Regulatory measures by SEBI on 20th March

SEBI has taken a bunch of proactive risk-containment measures in view of the ongoing market volatility. Check this circular. This may have been misinterpreted by many people and so NSE just put out a clarification. Let me summarize this for you. 

Firstly, trading is extremely tough even for the most seasoned professionals in such times. Please trade with as little as possible, or even take a break until the volatility subsides! Secondly, the entire 1200+ member Zerodha team has been working from home for the last two weeks under our COVID-19 contingency plan. This is to ensure business continuity and the safety of our team. Owing to this, for your support requirements, please create a support ticket instead of calling us as our support lines have been experiencing increased delays over the last week. 

Coming back to the circular, here is how the above measures taken by SEBI can affect you. 

Higher Equity Margins 

For stocks with F&O contracts

If the average daily price range, or how much a stock moves in a day, for a stock is more than 15% in the last 5 trading days or if the F&O contracts of these stocks have Market-Wide Position Limit (MWPL or Maximum open interest allowed in the contract) of more than than 40% in the last 5 days, then the minimum margin required to buy such stocks will be 40%. This means that maximum intraday leverages provided for these stocks will be reduced to 2.5 times.

For stocks without F&O contracts

If a stock has an intraday price range of more than 10% for 3 days in the last 1 month, the minimum margin will again be 40%. This again means a maximum intraday leverage of 2.5 times for these stocks.

This higher margin requirement will be applicable for most stocks. We at Zerodha had already increased our margin requirements, so this wouldn’t make much of a difference to you. Also, the above increase in margin is proposed for a period of 1 month. But I am guessing it will be extended if the volatility doesn’t come down.

Revision of MWPL for stock F&O

As I had mentioned earlier, “Market-Wide Position Limit” is the maximum open interest that is allowed in F&O for any stock. To curb speculation during these volatile times, SEBI is reducing the MWPL by 50% if the average daily price range of the stock is more than 15% in the last 5 trading days or if the F&O contracts of these stocks have MWPL (maximum Open Interest allowed in the contract) of more than than 40% in the last 5 days. 

As per SEBI regulations, when OI reaches 95% of MWPL, the scrip goes into “ban period”. When a contract is in ban period, you are only allowed to exit your positions in it, new positions aren’t allowed. Essentially, you cannot take a position that will increase the current OI for the security. With this change, many stock F&O scrips can get into a ban period. With this new rule, 9 stocks have already gotten into the ban period. You can keep a track of MWPL and stocks in ban period on our margin calculator. If you hold scrips which are in ban period, you will be able to exit current positions, you will not be able to add new positions or rollover to the next expiry. 

Also currently when stocks in F&O hit their upper or lower price band, the bands are relaxed. But going forward, such stocks will have a cooling-off period of 15 minutes before allowing trading again.

Revised position limits for index F&O

Big traders, prop desks, FII’s, etc., bring a systemic risk to the markets in these uncertain and volatile times. SEBI has set certain position limits on index F&O contracts, to trade beyond which they would need to bring in 100% of the notional contract value in cash for being long or have stocks worth the notional value to short. 

This position limit is set at Rs 500 crores of notional or contract value for futures and another Rs 500 crores for options positions (Rs 500 crores is approximately 7500 lots of Nifty at the current price). Further, this position limit is calculated on a net basis (based on risk) on a PAN level, which means if you are long calls and long puts in two different broker accounts, your net overall position is 0 to calculate the position limit. 

It is unlikely that retail customers take such large positions, so this rule wouldn’t affect you in most cases. But it will affect FII’s and prop desks. Check this clarification with examples shared by NSE. This potentially could also mean lower overall open interest in index F&O. 

Hopefully, this clarifies all the confusion created on social media over the weekend. You can follow us on Twitter to stay up-to-date on such topics. 

Finally, here is wishing that all of us do our best to stop the spread of Coronavirus, and all of us can soon get back to living normally. 

Stay safe!