SEBI’s new framework on index derivatives kicks in, first leg goes live today

This initial change marks the beginning of the Securities and Exchange Board of India’s phased approach to enhance risk management and rationalize derivatives trading, which will be fully implemented by April 30, 2025.

Ashish Nanda, President and Head of Digital Business, Kotak Securities, termed today as an important day for derivatives trading in India. “Henceforth, ELM margin will increase by 2% for all index derivative contracts expiring on the same day. While this may seem like a small setback, the impact can be significant, especially for traders with large or out-of-the-money (OTM) positions,” he explained.

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For example, Rs. 72,000 (12%) with a current margin of Rs. 6,00,000 worth of Nifty contracts now at Rs. 84,000 will be required for at-the-money (ATM) strikes, an increase of 16-17%. However, out-of-the-money (OTM) positions will see a sharp increase. Nanda noted that a strike at 22,000 took his margin to Rs. 37,000 to Rs. 50,000, which is a 35% increase.

Margin changes will immediately affect traders participating in weekly closings. With the weekly close of Nifty today and Sensex tomorrow, those holding short positions without adequate margin buffers may face challenges. This increase applies directly to the contract value and does not take into account the benefit of the hedge, potentially putting a strain on hedgers with complex strategies.

“This rule will particularly affect traders who relied on the earlier regime, where margins for OTM positions were progressively reduced,” Nanda added. “When a 2% increase is applied evenly, its effects vary significantly depending on the strike price, making it a key shift for derivatives trading.”

For in-the-money (ITM) strikes, Nanda asserted that the increase in margins would be less pronounced. “For ITM positions, the 16-17% increase seen on ATM strikes will be less than that,” he said. “While for hedgers, it may look like a 16-17% increase in margin for ATM strikes, it can move the needle. The change is more significant for those with positions beyond money.”

Today’s change is the first of six steps under SEBI’s new framework. The rest of the reforms, which include further adjustments to margin structures and risk management practices, will be staggered between December 1, 2024 and April 30, 2025.

Sebi introduced these reforms to address concerns about India’s heavy reliance on derivatives trading. These measures are aimed at creating a more balanced and stable market by curbing speculative behavior, especially among retail investors.

India’s derivatives market is often criticized for encouraging high-risk speculative trading. SEBI’s new framework, which increases tail-risk coverage on the expiry day, aims to reduce this by requiring traders to maintain higher margins. The regulator hopes these changes will promote sound business practices and reduce systemic risks.

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With today’s new rules in place, merchants will need to adapt quickly to the changing landscape. The full impact of SEBI’s move will be evident in the coming months as the rest of the reforms roll out.

(Disclaimer: Recommendations, suggestions, opinions and views given by experts are their own. These do not represent the views of Economic Times)