New Delhi: The phased implementation of Securities and Exchange Board of India (SEBI) measures aimed at safeguarding investors in the Futures and Options (F&O) sector is anticipated to avert systemic shocks and facilitate a measured tightening of the market, according to a report by investment banking firm Jefferies.
"We view the phased implementation over the forthcoming 3-6 months as a significant positive for market health, as it mitigates the risk of systemic shocks and ensures a calibrated tightening of the market," the report states.
On October 1, the market regulator announced the introduction of six measures to fortify the derivatives framework. These measures include an increase in the minimum contract size from Rs 5 lakh to Rs 15 lakh.
The aforementioned measures encompass the upfront collection of options premiums, the elimination of calendar spread benefits on the expiry date, an increase in the contract size for index derivatives, intraday monitoring of position limits, consolidation of weekly index derivatives to a single benchmark per exchange, and an enhancement in margin requirements on options expiry dates.
These measures are scheduled for implementation over a phased timeline, starting from November 20, 2024, and concluding on April 1, 2025.
However, the report notes that the implementation of the upfront premium collection and the removal of calendar spreads will commence on February 1, 2025, and the intraday monitoring of position limits will be introduced on April 1, 2025.
Furthermore, Jefferies highlights in the report that the reduction in the number of weekly contracts, the imposition of additional margin requirements, and the increase in the lot size will have a more significant impact on retail participation.
"At present, the premiums collected in the first three weeks constitute approximately 65% of the total industry premiums, and depending on the selection of one index (which will be continued), the supply of contracts amounting to approximately 35% of the industry premiums can be reduced. The extent of spillover trading activity (if any) from these contracts into the two selected products can limit the impact to 20-25% for the system," the report elaborates.
The report further states that the last three measures are of greater significance for institutional players, including High-Frequency Traders (HFTs)/Algorithms.
The document indicates that a reduction in the expiry period for weekly expiry dates, from the current five days to two days, is anticipated to lead to alterations in trading behaviors among both individual and institutional participants.
It further states that the "spillover of trading activity (if any) from discontinued products into those that continue to be traded can mitigate the overall systemic impact on premiums." The implications of these adjustments are expected to influence regulatory decisions regarding additional measures, should they be necessary.
Moreover, the report highlights that retail-oriented discount brokers and exchanges are likely to be most significantly affected by this reduction in system premiums.
"For the BSE, we have recently reduced our Equity Participation Scheme (EPS) by 10 percent, based on the assumption of the discontinuation of the Bankex product, with a focus on the volume impact on the Sensex product following the implementation of new regulations," the document elaborates.
Nonetheless, the report suggests that traditional brokers may experience less of an impact due to the lower margin increases, which are expected to benefit their High-Net-Worth (HNI) clientele.
"Traditional brokers are anticipated to experience a relatively lower impact, as the lower margin increases will benefit their HNI clientele, which typically includes a higher proportion of option sellers. Clearing members such as Nuvama Asset Services, which serve institutional players (High-Frequency Traders/Foreign Portfolio Investors) will experience minimal impact, if any. Other market participants, including Asset Management Companies, Wealth Management Firms, and Depository Institutions, are expected to remain unaffected," concludes the report.
