MUMBAI: Sebi seems determined to save the derivatives market from excessive speculation that has impoverished numerous unsuspecting investors who entered the F&O segment with the unrealistic ambition of making quick money and ended up burning their fingers.
In a sweeping overhaul of risk management in the equity derivatives space, Sebi, the market regulator is set to roll out a set of fresh curbs and recalibrated frameworks first proposed in February.
Despite some pushback from high-frequency traders and other market participants, Sebi will go ahead with key changes to monitor concentration, limit exposure, and align derivatives positions more closely with cash market liquidity.
A central element of the reform is a shift to the “future equivalent” or delta-based method for calculating open interest (OI), which is expected to offer a more accurate picture of trader positioning by factoring in the sensitivity of option contracts to movements in the underlying securities.
Sebi will also revise the gross position limit for index options to 10000 crore, a significant increase from the 1500 crore ceiling initially proposed in the consultation paper. Market intermediaries had argued that a lower cap would disrupt legitimate hedging and liquidity provisioning.
While most proposals in Sebi’s February paper have been cleared, the plan to impose intraday position limits has been dropped following industry feedback. The regulator’s Secondary Market Advisory Committee has already approved the final set of measures, and a formal circular is expected shortly.
Further, the Market-Wide Position Limit (MWPL) – which governs the maximum allowable F&O contracts for a stock – will now be pegged to the lower of 15 per cent of free float or 65 times the average daily delivery value. This revised formula is aimed at ensuring derivatives activity remains grounded in the underlying market’s liquidity.
Random intraday checks
For single stock contracts, foreign portfolio investors (FPIs) and mutual funds will be allowed up to 30 per cent of MWPL, while individual traders will be capped at 10 per cent. Sebi believes this will help reduce the frequency of F&O ban periods and limit the potential for price manipulation.
To tighten surveillance, exchanges will be required to conduct four random intraday checks daily to track trader behavior and flag potential misuse. Standard operating procedures for this will be issued to all market infrastructure institutions.
Another notable change is the restriction of weekly F&O expiries to just two days, ending the current system that allowed multiple expiry days. Exchanges will now need Sebi’s approval for any changes to the expiry calendar. This is likely to affect bourses such as the Metropolitan Stock Exchange, which had planned Friday expiries for new contracts.
The regulator has also launched a fresh survey on derivatives trading outcomes, with findings expected by mid-June. Sebi’s earlier study, covering 2021-22 to 2023-24, showed that 93 per cent of individual traders incurred losses in F&O.
Although index options volumes (in premium terms) declined 15 per cent year-on-year following Sebi’s November 2023 interventions, they remain 11 per cent higher than two years ago. Similarly, individual participation has dipped 5 per cent from last year but is still up 34 per cent compared to 2022.
