SEBI’s New Regulations on Weekly Expiry: Implications & Way Forward

In a significant move to enhance market stability and protect investors, the Securities and Exchange Board of India (SEBI) has introduced SEBI’s new regulations affecting weekly derivatives contracts on major Indian stock exchanges. Effective November 20, 2024, exchanges are permitted to offer weekly expiry contracts on only two benchmark indices. This directive has led the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) to discontinue weekly derivatives for several indices, retaining only Nifty 50 and Sensex, respectively.

Rationale Behind SEBI’s new regulations Decision

SEBI’s new regulations decision stems from concerns over the rapid growth and speculative nature of weekly derivatives trading, particularly among retail investors. A study by SEBI’s new regulations revealed that individual traders incurred net losses totaling ₹1.81 trillion in futures and options over three years, with only 7.2% making a profit. The regulator aims to curb excessive speculation and potential financial risks to households by limiting the availability of weekly contracts.

SEBI’s new regulations impact on Traders and Investors

• Retail Traders: The discontinuation of weekly contracts for indices like Bank Nifty, Nifty Midcap Select, and Nifty Financial Services will require traders to adjust their strategies. Many retail traders favored these contracts for short-term gains due to their lower premiums and higher volatility. With the SEBI’s new regulations, they may need to shift focus to monthly contracts or explore alternative instruments, potentially leading to reduced trading volumes in the short term.
• Institutional Investors: While institutional investors typically engage in longer-term strategies, the reduced availability of weekly contracts may limit their hedging options. However, the anticipated decrease in market volatility could provide a more stable environment for executing large trades.
• Implications for Brokers: Brokers may also see an impact on their revenue streams, as reduced trading volumes can lead to a decrease in brokerage fees. With fewer weekly contract options, active traders who prefer the flexibility and potential returns of weekly derivatives may reduce their trading activity, impacting brokers who rely heavily on these frequent trades for commission income. Additionally, brokers may need to shift their focus toward other investment products or encourage longer-term options to retain clients and sustain revenues, potentially adjusting their platforms to highlight monthly derivatives or other instruments as alternatives to weekly contracts.

Market-Wide Implications

• Volatility and Liquidity: The reduction in weekly expiries is expected to decrease market volatility, particularly on expiry days, as the concentration of contract expirations will be less frequent. However, this may also lead to reduced liquidity in the derivatives market, especially for the discontinued indices, potentially affecting price discovery and trading efficiency.
• Exchange Revenues: Exchanges like NSE and BSE may experience a decline in revenue from derivatives trading due to decreased volumes. For instance, Bank Nifty contributed significantly to NSE’s option premium volumes. The discontinuation of its weekly contracts could impact the exchange’s earnings.

Additional Measures

Beyond limiting weekly expiries, SEBI’s new regulations has implemented other measures to strengthen market integrity:

• Increased Contract Sizes: The minimum contract size for index derivatives has been raised to between ₹15 lakhs and ₹20 lakhs, up from the previous ₹5 lakhs to ₹10 lakhs. This change aims to ensure that only investors with sufficient risk tolerance participate in derivatives trading.
• Enhanced Margin Requirements: An additional Extreme Loss Margin (ELM) of 2% will be applied to short positions on expiry days to cover potential risks from increased volatility.
• Intraday Position Monitoring: Exchanges are now required to monitor intraday positions at least four times daily, with penalties for breaches similar to those for end-of-day violations.

Revised Expiry Schedule for Key Indices

The following table outlines the previous and new weekly expiry days for major indices affected by SEBI’s new regulations: