The proposed rules are aimed at curbing possible manipulation and limiting the spill-over of volatility from equity derivatives into the broader cash market

In a bid to enhance risk monitoring and trading efficiency in the equity derivatives market, the Securities and Exchange Board of India (SEBI) on Tuesday proposed a series of measures, official sources said here.The proposed rules are aimed at curbing possible manipulation and limiting the spill-over of volatility from equity derivatives into the broader cash market.\

The proposed steps also include 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, and more importantly ensure a better alignment with the cash market. SEBI has also suggested that market participants should receive intraday snapshots of F&O OI in near real-time. This will help in better risk management and decision-making.

The regulator has proposed changes to the exposure limits for mutual funds and alternative investment funds 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. The proposal suggests changing the position limit to 15 per cent of the free-float market capitalisation of a stock or 60 times the average daily delivery value, whichever is lower. Currently, the limit is the lower of 20 per cent of free-float market cap or 30 times the daily average.

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 Rs 500 crore (net) and Rs 1,500 crore (gross), while intraday limits are Rs 1,000 crore (net) and Rs 2,500 crore (gross). For index futures, the end-of-day limit has been increased from Rs 500 crore to Rs 1,500 crore, with an intraday limit of Rs 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.