Sebi unveils new rules to enhance oversight in equity derivatives market
Mumbai: The Securities and Exchange Board of India (Sebi) has announced new rules to strengthen oversight of the
equity derivatives market
. The changes include a new method for calculating open interest, revised position limits linked to cash market liquidity and tighter monitoring of large positions in index options and single-stock derivatives to curb excessive speculation.
Open Interest Calculation
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One of the key changes is the introduction of a new way to measure traders' positions in the derivatives market -
Futures Equivalent Open Interest
. The new method considers how sensitive a derivatives position is to movements in the underlying asset and is seen as a more accurate measure of market risk. This would replace the existing 'notional value' method to a 'delta-based' model.
Reduce Manipulation in Stock Ban Period
Sebi has also changed how trading limits are set for single-stock derivatives. The new rules link the Market Wide Position Limits in single stock derivatives more closely to the stock's actual trading activity in the cash market. This is aimed at reducing manipulation in illiquid stocks.
A key issue with the current method is that it assigns full notional value even to far-out-of-the-money options, many of which have little or no intrinsic value. This can artificially inflate the market-wide position limit (MWPL) in certain stocks, pushing them into F&O ban periods.
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"Tying the MWPL to cash market delivery volume will reduce the potential manipulation and better align derivatives risk with the underlying cash market liquidity," Sebi said.
Further, the regulator has tightened rules around the F&O ban mechanism. Once a stock is in the ban, any trading in its derivatives must lead to a reduction in the trader's overall exposure by the end of the day. Clearing corporations have been asked to impose penalties for any violations.
New trading limits for index F&O
Sebi has set new limits on how much traders or entities can hold in index derivatives. Starting July 1, 2025, exposure in index options will be capped at ₹1,500 crore on a net basis and ₹10,000 crore on a gross basis per entity. In index futures, the limits will depend on the type of the market participants. The regulator also clarified that passive breaches, such as those caused by a fall in overall market open interest, won't be treated as violations.
Pre-session open
Sebi has extended the pre-open session to cover current-month futures on both stocks and indices. In the last five trading days of expiry, this window will include next-month contracts as well, to help smooth rollovers.
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