Understanding SEBI’s New Rules for F&O Trading: What Traders Should Know

SEBI’s new rules for F&O trading aim to curb excessive speculation, align derivatives with the cash market, and protect retail traders, without shutting out genuine hedging and investing activity. Traders now need to pay far closer attention to position limits, margin use and risk disclosures before taking exposure in index and stock derivatives.  

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Big Picture: Why SEBI Changed F&O Norms 

• SEBI is responding to the surge in retail options volume, high loss ratios for small traders and concerns around speculative intraday activity distorting prices.  
• The regulatory push focuses on three levers: tighter risk and suitability checks, more realistic position limits, and better alignment of F&O contracts with liquidity in the underlying stocks and indices.  

Position Limits and MWPL Changes 

• Market-wide position limits (MWPL) in single-stock derivatives are now more tightly linked to free-float and actual delivery volumes in the cash market, reducing the scope for outsized positions in illiquid names.  
• On top of MWPL, entity-level caps apply. Individual traders can hold only a smaller percentage of MWPL in a single stock than proprietary desks or FPIs, forcing retail to size positions more conservatively.  

Risk Disclosures, Margins And Education 

• Brokers must show standardised risk disclosures and statistics such as what proportion of clients make or lose money in F&O before allowing trading access, making loss probabilities explicit for new entrants.  
• Margin frameworks and intraday monitoring are stricter, with exchanges taking multiple intraday snapshots and imposing penalties or extra surveillance margins for breaches, especially around expiry.  

Contract Eligibility And Product Design 

• Eligibility norms for stocks and indices in F&O have been tightened, with conditions on number of constituents, weight caps for top stocks, and minimum liquidity thresholds.  
• Pre-open sessions and revised lot sizes for certain index contracts are being phased in, aligning the F&O session structure and contract size more closely with the cash segment and volatility patterns.  

What Traders Should Practically Do 

• Recalculate strategy position sizes under the new entity-level limits and higher effective margin usage, and avoid relying on old thumb rules for lots and leverage.  
• Read broker risk reports and SEBI disclosures, track MWPL and ban-period rules before building large positions, and ensure intraday strategies can withstand stricter margin and penalty frameworks.