Options Shakeup: Global Body Demands SEBI Shield Traders from Forced Position Lock-In Amid New Strike Rules

Options Shakeup: Global Body Demands SEBI Shield Traders from Forced Position Lock-In Amid New Strike Rules​

The Futures Industry Association (FIA), a global derivatives industry body, has weighed in on the Securities and Exchange Board of India's (SEBI) proposal concerning dynamic options strike prices. While FIA supports SEBI's move to allow exchanges to introduce new strikes intraday based on market movements, it issued strong cautions regarding the process. The organization emphasized that traders must be protected against involuntary position lock-up under the proposed framework.

In a detailed letter dated June 15, FIA urged SEBI to mandate that exchanges do not remove or disable any option strike where traders still maintain positions. These existing strikes should remain fully available until the open interest is closed or the contracts expire, allowing participants flexibility in closing, hedging, or adjusting their current positions.

FIA Urges SEBI To Prevent Premature Removal of Options Strikes​

FIA cautioned that the premature removal of specific options strikes could lead to unnecessary margin requirements and effectively leave expiry as the sole practical exit mechanism for market participants. The gold derivatives body stated that if a strike is purged or disabled while open interest remains, traders may be left with only exercise or expiry as an inefficient or inappropriate means of exiting their position.

This prescriptive approach, FIA noted, would ensure SEBI’s objective of maintaining relevant strikes around the prevailing market price without jeopardizing participants' ability to manage risk. The derivatives body stressed that protection from involuntary margin lock-up and loss of position management flexibility is paramount in this dynamic environment.

Prescribing Minimum Standards Across Exchanges for Derivatives Trading​

To prevent inconsistent outcomes, FIA strongly suggested that SEBI establish minimum common standards that must be adhered to by all exchanges. These standards should cover critical operational aspects including notification protocols, strike availability, transparency, and file formats.

FIA argued that divergent practices across various stock exchanges would introduce unnecessary operational complexity into the system. The derivatives body also recommended mandating a minimum number of both in-the-money (ITM) and out-of-the-money (OTM) strikes across all products. This mandate is intended to ensure consistent strike availability irrespective of individual exchange discretion.

Mandating Strike Availability and Transparency in Market Framework​

The industry body also advised that newly introduced dynamic strikes must be disseminated via existing automated channels. These channels include FIX protocols, binary market data feeds, contract master files, and reference data systems. This recommendation aims to prevent manual intervention and reduce operational risks inherent in the new process.

Furthermore, FIA suggested that SEBI conduct an annual industry consultation to thoroughly review the framework's effectiveness post-implementation. The organization also requested a reasonable implementation period to allow exchanges and market participants sufficient time to upgrade their necessary trading systems before the new rules become effective.