SEBI ON ENHANCING TRADING CONVENIENCE AND STRENGTHENING RISK MONITORING IN EQUITY DERIVATIVES

The SEBI circular, issued on May 29, 2025, presents a comprehensive framework aimed at improving transparency, risk monitoring, and trading practices in the equity derivatives market. With increasing retail participation and the popularity of short-tenure index options, SEBI has introduced a structured set of measures in consultation with expert working groups and stakeholders to ensure orderly market conduct.

Purpose and Background:

The derivatives market enables efficient price discovery, liquidity improvement, and risk management for investors. Stock Exchanges and Clearing Corporations (CCs) provide platforms for derivatives trading, manage real-time risks, conduct surveillance, and ensure smooth settlement.

In light of the evolving dynamics such as increased retail involvement and high activity in index derivatives—particularly on expiry days—SEBI found it necessary to enhance monitoring mechanisms.

Objectives of the Measures:

The circular, based on recommendations from the Expert Working Group (EWG), aims to:

• Improve monitoring and disclosure of F&O risk.
• Prevent unnecessary or manipulated ban periods for single stocks.
• Increase oversight to detect concentration or manipulation risk in index options.

 1. Formulation of Open Interest Using Delta-Adjusted Positions:

Earlier Practice:
Open Interest (OI) was measured based on the total number of lots/contracts held, without accounting for the actual risk or exposure.

New Rule:
OI shall now be measured at the portfolio level in delta-adjusted terms, called Future Equivalent Open Interest (FutEq OI), which reflects actual price sensitivity to the underlying stock/index.

Delta tells how much a derivative reacts to price movement in the underlying stock or index:

Futures: Delta = +1 or -1 (long/short)

Call Option: Delta ranges from 0 to +1 (positive direction)

Put Option: Delta ranges from 0 to -1 (negative direction)

Simple Example:

Let’s say you are holding:

1 lot of Nifty Futures (₹1 lakh notional) → Delta = +1

→ FutEq OI = ₹1 lakh

1 ATM Call Option, delta = 0.5 → FutEq OI = ₹50,000

1 ATM Put Option, delta = -0.5 → FutEq OI = ₹50,000 (negative)

Your total FutEq OI = ₹1 lakh (futures) + ₹50k (call) - ₹50k (put) = ₹1 lakh net

Hence the total exposure of ₹3,00,000 as per raw OI will now reflect as ₹1,00,000 in net delta OI.

Old method inflated risk perception however, the delta-based method captures true directional exposure which will be the new standard for all OI-related calculations.

Moreover, Clearing Corporations (CCs) have been disseminating FutEq OI data at the scrip/index level on their website and entity-level FutEq OI to participants through their portal.

2. Redefinition of Market-Wide Position Limit (MWPL):

Let’s understand what’s MWPL?

MWPL is the maximum open interest allowed in a stock’s futures and options. If this limit is crossed, the stock goes into a ban period.

Earlier, MWPL was 20% of a stock’s free float (non-promoter holding). Now, it shall be the lower of:

15% of free float or 65 times the Average Daily Delivery Value (ADDV) with a minimum of 10% of free float to be maintained as a floor.

Example: If a stock has:

This new method ties the position limits to cash market liquidity, which can be assumed to reduce manipulation.

MWPL shall be recalculated quarterly based on a 3-month rolling ADDV. Exchanges/CCs shall test whether market-wide FutEq OI for any scrip exceeds 95% of proposed MWPL for that scrip at the end of each trading day.

However, the likelihood of any scrip exceeding 95% of the proposed MWPL is now significantly reduced, since the limit will be calculated on FutEq OI, as illustrated in the examples above, which inherently keeps the levels lower.

3. Position Creation for Single Stocks during Ban Period :

Earlier, when market wide OI of any scrip exceeds 95% of MWPL, the scrip enters a "ban period." During the ban, entities could only reduce positions through offsetting positions. The new rule says, any trading done in stock derivative subsequent to entry in ban period, should reduce net delta (FutEq OI) on an end-of-day basis. Merely switching long to short won’t count unless delta exposure actually comes down.

• Change of sign (e.g., delta position from +10 to -10) does not qualify as reduction. Further, it could only be reduced till 0.
• Passive increase in FutEq OI due to price movement shall not be considered a breach.

 Example Table:

 Only positions that reduce net directional risk are allowed during a ban. Clearing Corporations will prepare Standard operating procedures (SOP) for monitoring and penalizing non-compliance.

