Regulatory changes in 2024
Since joining Zerodha, a SEBI-regulated business, my calendar has been dominated by deadlines for upcoming regulations. We discuss these regulatory changes daily — analyzing their business impact, evaluating their effects on customers, and identifying the system and process updates needed for seamless business continuity.
This year, we’ve begun a new tradition: compiling a comprehensive list of regulatory changes introduced over the calendar year. If you think government organisations are slow and weighed down by bureaucracy, you might be surprised by how market participants — like brokers, exchanges, and other stakeholders — are kept on their toes by SEBI. By the end of this post, you’ll see just how relentless the capital markets regulatory landscape can be.
F&O
Measures to curb volatility in trading index options
The most significant regulatory actions this year were to curb the speculative excesses in the F&O segment — particularly for expiry day trading in weeklies. While some of these measures have already been implemented, others will be implemented in a phased manner till April 2025. Below is a list of the changes along with a short explanation of each:
- Limiting weekly expiries to one contract per exchange: From Dec 1, 2024, weekly contracts are available for one benchmark index per exchange (Nifty 50 for NSE and Sensex for BSE). This reduces the availability of zero days to expiration (0DTE) options, from 6 different indices across every day of the week to just 2 days. Since COVID, we have seen most of the options trading volume move to 0DTE options, leading to increased volatility in the market in the last couple of hours of trading every day. Additionally, all monthly expiries of an exchange will happen on the same day of the month. This limits the regulatory arbitrage of trading weekly expiries in other index contracts on the last week of the month.
- Increase in margins on expiry days: An additional exposure margin of 2% of the contract size has been made applicable for all short option contracts, making expiry-day trading expensive.
- Increase in contract size: All index options contracts will see a 2-3x increase in lot size. Index contracts used to have a notional trading value between 5-10L. This will now be maintained between 15-20L. While new contracts of higher lot sizes are already available, market participants will see this in action from Jan 1st, when the trading activity in the new contracts is expected to pick up.
- No calendar spread margin benefits on expiry day: For multi-week contracts in a portfolio, traders are currently given a SPAN margin benefit. This benefit will be removed on the expiry day from Feb 1, 2025. This change is expected to hurt traders who use the margin benefit from expiring contracts to reduce their margin requirement for short options in next week/month’s expiries.
- Intra-day monitoring of position limits: SEBI has prescribed client- and broker-wise maximum open interest position limits. This is about 5% of the total OI on a client level and 15% for brokers. Currently, these limits are monitored for violations at the end of each trading session, and appropriate additional margin blocks and penalties are levied. From April 1, 2025, this shall be monitored intra-day to ensure that traders don’t violate the limit during the day and downsize their positions before the market close.
- Upfront collection of options premium: SEBI has mandated that an option buyer now needs to pay the entire option premium upfront. This is to curb the excessive leverage that some brokers offer for intra-day options where you are already trading the risk of the underlying contract. At Zerodha, we have always collected option premium upfront as a healthy business practice. This will be applicable from Feb 1, 2025.
Changes in STT for F&O
In the annual budget this year, the finance minister announced an increase of about 60% in the STT payable for F&O contracts. This amounts to a STT of Rs. 1,000 per crore (up from Rs. 625 per crore) of futures sell turnover, and Rs. 5.000 per crore of options sell turnover (up from Rs. 3,125 per crore).
Changes in price bands in F&O stocks
SEBI brought in changes in how the dynamic price bands for stocks in F&O are relaxed intraday. These changes involve sliding price bands (earlier, both sides of the circuits would open up, but now they won’t), stricter criteria to flex price bands, etc. We’ve explained this in detail in this post.
Revision in eligibility criteria for stocks in F&O
The eligibility criteria for entry and exit of stocks from the F&O segment was last established in 2018. SEBI has now done a full review of this, as average market size, turnover, and delivery values have gone up threefold since then. The increased thresholds are listed in this post. Additionally, SEBI has asked the exchanges to implement the product success framework available in F&O, with criteria like an average trading premium turnover of Rs. 75 Cr, failing which the stock must be taken off F&O after a review.
