Minimum Contract Size: SEBI Raises Lot Size for F&O to ₹15-20 Lakh to Curb Speculative Trading; Volume May Decline

To curb speculative trading, SEBI has introduced a stringent framework for equity index derivatives by increasing the minimum contract size and mandating upfront premium collection for options. 

Other measures include intra-day monitoring of position limits, removal of calendar spread benefits on expiry day, streamlining weekly index derivatives, and enhancing tail risk coverage.

SEBI’s Measures to Protect Investors and Ensure Market Stability

SEBI stated in its circular that these measures will be gradually effective from November 20, aimed at protecting investors and maintaining market stability, especially in the high-risk environment of index options trading on expiry days.

A recent study by SEBI revealed that 93% of over 1 million individual traders in the F&O segment lost an average of ₹2 lakh (including transaction costs) between FY22 and FY24. 

During this period, total trader losses exceeded ₹1.8 lakh crore. To address these concerns, SEBI has increased the minimum contract size for index derivatives from ₹5-10 lakh to ₹15-20 lakh, which was last set in 2015. This adjustment aims to better align with market growth.

SEBI’s Regulations on Derivative Contracts and New Asset Classes

It has been determined that the value of derivative contracts should not be less than ₹15 lakh at the time of market introduction. To curb speculative trading in index derivatives, exchanges can only offer weekly expiry derivatives for a single benchmark index.

Additionally, the market regulator SEBI’s board has approved a proposal to introduce a new asset class for high-risk profile investors, aimed at reducing the gap between mutual funds and portfolio management services. SEBI has also authorized a light framework for passive schemes within mutual funds.

SEBI Board Approves Proposals to Strengthen Regulations and Clarify Definitions

The SEBI board has approved a total of 17 proposals, including amendments to insider trading rules to clarify the definitions of related persons and their associates. These proposals also include some relaxations regarding the eligibility criteria for investment advisors and research analysts, as well as compliance requirements.

This board meeting marked the first convening after allegations were made against SEBI’s chairperson, Madhavi Puri Buch, by the U.S.-based short seller Hindenburg Research and Congress. Hindenburg accused Buch and her husband of having invested in offshore funds managed by Vinod Adani, brother of Gautam Adani, chairman of the Adani Group.

SEBI Mandates Upfront Premium Payment for Option Buyers

SEBI has announced that option buyers will be required to pay the full premium upfront to avoid excessive leverage. Additionally, the benefits of offsetting positions across different expirations will no longer be allowed on the expiration day, effective February 1. 

There is a likelihood that further measures will be taken soon regarding the futures and options segment to enhance investor safety.