SEBI Rolls Out Comprehensive Reforms for F&O Market to Enhance Oversight and Stability

The Securities and Exchange Board of India (SEBI) announced a comprehensive overhaul of the derivatives market on Thursday, introducing new frameworks for calculating Open Interest (OI) and Market-Wide Position Limits (MWPL). These measures are designed to strengthen market surveillance, reduce the frequency of Futures & Options (F&O) trading bans, and curb the risks of manipulation and concentration—especially in index options.

Initially proposed in a consultation paper, some of the reforms had raised concerns among market participants over potential impacts on trading activity. This was particularly pressing as F&O volumes have already declined by 30% from their peak. However, following extensive engagement with industry stakeholders, SEBI revised several aspects of the original proposals.

The regulator has outlined eight key reforms, set to be implemented in phases between July and December.

Key Changes to OI and MWPL Calculations

Under the new framework, Open Interest—an important barometer of market sentiment—will now be calculated on a portfolio level using net delta-adjusted open positions across F&O contracts. Delta represents how sensitive a derivative is to price changes in its underlying asset. The aggregated net positions across all Unique Client Codes (UCCs) will be termed as the Future Equivalent Open Interest (FutEq OI).

Market-Wide Position Limits will be recalibrated using a new formula: the lower of 15% of free-float market capitalisation or 65 times the Average Daily Delivery Value (ADDV), with a minimum floor of 10% of free-float. This approach links MWPL to real market activity, making it harder for speculative players to dominate. MWPL will now be refreshed quarterly, based on rolling ADDV data.

To enhance real-time monitoring, stock exchanges must conduct intraday checks on MWPL utilisation at least four random times a day, helping to mitigate settlement and volatility risks.

New Limits for Index Derivatives

SEBI has also introduced caps on index derivative exposures:

• For index options, the net end-of-day FutEq OI is limited to ₹1,500 crore, while the gross limit is set at ₹10,000 crore.
• For index futures, institutional investors such as Category-I FPIs, mutual funds, and proprietary brokers can hold the higher of ₹500 crore or 15% of futures OI. Other FPIs (individuals, corporates, family offices) are capped at the higher of ₹500 crore or 5%.

Importantly, SEBI clarified that passive breaches due to a drop in market-wide OI will not be penalised.

Enhanced Surveillance and Exposure Guidelines

SEBI has directed exchanges to prepare a joint Standard Operating Procedure (SOP) to closely track intraday activity and large positions. This move aims to reinforce market integrity and reduce the chances of manipulative practices.

To ensure a balance between flexibility and systemic safety, entities may take on additional exposures provided their short index derivative positions are covered by equivalent holdings in the underlying stocks.

Additional Measures

• A pre-open session will now be introduced for current-month futures of both stocks and indices, aligning the derivatives market more closely with the cash segment.
• Eligibility norms for launching derivatives on non-benchmark indices have been tightened. Such indices must have at least 14 stocks, with no single stock accounting for more than 20% of the weight, and the top three collectively under 45%.
• Exchanges must submit proposals for new non-benchmark derivative indices (e.g., Bankex, Nifty Bank) to SEBI within 30 days.
• SEBI has imposed individual position limits: Mutual funds can hold up to 30% of a stock’s MWPL, and proprietary brokers up to 20%.
• Clearing corporations are required to create an SOP—within one month—covering the monitoring of end-of-day delta positions and the establishment of a penalty framework for breaches.

Conclusion

These regulatory enhancements reflect SEBI’s effort to foster a more resilient and transparent derivatives market, with stronger safeguards against systemic risks and speculative excess.

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