Shortly, the Securities and Exchange Board of India (SEBI) will start major talks on the index options limit and expiry date setting. A considerable number of market players, including stock exchanges and foreign institutional investors (FIIs), find these concerns very important.
Scheduled to meet on May 7, the SEBI committee will handle these important but still open questions, guiding the regulator on secondary market rules.
This panel will discuss the proposal; comments and other inputs on both important proposals will also be taken into account. Later, SEBI could publish a last circular, according to a source familiar with the matter.
Apart from a government official, the council is made up of people from a wide range of market intermediaries, including depositories, industry authorities, brokers, and exchanges.
The lastity of the suggested gross and intraday future equivalent (FutEq) or delta equivalent-based open interest limits excites market players. To compute FutEq, we total the delta of the price change of the position.
Establishing the intraday options limit is the main issue since many parties, especially the large algo (HFT) traders and FPIs, are asking for very high limits. Another source, familiar with the evolution, projected the need to fall between Rs 5,000 and Rs 15,000 crore.
The source added that the higher limit is being pursued to stop traders from being punished should a limit be broken.
The regulator, though, has its own worries. The SEBI consultation paper published on February 24 describes the present monitoring system for index options as one that combines long and short notional positions to arrive at a net figure. Though they carry significant net delta risk, it allows an entity to keep significant notional positions in both long and short positions, which practically produce a zero notional value.
In its consultation paper, SEBI suggested a net intraday cap of Rs 1,000 crore and a cumulative intraday limit of Rs 2,500 crore for index options. A net end-of-day (EoD) limit of Rs 500 crore and an aggregate limit of Rs 1,500 crore were also proposed.
SEBI suggested raising the EoD limit for index futures to Rs 1,500 crore from the present Rs 500 crore and the intraday limit to Rs 2,500 crore. The last set by SEBI was in March 2020; the suggested limit was based on the threefold rise in trading activity and index levels.
Interestingly, SEBI suggested these limits depending on its study of the top 50 open interest holders’ data from November 2024. The study found that most of the top November entities had net FutEq OI in the ±500 crore range, with a few at greater exposures.
SEBI also found that in 1% of cases, entities were carrying a major divergence risk of over Rs 10,000 crore while remaining substantially below that amount in net notional terms. SEBI is also expected to examine the open interest data from April to obtain more insights before deciding.
The second major suggestion relates to the creation of exchange-specific derivatives expiry dates. According to its draft circular dated March 27, SEBI has suggested that all equity derivatives contracts on an exchange will be uniformly limited to either Tuesdays or Thursdays. SEBI will allow every exchange to publish one weekly benchmark index options contract on their chosen day, either Tuesday or Thursday. On the last Tuesday or Thursday of every month during the last week of the month, all equity derivatives contracts except benchmark index options will also expire.
SEBI aims to ensure that the best spacing between expiries across exchanges is preserved while preventing the choice of either the first or last day of the week as an expiry day. SEBI thinks that the distribution of expiry days across the week gives exchanges the chance to distinguish their goods in the market and lowers concentration risk. While a small percentage of market players feel the exchanges should set the expiry date and SEBI should not interfere, others have suggested a three-day expiry.
SEBI has also recommended that exchanges change the expiry dates only with the regulator’s prior approval.
SEBI did not respond to an email requesting comments before this article’s release.
