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Impact of SEBI's New Regulations on Long-Dated Derivatives (Effective November 20, 2024)

In this video, we focus on SEBI’s latest rules for index derivatives, particularly how they affect long-dated options and futures contracts. SEBI's changes, announced on October 1, 2024, aim to boost market stability but also have significant implications for traders dealing with long-term derivatives.

Key Impacts on Long-Dated Derivatives:
Increase in Contract Size

Old Size: Rs. 5-10 lakhs
New Size: Rs. 15-20 lakhs (Effective November 20, 2024)
Impact: Traders holding long-dated contracts (those expiring several months or years from now) will face higher margin requirements. This increase may also create odd lots, complicating trades and settlements. For example, if you’re holding a Nifty options contract that used to be worth Rs. 5 lakhs, it will now represent Rs. 15 lakhs, meaning a much larger investment is needed for the same contract.
No Calendar Spread Benefits on Expiry Day

Starting February 1, 2025, traders will no longer enjoy margin benefits on expiry days. This can lead to significantly higher margin requirements for long-dated contracts near expiry, affecting hedging strategies.
Limitation of Weekly Expiry Contracts

Only one benchmark index (either Nifty 50 or Bank Nifty) will be allowed to offer weekly expiries, reducing flexibility for traders looking to manage long-term positions with shorter-term expirations.
Additional Margins on Expiry Day

A 2% Extreme Loss Margin (ELM) will be imposed on short positions during expiry days. Traders with long-dated contracts extending over multiple expiries may face more frequent margin calls, impacting liquidity.
Upfront Collection of Premiums

Buyers will now need to pay the full premium upfront, impacting liquidity for those holding long-dated options contracts.
Intraday Monitoring of Position Limits

Position limits will be monitored multiple times daily, meaning traders holding large positions in long-dated contracts must be more vigilant about staying within the allowed limits.
Example Scenarios:
If you're currently holding a Nifty options contract worth Rs. 5 lakhs that expires in the next 6 months, under the new rules, the same contract will now be worth Rs. 15 lakhs after November 20, 2024. This change significantly impacts your margin and capital requirements, especially if you’ve taken large positions in long-dated derivatives.

Industry Perspectives:
Nithin Kamath, CEO of Zerodha, highlights that these regulations could affect around 60% of overall F&O trades. For long-term traders, the increased contract sizes and changes in expiry margin rules could substantially affect trading strategies.

Stay updated to ensure you adapt to these important changes!