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Source: The post on New SEBI Rules to Curb F&O Frenzy and Protect Small Investors is based on the article “New SEBI rules to curb F&O frenzy, aim to protect small investors published in “The HINDU” on 3rd October 2024.
Why in the News?
SEBI (Securities and Exchange Board of India) has introduced new rules aimed at curbing speculation in the derivatives market and protecting retail investors from excessive risk. These measures collectively aim to reduce speculative trading, ensure investor protection, and promote market stability by encouraging more disciplined and risk-aware participation in the F&O segment.
key measures and their implications:
| New Rules | Implications |
| The minimum contract size has been increased to Rs 15 lakh from Rs 5-10 lakh. | 1. This raises the entry barrier, reducing participation from smaller retail investors. 2. Small traders may need to reassess their strategies, especially in tier 2 and 3 cities. 3. It is likely to limit speculative trading by retail investors, protecting them from potential losses. |
| Trading members must collect options premiums upfront from buyers. | 1. It aims to reduce excessive leverage and risk at the investor level. 2. It ensures prudent risk management and prevents aggressive short-term speculation. 3. It encourages disciplined trading practices. |
| Exchanges can offer derivatives contracts with weekly expiry for only one benchmark index. | 1. It limits speculative trading in multiple weekly expiring contracts. 2. It reduces market volatility and price fluctuations, particularly on expiry days. 3. It narrows the scope for naked/uncovered options selling. |
| Position limits for equity index derivatives will be monitored intra-day by exchanges. | 1. It ensures real-time compliance with regulatory norms. 2. It prevents speculative excesses by tracking positions throughout the trading day, not just at the end of the day. |
| The benefit of offsetting positions across different expiries will not be available on expiry days. | 1. It forces market participants to roll over positions earlier, reducing speculative trading on expiry day. 2. It helps stabilize asset prices and reduces sharp price movements. |
| An additional 2% Extreme Loss Margin (ELM) will be levied on short options contracts. | 1. It acts as a buffer against rare, extreme market events. 2. It protects both investors and the broader market ecosystem from sudden, sharp losses driven by leveraged short options. |
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