in the
below stated manner:
a. At the start of the day before expiry, Extreme Loss Margin (ELM) to be
increased by 3%.
b. At the start of expiry day, ELM to be further increased by 5%.

4. In view of the above, this consultation paper invites Public comments and
suggestions along with supporting rationale from all interested stakeholders
including individual investors Market Participants and intermediaries, Investor’s
Associations and Academic Institutions on the Measures to index strengthen
derivatives framework for increased investor protection and market stability,
discussed above and summarised as draft circular at Annexure-A. Comments may
be sent latest by August 20, 2024, via online web based platform through the
following link:

_______________
In case of any technical issue in submitting your comment through web based
public comments form, you may contact the following through email with a subject
Issue in submitting comments on Consultation Paper on Measures to strengthen
index derivatives framework for increased investor protection and market stability.
vishals@sebi.gov.in, ansumanp@sebi.gov.in,
darshilb@sebi.gov.in, abhishekr@sebi.gov.in
***

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 Annexure-A
Draft Circular

SEBI/HO/MRD/MRD-POD-TPD/ /2024

To

All Recognised Stock Exchanges

All Clearing Corporations

Subject: Measures to strengthen 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 / Clearing
Corporations provide products for trading in derivatives market and also a platform
facilitating smooth trading in these products, while ensuring online real time risk
management, surveillance as well as settlement of trades, for orderly trading.

2. 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 date,
the role of product offering, risk management and surveillance by Stock Exchanges
/ Clearing Corporations has become crucial in ensuring integrity of securities
market. Regulation 28 (2) read with Part–C of Schedule II of the SECC
Regulations, 2018, considers Risk Management, Surveillance and Product
development functions of Stock Exchange/Clearing Corporations as core
functions. In addition, Clearing and Settlement is considered as a core function of
Clearing Corporation.

3. The Securities and Exchange Board of India Act, 1992 (“SEBI Act”) inter alia
requires 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 objective as provided in
the SEBI Act is to regulate the market through measures that may provide for
regulating the business in the stock exchanges.

4. In order to review 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.

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5. On the basis of the measures proposed by the EWG and subsequent deliberations
held in Secondary Market Advisory Committee (SMAC) of SEBI, it has been
decided that the following measures shall be adopted by the Exchanges and
Clearing Corporations.

5.1. Rationalization of options strikes

The strike scheme for weekly/monthly index options contracts shall be based
on the following principle;
5.1.1. Strike interval to be uniform up to a fixed percentage coverage near
prevailing index price –i.e. 4% around prevailing index price.
5.1.2. Beyond the initial coverage threshold, specified at (a) above, the strike
interval to be expanded so as to ensure that fewer strikes are introduced
further away from the prevailing index price.
5.1.3. The number of strikes at the time of introduction not more than 50.
5.1.4. New strikes to be introduced to comply with aforesaid requirement at
(5.1.1) and (5.1.2) above, on daily basis

5.2. Upfront collection of Option Premium from options buyers

Members to collect option premiums on an upfront basis from the clients.

5.3. Removal of Calendar spread benefit on the Expiry Day

The margin benefit for calendar spread positions would not be provided for
positions involving any of the contracts expiring on the same day.

5.4. Intraday monitoring of position limits

The position limits for index derivative contracts shall be monitored by the
clearing corporations/ stock exchanges on intra-day basis, with an appropriate
short-term fix, and a glide path for full implementation.

5.5. Minimum Contract size

In view of growth witnessed in the broad market parameters, the minimum
contract size for index derivatives contract to be revised, in phased manner:
5.5.1. Phase 1: Minimum value of derivatives contract at the time of
introduction to be between `15 lakhs to `20 lakhs.
5.5.2. Phase 2: After 6 months, minimum value of derivatives contracts to be
between the interval of `20 lakhs to `30 lakhs

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 5.6. Rationalization of Weekly Index products
Weekly options contracts to be provided on single benchmark index of an
exchange.

5.7. Increase in margin near contract expiry

The margins on Expiry day and the day before expiry shall be increased in the
below stated manner:
5.7.1. At the start of the day before expiry, Extreme Loss Margin (ELM) to be
increased by 3%.
5.7.2. At the start of expiry day, ELM to be further increased by 5%.

6. The provisions of this circular shall come in to effect from DD-MM-YYYY.

7. 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, to protect the interests of
investors in securities and to promote the development of, and to regulate the
securities market.

8. This circular is available on SEBI website at www.sebi.gov.in under the category

“Legal Circulars”.

Yours faithfully,

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