Equity Derivatives Minimum Contract Value Increased To 5 Lakh

SEBI has notified the increase in Equity Derivatives minimum contract value from present 2 lakh to 5 lakh rupees.  This move is expected from SEBI as it is mulling options to restrict retail investors to trade in F&O segment.  The increase in the minimum contract size will be effective from 30 Oct 2015. This is expected to have impact on the retail investors who trade with minimum margins. As per SEBI Notification, the provisions shall be made effective from the next trading day after expiry of October 2015 contracts.

Increase in equity derivatives minimum contract value will increase the lot sizes of almost all the contracts available in f&o segment.  As on date of fixing the lot sizes, the minimum value of the contract should be 5 Lakh rupees and the maximum value should be 10 lakh rupees.  The lot sizes will be fixed accordingly so that the contract value shall be between 5-10 lakh rupees.

Equity Derivatives Minimum Contract Value Revision from 30 Oct 15

For stock derivatives, the minimum lot size shall be 50 and in multiples of 25.   The minimum lot size of 50 is further relaxed if total contract value is above 10 lakh. In the case of minimum contract value exceeding 10 lakhs, then the lot size shall be in multiples of 5.  In any case, the minimum lot size should be fixed as 10.  At present the minimum lot size in equity derivatives is 125 and this causes some equity derivatives contracts value is as high as 40 lakh rupees. For example MRF trades above 30,000 rupees and its lot size is 125.  Now, we can expect the lot size of MRF shall be around 30. This is based on current market price of around 30,000.

For Index derivatives, the minimum lot size is fixed as 10.  The increase in lot sizes shall be in multiples of 5.  Currently, minimum lot size in index is 25.  If current prices continue at the time of fixing lot sizes, Nifty’s lot size can be 60.

Further SEBI has directed all the exchanges which offer stock derivatives to have same lot sizes for the same underlying across exchanges.  At present, same underlying can have different lot sizes in different exchanges.

All the stock exchanges will review the revision of lot sizes once in every six months.  The review ofequity derivatives minimum contract value increase by sebi equity derivatives lot sizes will be based on the average traded price of last one month in the underlying contract.  If there is necessity to increase / decrease lot sizes, exchanges should notify atleast 2 weeks in advance.  This is applicable if the lot sizes are decreased and in even lot sizes.  If the lot sizes are increased, then the changes in new increased lot sizes will be applicable after the expiry of all existing contracts.  At present, a maximum of 3 months contracts are available for stock derivatives.

This move is mostly expected to restrain retail investors to participate in derivative segment.  Even the present rule of minimum 2 lakh value is implemented to stop retail investors to trade in the f&o segment.  Analysts fear that this move may impact the liquidity and trading volumes in derivatives segment.  As most of the trading in this segment takes place in NSE, it is most effected one due to this decision.

We all know that after 2008-09 market crash, most of the retail investors moved to this segment and the volumes in options has increased.  But most retail investors trade in f&o segment without really understanding the risk involved in trading derivatives.  On the positive side, this move of equity derivatives minimum contract value to 5 lakh is expected to increase cash segment volumes.

source: SEBI circular on minimum contract value


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