The National Stock Exchange (NSE) has announced a significant increase in the lot sizes for its index derivative contracts, in compliance with the Securities and Exchange Board of India’s (Sebi) directive to ensure a minimum contract value of ₹15 lakh. The change, which affects contracts including Nifty50 and Nifty Bank, will apply to new weekly, monthly, quarterly, and half-yearly derivatives starting November 20, 2024. This recalibration aims to address the inherent leverage and risk in derivatives trading, aligning with Sebi’s recent push for market suitability. Existing contracts will transition to the new lot sizes in December.

NSE Increases Lot Sizes for Index Derivatives

Sebi-Mandated Recalibration
In response to an order from the Securities and Exchange Board of India (Sebi), the National Stock Exchange (NSE) has increased the lot sizes for all five of its index derivative contracts. This move is intended to ensure that each derivative contract has a minimum value of ₹15 lakh, effective from November 20, 2024. The change will apply to all new index derivative contracts, including weekly, monthly, quarterly, and half-yearly expiries.

Details of Lot Size Increases
According to the circular issued by NSE, the lot size for Nifty50 will increase significantly from 25 to 75 contracts, while the Nifty Bank lot size will double from 15 to 30. Additionally, the lot size for Nifty Financial Services, or Fin Nifty, will rise from 25 to 65 contracts. Nifty Midcap Select will see its lot size grow from 50 to 120, and Nifty Next 50 will increase from 10 to 25 contracts.

Transition Plan for Existing Contracts

Existing Contracts to Remain Unchanged Until Expiry
The NSE has clarified that the lot sizes of existing weekly and monthly expiry contracts will remain unchanged until they expire. However, existing quarterly and half-yearly contracts will transition to the new lot sizes on December 24, 2024, for Nifty Bank, and December 26, 2024, for Nifty, at the close of business. This phased approach ensures a smooth transition while preventing disruption in current trading activity.

Impact on Market Liquidity and Trading Suitability

Alignment with Sebi’s Framework for Derivatives
The revised lot sizes are expected to impact market liquidity, making it more suitable for participants with a higher risk tolerance. Earlier in the month, Sebi introduced a six-step framework designed to address the risks in the high-leverage Futures and Options (F&O) market. Sebi’s intent is to maintain an “inbuilt suitability and appropriateness criteria” for participants by calibrating contract sizes in line with the market’s growth, effectively curbing excessive risk-taking.

New Minimum Contract Value and Calculation Method

Ensuring Contracts Meet Sebi’s ₹15 Lakh Threshold
Starting November 20, 2024, all new index derivative contracts will have a minimum contract value of ₹15 lakh. The NSE has stated that lot sizes will be adjusted such that the contract value, as of the review date, falls within the ₹15 lakh to ₹20 lakh range. The calculation for revised lot sizes will be based on the average closing price of the underlying index between September 16 and October 15, 2024, ensuring fair and accurate adjustments.

In conclusion, the recalibration of lot sizes represents a regulatory-driven effort to make derivative trading more suitable for investors, aligning with the broader objectives of risk management and compliance set by Sebi. As these changes roll out, market participants will need to adjust their strategies to navigate the new trading landscape effectively.