SEBI Circular: Big news for those investing in the stock market – new circular issued, new rules implemented:This change will directly impact expiry day trading, liquidity, and the strategies of smaller traders.

News Topical, Digital Desk : SEBI has changed a key rule for retail investors who make money through F&O trading in the stock market. Margin relief on calendar spreads on the expiry day of stock derivatives will now be eliminated. This change will directly impact expiry day trading, liquidity, and the strategies of smaller traders. Importantly, this rule has been made similar to index derivatives and will come into effect after three months.

SEBI has changed a key rule for retail investors who make money through F&O trading in the stock market. Margin relief on calendar spreads on the expiry day of stock derivatives will now be eliminated. This change will directly impact expiry day trading, liquidity, and the strategies of smaller traders. Importantly, this rule has been made similar to index derivatives and will come into effect after three months.

Question: What changes has SEBI made?
The Securities and Exchange Board of India (SEBI) has issued a circular stating that calendar spread margin benefits will no longer be available on contracts expiring on the same day for any single stock derivative. This means that if your position includes contracts expiring on that day, margin allowance will not be granted between different expiries. This rule will specifically apply to the expiry day.

Question: What is a calendar spread, which has been tightened?
A calendar spread is a situation where a trader buys and sells two contracts of the same stock with different expiries. Previously, the exchange used to provide margin relief in such cases, considering it to be less risky. However, SEBI now believes that this allowance could increase risk on the expiry day, so this feature has been removed.

Question: How will the new rule actually be implemented?
The new rule clearly states that on the day a single stock derivative contract expires, offsetting, i.e., margin benefit, will no longer be available on calendar spread positions associated with that contract. However, margin relief will continue as before for calendar spreads where both expirations are in months that do not expire on that day.

Question: Will margin benefit be discontinued on all calendar spreads now?
No, it has not been completely discontinued. SEBI has clarified that relief will not be available only in cases involving an expiring contract. Spreads with other non-expiring months will be treated as before, with no changes to margin calculation.

Question: Why has SEBI made this change? According to SEBI, on the expiry day, calendar spread trades face the risk of sudden margin increases and sharp price movements on the open leg. If one leg expires and the other remains open, the risk for brokers and clearing corporations increases significantly. This step has been taken to mitigate this risk.

Question: Was there already such a rule for index derivatives? Yes, index derivatives already did not benefit from calendar spreads on the expiry day. Now, the same rule has been applied to stock derivatives to maintain uniformity of regulations across both segments.

Question: When will this rule come into effect?SEBI has clearly stated in its circular that this new rule will be implemented three months from the date of the circular. The purpose is to allow traders, brokers, and exchanges to prepare their systems and risk management in time.

Question: What will be the direct impact on the average retail trader? Trading on the expiry day will now become more expensive for retail traders. Where previously large calendar spreads could be created with a low margin, higher margins will now be required for the same strategy. This will reduce leverage and weaken many expiry-day-based short-term strategies.

Question: Will the expiry day impact liquidity?

Yes, this could have the biggest impact on liquidity on expiry day. When margins suddenly increase, many small and medium traders will avoid taking positions. This could lead to decreased volumes, increased bid-ask spreads, and more price fluctuations.

Question: Why is this being considered a negative for BSE and Angel One?
This change is expected to reduce trading activity in the derivatives segment, especially on expiry day. This directly impacts the business of exchanges and brokerages. Therefore, the market is considering this a negative for BSE and Angel One, as both derive significant revenue from derivatives trading.

Question: What precautions should traders take now?
If you enter into a calendar spread in single-stock F&O, it will be necessary to prepare for additional margin in advance for the expiry day. You will also need to decide whether to roll over the position in time or close it before expiry, as it will no longer be possible to maintain the position relying on margin relief.