SEBI to Review and Finalise Regulatory Framework for F&O on May 7

The capital market regulator, the Securities and Exchange Board of India’s (SEBI) Secondary Market Advisory Committee, will meet today on May 7, to finalise the next phase of reforms in the equity derivatives (Futures & Options or F&O) market. The said meeting will address key proposals aimed at enhancing risk monitoring and improving trading convenience in the F&O segment.

Key Agenda Items of SEBI Panel Meet

Revamping Open Interest (OI) Measurement

SEBI is evaluating a shift from the traditional notional OI to a delta-based or FutEq OI model. This approach considers the price sensitivity (delta) of each position, offering a more accurate risk assessment. The aim is to prevent stocks from being prematurely pushed into the ban list due to misleading OI figures.

Linking Market-Wide Position Limits (MWPL) with Cash Market Volume

A revised mechanism could tie MWPL to 15% of free-float market capitalisation or 60 times the stock’s cash market volume. This linkage is intended to make the system more dynamic, potentially allowing certain trades during ban periods if they reduce market risk.

Intraday Monitoring of MWPL

Currently monitored only at end-of-day, SEBI proposes real-time MWPL tracking, with at least four intraday checks by clearing corporations. This step aims to mitigate settlement risk caused by sudden spikes in delta-based OI.

Revised Intraday Position Limits

New limits are being proposed for index futures and options:

1. Index Options: Intraday limit of ₹1,000 crore (net), ₹2,500 crore (gross); EoD limit of ₹500 crore (net), ₹1,500 crore (gross).
2. Index Futures: EoD limit raised to ₹1,500 crore (from ₹500 crore), and intraday limit to ₹2,500 crore.

These limits reflect increased market volumes and index levels since 2020. However, FPIs and large algo traders are pushing for higher thresholds to avoid penalties. SEBI will review the April data before finalising these numbers.

Pre and Post-Market Sessions for F&O

Extending pre-open and post-close trading windows to the F&O segment is under consideration, similar to the cash segment. This could enhance price discovery and alignment between both markets.

Stricter Criteria for Non-Benchmark Indices in F&O

SEBI has proposed new eligibility norms for derivatives on non-benchmark indices, including:

• At least 14 constituent stocks
• Maximum 20% weight for a single stock
• Combined 45% cap for the top three stocks

Individual Position Limits for Single Stocks

To curb potential manipulation, SEBI suggests capping positions per participant category:

• Clients and Proprietary Brokers: 5% of MWPL or 20% of FutEq
• Category I FPIs and Mutual Funds: 20% of MWPL or 30% of FutEq
• Corporates and Family Offices: 10% of MWPL or 15% of FutEq

Standardising F&O Expiry Days

The panel will also discuss SEBI’s proposal to fix F&O contract expiries to either Tuesday or Thursday. Exchanges can choose one day for their weekly benchmark index options. All other derivative contracts will expire on the last Tuesday or Thursday of the month, based on each exchange’s selection.

Also Read: SEBI Proposes Eased Delisting Norms for PSUs with 90% Government Stake

Conclusion

The upcoming SEBI panel meeting on May 7 is poised to play a pivotal role in reshaping the structure and oversight of the equity derivatives market in India. With a focus on tightening risk controls, enhancing transparency, and aligning F&O trading practices with evolving market dynamics, the proposed changes could significantly impact all market participants, from retail investors to institutional players.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.