 4. Intraday MWPL Monitoring:

 Earlier, MWPL usage was only checked at day-end. Whereas now the Stock Exchanges shall monitor MWPL usage at least four random times during the trading session. In addition, Exchanges:

• Can levy additional Surveillance Margin, monitor  entity level concentration, additional surveillance checks etc.
• Report high utilizations of MWPL / breach of MWPL to SEBI in fortnightly meeting

 This measure directs Exchanges to address intraday spikes proactively.

5. Position Limits on Index Derivatives:

 a. For Index Options (at PAN level):

Earlier, there were no PAN level limit for Index Options exposure. To balance market stability and the fear of manipulation linked to large index positions, specific limits for index options have been set at the PAN level. 

The net end-of-day FutEq OI limit for options is ₹1,500 crore, and gross FutEq OI (long or short) limit of ₹10,000 crore, meaning neither gross long nor gross short positions can exceed this amount. Stock exchanges are asked to create a joint standard operating procedure with SEBI to monitor intraday positions and trading activities of major participants to ensure market integrity and address surveillance concerns.

b. For Index Futures:

To facilitate market participants to take meaningful market wide exposure and to develop index futures segment further, following position limits are stipulated for index futures:

Limits will be measured on gross notional value. Entities can take more exposure only if shorts are backed by stock holdings & longs are backed by cash or cash equivalents.

Starting July 1, 2025, Stock Exchanges will implement a glide path or a specific approach to monitor position limits for index options. By 9 PM each trading day, these exchanges will notify entities if their Futures and Equity Open Interest (FutEq OI) in index options exceeds allowable limits, set at ₹1,500 crore net or ₹10,000 crore gross long or gross short.

If an entity holds a long position above these limits, they must inform the Stock Exchanges or Clearing Corporations (CCs) about their cash holdings by noon on the next trading day. If the short position is also over the limit, or if the long position remains excessive after reporting cash, the entity must reduce their options positions to comply with limits by the end of the next trading day. Entities lacking systems to compute delta can use end-of-day prices provided by the Stock Exchange for compliance.

Failure to reduce positions within the limits by the specified time will result in additional surveillance deposits or penalties. This monitoring scheme will last until December 5, 2025. After this date, entities must have their systems to compute delta independently. Excessive positions on that date will continue to face surveillance and potential penalties. The purpose of allowing one additional day for adjustment is to help entities develop their monitoring systems without affecting typical retail traders. Stock Exchanges will then prepare a joint Standard Operating Procedure (SOP) to enforce these measures and address repeated violations.

6. Pre-Open Session for Derivatives:

Pre-open sessions to be introduced for current-month futures on both stocks and indices. Also, in the last 5 trading days of expiry, this will extend to next-month futures, as liquidity shifts from one expiry to the other on account of rollover of futures contracts. This mirrors cash market’s pre-open and post-closing practices and can be assumed to smoothen expiry-related volatility.

7. Criteria for Non-Benchmark Indices Derivatives:

Earlier, the criteria had been flexible for launching derivatives on sectoral/thematic indices. Now, before introducing derivatives on a non-benchmark index, the index must have:

• At least 14 stocks
• Top constituent’s weight ≤ 20%
• Combined weight of the top three constituents ≤ 45%
• Remaining stocks in descending weight order

This is intended towards promoting diversification and lowers risk of Index concentration. Exchanges must evaluate compliance every quarter and report to SEBI on their proposal for non-benchmark indices having derivatives contracts, within 30 days of the circular.

8. Entity-Level Position Limits for Single Stocks:

Earlier, limits were loosely defined, not aligned to true exposure or updated MWPL. Limits shall now be recalibrated as per new MWPL formula, with clear percentages as per trader type.

This focuses on net delta exposure and protects market from oversized bets by a single entity. Stock Exchanges and CCs will develop an SOP to monitor large or concentrated positions and take necessary action where needed.

Phased implementation of proposals:

In order to provide adequate time to market participants for shifting to FutEq OI, the phased implementation timelines are mentioned below:

 The circular implements risk-aligned reforms across open interest, position limits, ban period rules, and derivative eligibility. Each measure is backed by a timeline and requires Exchanges and Clearing Corporations to prepare SOPs. While retail investors remain largely unaffected, institutional and high-volume traders must prepare systems for delta tracking, compliance checks, and timely reporting.

References:

SEBI Circular – Measures for Enhancing Trading Convenience and Strengthening Risk Monitoring in Equity Derivatives

Circular No.: SEBI/HO/MRD/TPD-1/P/CIR/2025/79, May 29, 2025

Link: SEBI | Measures for Enhancing Trading Convenience and Strengthening Risk Monitoring in Equity Derivatives

Click to read our blog on: Intraday Monitoring of Position Limits for Index Derivatives