SEBI’s New Proposal: Limiting Derivatives Expiry to Specific Weekdays in India

The Securities and Exchange Board of India (SEBI) has proposed a framework to standardise the expiry of equity derivatives contracts by limiting them to particular weekdays. Currently, exchanges can schedule different contract expiries across the week. Under the new proposal, this could be restricted to a set day or days.

In the derivatives market, expiry refers to the date a contract becomes void and the final settlement takes place. SEBI’s proposed move aims to reduce excessive trading activity around multiple expiry dates, which can cause volatility and strain market infrastructure.

The consultation paper outlines the regulator’s concerns over rising volumes in weekly options and the clustering of expiries, particularly in index derivatives. The proposal is now open for public feedback, with potential operational and liquidity-related challenges under review.

Here’s all you need to know about the proposal, its rationale, and the challenges ahead.

The proposal

SEBI has recommended a regulatory amendment to standardise the expiry days for derivatives contracts in India. Under this proposal, weekly and monthly expiries for index and single-stock derivatives contracts would be limited to Tuesdays or Thursdays.

The primary objective of this initiative is to simplify operations for market participants, improve market efficiency, and reduce the complexities associated with multiple expiry days. SEBI had invited public feedback on this proposal.

Expiry of different derivatives in India

Here are the different expiry dates for various derivatives in India.

Index derivatives

• Weekly expiry: NIFTY and BANKNIFTY weekly contracts expire on Mondays. If Monday is a holiday, the expiry shifts to the next trading day.

• Monthly expiry: Index derivatives like NIFTY and BANKNIFTY expire on the last Monday of the expiry month.

• Quarterly expiry: These contracts expire on the last Monday of the quarter.

Stock derivatives

• Monthly expiry: Futures and options on individual stocks expire on the last Monday of the expiry month.

Long-term index options

• Half-yearly expiry: These contracts expire in June and December, specifically on the last Monday of these months.

Special cases

• If the designated expiry day falls on a trading holiday, the expiry will be shifted to the preceding trading day.

Regulatory reasoning for fixing expiry days

The primary objective is to eliminate the complexity associated with multiple expirations. Here is a detailed explanation of the reasoning behind this proposal.

• Mitigating excessive speculation

SEBI recognised a surge in speculative trading, particularly weekly index options, with retail investors incurring significant losses. Data indicates that only 7.2% of individual traders profited from futures and options trading over three years, while the majority faced losses totalling ₹1.81 trillion. SEBI aims to curb daily speculative activities by restricting expiries to specific days.

• Avoid inter-exchange arbitrage

Different exchanges offer derivative expiries on various days of the week, allowing traders to exploit arbitrage opportunities between near-similar contracts. SEBI aims to eliminate such price and volume distortions by aligning expiry days across exchanges.

• Prevent liquidity fragmentation

With expiry dates spread across different weekdays, liquidity gets divided between various contracts. This fragmentation affects volume concentration and hampers efficient order execution.

• Streamline risk management

Multiple expiries across the week increase the risk exposure for brokers and clearing corporations due to overlapping margin settlements and open positions. Uniform expiry days simplify settlement cycles and margin calculations, reducing operational risks and improving post-trade infrastructure reliability.

• Align with global practices

Major global markets, such as the US and the UK, follow uniform weekly expiry days, typically Thursdays or Fridays. SEBI’s proposal aims to align India’s derivatives expiry norms with global standards, thereby improving access for international investors.

• Improve operational efficiency

Institutional investors manage complex portfolios and depend on consistent expiry cycles for rolling over positions and hedging. Fixed expiry days allow better planning and execution of strategies and can reduce administrative workload and back-office errors.

Potential impact of SEBI’s proposal

Despite its benefits, SEBI’s proposal presents potential challenges. Let’s discuss them.

Liquidity compression

Concentrating expiry on specific weekdays may result in high liquidity on those days but poor participation on non-expiry days. For example, suppose all expiries are fixed to Wednesdays. In that case, traders and institutions may avoid Mondays and Fridays, reducing market activity and price discovery, especially in options markets where time decay plays a significant role.

Increased volatility

With expiry restricted to a few weekdays, significant open interest would converge around these dates. This creates intense unwinding pressure and hedging adjustments, causing erratic price movements. For instance, if both Bank Nifty and Nifty contracts expire on the same day, sharp intraday moves can occur because of simultaneous unwinding by large participants.

Disruption in algorithmic trading models

Many quant and HFT strategies are built around multiple expiry patterns. Rewriting models to fit a limited expiry system will require code refactoring, backtesting, and risk rebalancing. For instance, if an algo executes gamma scalping on Monday and Thursday expiries, merging them would distort the model’s P&L cycle and execution logic.

Poor volatility management

Traders often use short-term options with mid-week expiries to manage risk during events like RBI policy or earnings announcements. For example, if TCS results are on a Tuesday, traders may use a Wednesday expiry for precise hedging. A fixed expiry structure could force them into misaligned expiries, exposing them to unwanted gamma risk.

Increased load

Fewer expiry days mean more contracts expiring simultaneously, increasing stress on clearing corporations. For instance, National Securities Clearing Corporation Limited (NSCCL) may have to settle all contracts across indices, sectors, and stocks on a single day, raising operational risk and potential delays in margin release, which may affect trader cash flows the next day.

Conclusion

SEBI’s proposal to limit derivatives expiry to specific weekdays is a strategic move to improve market stability and protect retail investors from the risks associated with speculative trading. While the changes may pose challenges for various market participants, they aim to promote a more disciplined and secure trading environment.

Sources

SEBI
Mint
MoneyControl
CNBC TV18
CNBC TV18