Resized for Right Sizing

The concept of exchange traded contracts is based on the premise of standardisation, liquidity and elimination of counter party risk. Standardisation means having a lot size, a fixed number of shares in each lot (bunch). Liquidity means having enough buyers and sellers to move in and out of any contract without much impact. Finally, the settlement is guaranteed by the exchanges. That eliminates counter party risk. Even in the worst of the times in the market, there have been no payment defaults by the exchange.

As a part of the standardisation process, exchange has decided to have a fixed notional value for all the contracts in the derivatives segment and based on the underlying price a lot size is decided. The lot size in terms of number of shares. The notional value is Rs. 5,00,000/- at minimum on review day. So, if the price of stock on the reporting day for deciding lot size is Rs. 100. The lot size will be 5000. 

Till 2015, the minimum notional value was 2,00,000 which was then increased to 5,00,000. The regulation around this are as under:

• The lot size for derivatives contracts in equity derivatives segment shall be fixed in such a manner that the contract value of the derivative on the day of review is within Rs. 5 lakhs and Rs. 10 lakhs.

• For stock derivatives, the lot size shall be fixed as a multiple of 25, provided the lot size is not less than 50. However, if the contract value of the stock derivatives at the minimum lot size of 50 is greater than Rs. 10 lakhs, then lot size shall be fixed as a multiple of 5, provided the lot size is not less than 10.

• For index derivatives, the lot size (in units of underlying) shall be fixed

as a multiple of 5, provided the lot size is not less than 10.

• The stock exchanges shall review the lot size once in every 6 months based on the average of the closing price of the underlying for last one month.
• Wherever warranted, revise the lot size by giving an advance notice of at least 2 weeks to the market. If the revised lot size is higher than the existing one, it will be effective for only new contracts. 

• In case of corporate action, the revision in lot size of existing contracts.

• The stock exchanges shall jointly ensure that the lot size is same for an underlying traded across exchanges and across asset classes.

Based on this there have been 15 downward revisions, which will be effective from November series and 12 upward revisions, which will be applicable from Jan 2021 series. 

For instance, for Divi’s Lab the lot size has been revised from 400 to 200. At current price of near 3000, the lot size has been brought down from Rs. 12 lakhs to Rs. 6 lakhs. So, if one is holding 1 lot, the holding will change to 2 lots from November series, keeping overall holding in terms of shares and value same.

For Canara Bank, the lot size has moved up from 5000 to 5400. This would increase the notional exposure at current price of near Rs 90/- from Rs. 4.5 lakhs to Rs 5 lakhs. There will be no change right now, but the January contract will have a lot size of 5400.

Maintaining uniformity and standardisation is very important for derivative contracts, else the notional values will go out of reach or fall down to levels too low to trade. 

Happy Trading!!!

Cheers.