The market watchdog Sebi has proposed key reforms in the F&O segment to curb market volatility and enhance risk management by suggesting introduction of real-time monitoring of futures & options open interest and increasing the exposure limits massively for index derivatives. Other changes include a Delta-based open interest computation, reducing artificial ban periods, recalibrating market-wide position limits, and strengthening intraday monitoring.
In a consultation paper issued late Monday, the Securities and Exchange Board (Sebi) has proposed radical F&O reforms to curb volatility by refining OI calculation, limiting manipulation, reducing artificial ban periods, and aligning derivatives risk with cash market liquidity.
A key proposal is introducing 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 and Rs 1,500 crore, while intraday limits are Rs 1,000 crore and Rs 2,500 crore
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.
This is the second serious bid on the part of the regulator to address volatility in broader markets as a result of spill-over from the derivative markets after it imposed a slew of curbs on the derivatives play by retail investors beginning last November when it had increased the margin limits manifold as its studies had found that retail investors were heavily losing in the derivatives space.
In the latest consultation paper, Sebi has proposed a slew of measures in the equity futures & options (F&O) segment to enhance ease of trading and risk management.
The Sebi has sought feedbacks by March 17.
The measures, if implemented, will help market participants make more informed decisions and manage risks more effectively, Sebi said.
Under the proposals, the Sebi has suggested market participants receive intraday snapshots of F&O open interest in near real-time, which, it feels will help in better risk management and decision-making. Also, it has proposed changes to the exposure limits for mutual funds and alternative investment funds in the derivatives space.
While the calculation for futures exposure will remain unchanged, options exposure will now be measured using the future equivalent or Delta basis, ensuring it accurately reflects market sensitivity.
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 Futures equity 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 and Rs 1,500 crore, while intraday limits are Rs 1,000 crore and Rs 2,500 crore
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, the paper said, adding 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 proposes 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.
The regulator has also proposed new eligibility rules for derivatives on non-benchmark indices to prevent excessive concentration. These indices should have at least 14 constituents, ensuring broader market representation.
Additionally, the weight of the top stock should not exceed 20% while the top three stocks together should not exceed 45%. The remaining stocks should follow a descending weight structure, promoting a balanced and diversified composition.
On position limits for single stock derivatives, Sebi has suggested that position limits will be based on both market wide position limits and total open interest across exchanges.
Further, different limits would be set for clients, brokers, FPIs, and MFs. Positions should be monitored across multiple clearing corporations to prevent excessive concentration.
Currently, some stocks have high market wide position limits but low actual open interest, allowing a single entity to hold a disproportionately large position.