Change in eligibility to trade in currency F&O
RBI has mandated traders to compulsorily have an underlying contracted exposure to foreign currency if they want to trade in currency F&O contracts with Indian Rupees. As a result, traders in this segment have to declare that they have exposure to continue trading in this segment from May 1, 2024. Since this requirement came into effect, we have seen a 90% decline in volumes in currency F&O trading with INR as the quote currency.
Changes involving investor protection
SEBI’s “True-to-label” circular
Exchanges previously had an incentive scheme in place that allowed them to pass some of the exchange turnover charges they collected to brokers, based on the turnover generated by a broker. This could go up to 40% of the total charges collected and make a decent contribution to the broker’s revenue pool. Starting Oct 1, 2024, SEBI disallowed this, ensuring a single rate of transaction charges across brokers.
Direct payout of securities to the investor
Currently, when you buy or sell a stock, the securities are settled by the clearing corporation to the broker’s pool accounts. With this change, the clearing corporation will directly settle the stock to your demat account. These regulations are a step further in making securities trading safer for investors where the stocks don’t sit in the broker’s account for a day in between.
Changes in AMC charges for BSDA accounts
For Basic Service Demat Account (BSDA) or first-time demat account holders, SEBI had previously placed restrictions on how much AMC can be charged. This used to be up to Rs. 100 (for up to holdings of Rs. 50K) and Rs. 300 (for holdings of up to Rs. 2L). This holding threshold hadn’t been updated for a while. SEBI has now increased this to Rs. 4L and Rs. 10L respectively.
Release of 100% funds from the sale of holdings
Exchange peak margin regulations allowed brokers to release up to 80% of the sale credit to be used to trade F&O and other segments. Brokers are now allowed to release 100% of the funds as long as an early pay-in of stocks is done to the clearing corporation.
Introduction of new initiatives
T+0 settlement of stocks
After successfully moving from T+2 day settlement in Equity to T+1 day in 2023, SEBI has now introduced an optional T+0 settlement of securities, over 2 phases. In the first phase, which went live on April 1, 2024, the stocks would be settled at the end of the day.
The next phase will involve instant settlement of securities at the depository as soon as an order is executed. We are yet to see mass implementation of this across brokers, due to the massive changes required in risk management systems and back offices to accommodate this change.
Trading supported by blocked amount
Currently, to trade in equities, you are required to add funds to your trading account at your broker and place trades in your account. The broker pools your funds at their end and upstreams this to the clearing corporations. SEBI has introduced the amount block framework for investing in the secondary markets, starting from January 1, 2024.
This system functions much like blocking funds for an IPO application, where your funds are deducted only when your share purchase transaction completes. Market intermediaries are testing this out and SEBI has required the top stockbrokers in the country (Qualified Stock Brokers) to roll out the feature for their clients by 1st Feb 2025.
Debt markets
Reduction in Debt IPO timeline to T+3 Day
SEBI shortened the timeline for listing debt securities and non-convertible redeemable preference shares issued via public offering from T+6 to T+3 working days. This change facilitates faster fund access for issuers and investors, aligning the process with private placements. The T+3 timeline will be optional from November 1, 2024, and mandatory from November 1, 2025. This is now at par with Equity IPOs.
Introduction of Liquidity window for investors in Debt securities
SEBI proposed to introduce a Liquidity Window facility for investors in debt securities via the stock exchange. Issuers may voluntarily provide this facility, enabling investors to exercise put options (buyback bonds) at predetermined intervals addressing liquidity concerns, especially for retail investors. If this picks up, it could attract investors who prefer fixed deposits for the debt portion of their investments due to favorable liquidity.
Reduction in denomination of debt securities and preference shares
SEBI reduced the denomination of privately placed debt securities from Rs. 1L to Rs. 10,000 to improve liquidity.
Other miscellaneous changes
Suspension of client referral programs
Brokers generally had a referral program that shared a part of the brokerage earned with the referrer. NSE has now disallowed any form of continuous brokerage-based revenue sharing program if the referrer is not registered as an Authorised Person (AP) at the exchange.
An Authorized Person (AP) is an individual or entity registered with a stockbroker and approved by the exchange to act as their agent, facilitating trading and client acquisition, and is regulated under a strict compliance framework. At Zerodha, we had a 10% brokerage share referral program for all our referring clients. We have stopped this program since the implementation of this circular.
