MUMBAI: Welcoming the new curbs re-introduced by market regulator Securities and Exchange Board of India (Sebi) on intra-day limits for index options, market participants said these intraday limits give better flexibility to traders. This will ensure tighter real-time surveillance It will also bring in more discipline, stability and robustness in the equity derivatives segment while benefiting both institutional and retail players, they said.
SEBI, in order to ensure that the derivatives market -- the largest and the most active in the world, which continues to grow under robust risk management and transparent regulations --, has on Tuesday reintroduced the intra-day limits for index options trading from next month, capping intraday positions for each entity at Rs 5,000 crore and the gross intraday position at Rs 10,000 crore, a level that mirrors the existing end-of-day gross limit.
The new rules will take effect from October 1, the Securities and Exchange Board said in a circular, seeking to curb the risks posed by oversized exposures while preserving liquidity and orderly functioning of the market by rolling out a comprehensive framework to monitor intraday positions in equity index derivatives.
The new curbs come against the backdrop of rising concern that some participants have been taking disproportionately large positions, particularly on options expiry days, creating volatility and threatening market integrity. This had led to the Sebi clamping down heavily on the Wall Street major Jane Street in July and asked it to disgorge the illicit profit to the tune of Rs 4,805 crore.
According to the circular, the net intraday position, calculated on a futures-equivalent basis, will be capped at Rs 5,000 crore per broker and the gross intraday position, again on a futures-equivalent basis, will be capped at Rs 10,000 crore, a level that mirrors the existing end-of-day gross limit, per trader. Market experts welcomes the new intraday cap in index options saying it gives better flexibility to traders while ensuring tighter real-time surveillance.
To enforce the new framework, stock exchanges will be required to monitor positions using at least four random snapshots during the trading session. One of these checks must take place between 2:45 pm and 3:30 pm, a time window that often witnesses a flurry of trading as positions are squared off before the close.
"For the entities breaching the aforesaid limits, stock exchanges shall examine trading patterns of such entities which would inter-alia include seeking rationale for such positions from the clients, examining trading in the constituents of the index by the entity and discussing such instances with Sebi in the surveillance meeting,” read the circular.
At the time of taking these snapshots, exchanges will also need to account for the prevailing price of the underlying index, ensuring that position assessments reflect real market conditions. The regulator has made it clear that entities breaching these limits will come under increased scrutiny as stock exchanges are asked to examine the trading patterns of such participants, which may involve calling for explanations, reviewing trades executed in the underlying index constituents, and reporting their findings to the Sebi in surveillance meetings.
On expiry days, when speculative pressures are at their peak, violations will additionally attract penalties or surveillance deposits, to be determined jointly by the exchanges, the circular said. The circular further notes that, "the aforesaid framework would facilitate market making activity on all trading days while putting a check on creation of outsized intraday positions on the expiry day for orderly trading. The new framework will also provide predictability, operational clarity, and a fair balance between ease of trading and risk management".
The regulator also highlighted that these provisions will be confined strictly to index options, which dominate the derivatives landscape and observed that the absence of intraday curbs was allowing entities to build outsized bets, particularly on expiry days, that could destabilize the market.
As part of the implementation roadmap, Sebi has asked stock exchanges and clearing corporations to jointly prepare a standard operating procedure for intraday monitoring. This SOP must be submitted to the regulator within 15 days and communicated to market participants before the new framework is enforced. Market infrastructure institutions will also be required to make suitable changes to their systems, processes, and byelaws to support the rules.
Though the new intraday limits will come into force on October 1, the penalty provisions related to expiry-day breaches will apply from December 6, 2025, aligning with the end of the glide path for position limits.
The market participants have welcomed the move.
“The new curbs comes amidst the oversized intraday positions on expiry days and the recent Jane Street fiasco, which highlighted risks from aggressive trading strategies.
These higher thresholds can provide better flexibility for traders during the day while ensuring tighter real-time surveillance," said Ajay Garg, chief executive of SMC Global Securities.
Rupak De, a senior technical analyst at LKP Securities, on the other hand said the new end-of-day position limits are expected to improve market liquidity and provide greater flexibility for institutional players.
“However, curbs on intraday positioning, along with stricter monitoring and random snapshots, will help enforce discipline and prevent manipulation. While retail traders may not benefit directly, they could gain indirectly from better price discovery and reduced expiry-day volatility, which may help limit sharp negative shocks,” he added.
Arjun Prajapati, a senior vice-president at Asit C Mehta Investment expects the new measures to encourage more mature and disciplined participation in the markets.