With the first phase of the futures and options (F&O) guidelines kicking off on Wednesday, traders will face their first challenge on Thursday when they need to contend with the 2% extreme loss margin (ELM) for the Nifty 50’s expiry. The other norms include trading in bigger lot sizes and will only have the option of Nifty and Sensex weekly contracts.
The rule will also apply to the Sensex derivatives contract expiring on Friday. ELM is an additional margin charged by exchanges, besides the normal margin requirements.
The rationalisation of weekly expiries is already in place with the discontinuation of all weekly contracts except for Nifty 50 and Sensex, and the increased lot sizes within Rs 15-20 lakh will apply only to all new index derivatives contracts.
This marks the initial phase of a larger set of changes introduced by the Securities and Exchange Board of India (SEBI) aimed at curbing the excessive speculation in the derivatives segment. The other measures — upfront collection of options premium from buyers and removal of calendar spread benefit to traders on the day of expiry — will take effect from February 1. The final rule of mandating intraday monitoring of position limits will be in place from April 1, 2025.
Traders holding index derivatives contracts on expiry day will now need to meet higher margin requirements. For example, if the Nifty is at 24,000 points and a trader holds a contract with a lot size of 25, the contract value amounts to Rs 6 lakh. The previous margin requirement of Rs 72,000 at 12% will now rise to Rs 84,000 — an increase of 16-17%. While this change may appear modest for at-the-money (ATM) strikes, the impact on out-of-the-money (OTM) contracts is sharper.
Margins for OTM strikes, previously as low as 8-10%, will rise significantly for deeper OTM strikes, said experts. For instance, a 22,000 OTM strike of Nifty 50 with a margin requirement of Rs 37,000 will require Rs 50,000, a 35% jump. Inversely, the margin hike will be less than 16-17% for in-the-money (ITM) strikes.
Ashish Nanda, president and head of digital business at Kotak Securities said, “Since on Thursday we have Nifty weekly expiry, customers may have to add some margin to their trading accounts, if they have short positions in Nifty expiry contracts and they haven’t left a buffer margin in their accounts.” Since the 2% increase in ELM applies directly on the contract value, the hedge benefit goes away, which may significantly affect hedgers, Nanda said.
With regards to the rise in contract sizes, all new index derivatives contracts (including weekly, monthly, quarterly and half-yearly) introduced from Wednesday onwards will have revised contract sizes. However, all existing weekly and monthly contracts will continue with the current lot sizes until they expire. For instance, the Nifty 50 contract expiring on Thursday will have the current lot size of 25, but the fresh weekly contract will have a minimum lot of 75.
For the quarterly and half-yearly contracts, the minimum lot size for Nifty, Bank Nifty and Sensex will change at the end of day’s trade on December 24, December 26 and December 27, respectively. Similarly, existing monthly contracts for November, December and January will also retain the current lot sizes.
For rationalisation of weekly expiries, BSE and NSE will only have one weekly contract expiry from this week onwards. NSE has retained benchmark Nifty 50, while BSE has continued with Sensex.