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The Securities and Exchange Board of India (SEBI) has recently issued significant directions regarding the expiry of equity derivatives contracts. These changes aim to streamline the settlement process, enhance investor protection, and improve the stability of India’s financial markets.
Here’s a summary of the key directives:
* Standardization of Expiry Days: All equity derivatives on a given exchange must now expire only on Tuesday or Thursday. This measure is intended to balance market activity and minimize excessive volatility.
* One Weekly Benchmark Index Option: Each stock exchange is permitted to offer only one weekly benchmark index options contract, and this must be on their chosen weekday (either Tuesday or Thursday).
* Minimum Tenor for Other Derivatives: All other contracts, including benchmark index futures, non-benchmark index options/futures, and single stock derivatives, must now have a minimum tenor of one month. Their expiry will be in the last week of each month, again limited to either the last Tuesday or last Thursday of that month, depending on the exchange’s chosen day.
* SEBI Approval for Changes: Exchanges wishing to modify their designated expiry day must seek prior approval from SEBI, tightening oversight on future modifications.
* Implementation Timeline: Stock exchanges are required to submit their compliance proposals to SEBI by June 15, 2025, to ensure a smooth transition.
Impact of the New Rules:
* Reduced Volatility and Concentration Risk: By limiting expiry days to two per week and restricting weekly options to one benchmark index per exchange, SEBI aims to reduce hyper-activity and concentration risk on expiry days.
* Simpler Trading Patterns: For retail traders, the standardized expiry days and minimum tenors are expected to create more predictable and stable trading patterns, potentially lowering risk.
* Potential Shift in Market Share: The rule could lead to competitive dynamics between exchanges (e.g., NSE and BSE) as they choose their preferred expiry days to attract volume.
* Increased Margin Requirements: Earlier changes have also seen increased extreme loss margins (ELM) on all short options positions on expiry day, aiming to cover increased risk and potentially raising the cost of derivatives trading for some participants.
* Impact on Volumes: While the notional turnover for index options might see a decline due to fewer weekly expiries, the premium turnover is expected to remain stable.
These directives reflect SEBI’s proactive approach to managing systemic risks in India’s growing derivatives market, aiming to reinforce market integrity and ensure a level playing field for all participants.

Video courtesy of Thinking Crypto

Video courtesy of Thinking Crypto