SEBI considers measures to boost trading convenience, strengthen risk monitoring in equity derivatives

Markets regulator SEBI on Tuesday proposed measures to enhance risk monitoring and trading efficiency in the equity derivatives market, including the introduction of real-time monitoring of Futures & Options (F&O) Open Interest (OI).

The measures, if implemented, will help market participants make more informed decisions and manage risks more effectively.

The Securities and Exchange Board of India (SEBI) has sought public comments on the proposals till March 17.

Under the proposals, SEBI has suggested that market participants should receive intraday snapshots of Futures & Options (F&O) Open Interest (OI) in near real-time. This will help in better risk management and decision-making. Also, the regulator, in its consultation paper, has proposed changes to the exposure limits for Mutual Funds (MFs) and Alternative Investment Funds (AIFs) in derivatives.

While the calculation for futures exposure will remain unchanged, options exposure (both long and short) will now be measured using the Future Equivalent (FutEq) or Delta basis, ensuring it accurately reflects market sensitivity.

Net exposure for each stock or index will be determined by offsetting long and short Delta values, and the total exposure will be the sum of all net FutEq exposures, with MF and AIF limits adjusted accordingly.

Currently, different methods are used for calculating exposure based on position types' futures and short options are measured by notional value, while long options only account for the premium paid.

Additionally, SEBI has proposed new position limits for index derivatives to better reflect actual market risks. For index options, the end-of-day limits are set at ₹500 crore (net) and ₹1,500 crore (gross), while intraday limits are ₹1,000 crore (net) and ₹2,500 crore (gross).

For index futures, the end-of-day limit has been increased from ₹500 crore to ₹1,500 crore, with an intraday limit of ₹2,500 crore.

These limits will apply to all market participants, including FPIs, MFs, traders, and clients, ensuring a standardized framework.

However, exemptions will be provided for positions backed by actual holdings, such as stocks for short positions and cash for long positions.

Currently, position limits are based on notional value, which overlooks real risks like Delta risk in options, and netting of large long and short positions can sometimes obscure the true exposure.

With regards to pre-open & post-closing sessions for derivatives, Sebi has proposed to extend these sessions to futures on stocks & indices to improve price discovery and reduce volatility. Currently, these sessions exist in the cash market but not in derivatives.

The regulator has proposed new eligibility rules for derivatives on non-benchmark indices to prevent excessive concentration. These indices should have at least 14 constituents, ensuring broader market representation.

Additionally, the weight of the top stock should not exceed 20% while the top three stocks together should not exceed 45%.

The remaining stocks should follow a descending weight structure, promoting a balanced and diversified composition.

On position limits for single stock derivatives, Sebi suggested that position limits will be based on both Market-Wide Position Limits (MWPL) and total Open Interest (OI) across exchanges.

Further, different limits should be set for clients, brokers, FPIs, and MFs. Positions should be monitored across multiple clearing corporations to prevent excessive concentration.

Currently, some stocks have high MWPL but low actual OI, allowing a single entity to hold a disproportionately large position.