Sebi may revise ₹500 cr derivative exposure limit for institutional investors | Stock Market News

The Securities and Exchange Board of India (Sebi) may revise the ₹500-crore exposure or open interest limit each in index futures and options introduced for institutional investors—foreign portfolio investors and mutual funds—after the covid-19 outbreak in March 2020.

The markets regulator proposes to change the methodology for measuring open interest (OI), the value of outstanding buy-sell positions, among participants in the derivatives segment. The limit is over and above that set for institutions to hedge their portfolios.

Besides, Sebi plans to link the market-wide position limit (MWPL)—collective positions held by market participants—in single stock futures and options (F&O) to the average daily delivery volumes of the underlying stocks rather than to the notional volumes.

The changes aim to prevent manipulation of one market segment by the other—either cash on derivatives or vice versa—and excessive volatility this gives rise to, said Sebi’s whole-time member Ananth Narayan on Saturday at Samvad, a symposium on the securities market.

To be clear, the regulator announced an upward revision in the position limits for trading members and their clients in the index F&O contracts in October.

Sebi, in a release, said the position limits for trading members, cumulatively for client and proprietary trades, in index F&O contracts were now set at ₹7,500 crore or 15% of the total open interest in the market, whichever is higher.

The proposed changes follow Sebi’s half-a-dozen measures in October 2024 to cool the retail frenzy in index options trading. A Sebi study from 2021-22 to 2023-24 found that individual traders lost an aggregate ₹1.8 trillion, largely trading index options.

What is Sebi thinking?

Narayan said the method of measuring F&O open interest in the market by adding the notional volumes—the total or nominal value of a security—of futures with that of options contracts was flawed.

Also Read: Derivatives decline: Where did F&O volumes disappear?

He explained that option pricing was determined by five key risks known as Greeks. One of the risks was delta—a change in an option’s price relative to a change in the price of an underlying stock or index. For instance, if the Nifty moves by 10 points and an option’s price by ₹5, the option delta will be 0.5 for a call option and -0.5 for a put.

Sebi is planning to move to a delta-based metric—wherein the delta of options will be added to the notional volume of a futures contract rather than adding the notional volumes of the two instruments to measure the open interest. 

“You have to add, at best, the delta of an option with the notional of a future. So, this future equivalent is a metric that makes far more sense than adding notional on both sides,” he said.

He added moving to a delta-based approach to measuring open interest will be in line with global best practices.

“Moving to a delta-based metric would ensure that we are actually measuring risk the correct way,” he said, indicating that the consultation paper, after advisory committee discussions, will be out by February. “Do not worry about something coming as a jhatka (shock) overnight,” he said.

Also Read: Mint Primer: A new era awaits India’s F&O market in 2025

Regarding the Covid onset restriction, Narayan said, “Linked to this sometime back when we had the covid incident, we brought in some limits on index trading. We had said the notional that you can actually take on a net basis in futures is ₹500 crore.”

“We had said on options as well, the notional you can take is ₹500 crore. This was brought in during the covid time essentially as a measure of controlling the volatility during that period. That needs to be revised now. The reason why we’ve been holding back on revising this is that the notional limit is, in the first place, not correct,” he added.

The MWPL on single stock F&Os, which is 20% of the underlying stock’s free float, will have to be tweaked once the method of measuring open interest changes.

“We have seen cases where the overall market delta in derivatives is 50 or 60 times the daily delivery volumes. So, linking the MWPL to delivery volumes is something else that we are considering,” he said.

Sebi introduced the limit in 2020 to contain excessive market volatility. The benchmark Nifty 50 fell by 38% from 12,201 on 12 January 2020 to 7,610 on 23 March that year due to covid outbreak, leading to a stoppage of economic and trading activity globally to contain its outbreak.