The Securities and Exchange Board of India (SEBI), under the SEBI Act, 1992, is entrusted with the crucial mandate of protecting investor interests, promoting the development of the securities market, and regulating it effectively. In line with this mission, SEBI continuously reviews and upgrades its regulatory framework to ensure market integrity and safeguard participants—particularly in complex segments like equity derivatives.
One such step came recently when SEBI, in collaboration with the Expert Working Group (EWG) on derivatives, examined the equity Futures & Options (F&O) market to address rising concerns around risk disclosure, spurious ban periods, and manipulation in index options. The initiative aimed at tightening oversight, reducing systemic risks, and aligning the derivatives market with the underlying cash segment’s liquidity and structure.
Key Measures Introduced
- Delta-Based Open Interest Calculation
SEBI has revamped how Open Interest (OI) is measured by moving to a Delta-adjusted model. This shift involves computing participants’ net Delta positions across futures and options contracts. Delta, indicating the price sensitivity of a derivative relative to its underlying asset, will now determine the Future Equivalent Open Interest (FutEq OI) for each stock or index. This more nuanced approach reflects the actual risk exposure of market participants, offering a precise and effective regulatory lens.
- Redefining Market-Wide Position Limits (MWPL)
The traditional MWPL, pegged at 20% of a stock’s free float, has now been refined. It will be the lower of 15% of the free float or 65 times the Average Daily Delivery Value (ADDV), subject to a minimum of 10% of free float. This dynamic adjustment ties derivatives exposure directly to real cash market activity, discouraging speculative build-ups in illiquid stocks.
- Trading Restrictions During Ban Periods
Once a stock hits 95% of its MWPL, it enters a “ban period.” Under the new rules, any trades in its derivatives must reduce the entity’s Delta exposure by the end of the next trading day. Passive increases due to price movement won’t be penalized, but any increase in actual position size is restricted. A standard operating procedure (SOP) will be created to monitor and enforce these conditions.
- Intraday Monitoring of Position Limits
To counteract manipulation risks from intraday surges, stock exchanges are now required to conduct random intraday checks on MWPL utilization, at least four times daily. Alerts, additional surveillance margins, and reports to SEBI will be deployed when significant thresholds are breached.
- Tighter Controls on Index Derivative Exposure
Entities must now align their index derivative positions with their holdings—short positions must be backed by stock holdings, while long positions require equivalent cash or government securities. SEBI has laid out a glide path until December 5, 2025, to help entities build systems for daily Delta monitoring. Thereafter, stricter enforcement, penalties, and surveillance will apply for breaches.
Conclusion
With these reforms, SEBI has taken a bold step toward creating a more resilient and transparent equity derivatives market. By aligning risk metrics with market reality and introducing stricter position oversight, SEBI reinforces its commitment to investor protection and systemic stability. These measures, while technical, serve a vital public interest—ensuring India’s capital markets remain fair, orderly, and globally competitive.
