The phased implementation of Sebi’s measures to protect investors in the futures and options (F&O) trade will prevent systemic shocks and lead to a calibrated market tightening, says investment banking company Jefferies in a report.
"We see phased implementation over the next three to six months as a big positive for market health as it prevents any systemic shocks and leads to a calibrated tightening of the market," said the Jefferies report.
The market regulator on 1 October, declared as many as six measures to strengthen the derivatives framework, including raising the minimum contract size from Rs 5 lakh to Rs 15 lakh.
These six measures include the upfront collection of options premiums, removing calendar spread benefits on expiry day, increasing the contract size for index derivatives, intraday monitoring of position limits, rationalising weekly index derivatives to one benchmark per exchange, and enhancing margin requirements on options expiry days.
These six measures are to be implemented in a phased manner between 20 November 2024, and 01 April 2025. However, the upfront collection of premiums and removal of calendar spreads will be implemented from 01 February 2025 and intraday monitoring of position limits will be effective from 01 April next year.
Going further, Jeffries added in the report that the reduction in weekly contracts, additional margin, and higher lot size have a bigger impact on retail participation.
"Currently, weekly premiums (weeks one to three) make up 65 per cent of overall industry premiums, and depending on the choice of one index (to be continued) by exchanges, supply of contracts amounting to 35 per cent of industry premiums can be removed. Spillover of trading activity (if any) from these into the two continuing products can limit the impact to 20 to 25 per cent for the system," said the report.
The report adds that the latter three measures are more consequential to institutional players (HFTs/Algos).
It says that a reduction in the expiry date per week, from the existing five days to two days, will induce trading behaviour changes for both individual and institutional participants.
"Spillover of trading activity (if any) from discontinued products into continuing products can reduce the overall systemic impact on premiums. The outcome of these measures will also drive the regulatory direction on further measures, if required," it added.
Additionally, the report mentions that retail-focused discount brokers and exchanges will be most affected due to the shrink in system premiums.
"For BSE, we have recently cut our EPS by 10 per cent assuming discontinuance of Bankex product and focus will remain on volume impact on continuing product (Sensex) post implementation of new regulations," the report added.
However, the report says that the traditional brokers will be less impacted as the lower margin hikes will aid their HNI client base.
"Traditional brokers should see relatively lower impact as the lower margin hikes aid their HNI client base (which tend to have a higher mix of option sellers). Clearing members like Nuvama Asset Services that cater to institutional players (HFTs / FPIs) will have marginal impact, if any. Other market participants like AMCs, wealth managers and depositories remain unaffected," said the report. (ANI)
