Sebi set to roll out new risk metrics to curb F&O market speculation
Mumbai, May 11, 2025
New risk metrics target speculative churn; parts of the original plan revised after industry pushback
In a sweeping overhaul of risk monitoring in the derivatives segment, the Securities and Exchange Board of India (Sebi) is set to implement a new raft of measures first outlined in February. The goal is to rein in speculative activity in the derivatives market. Despite some pushback from the industry, the regulator will go ahead with key risk metrics while revising parts of the original proposal.
Sebi will adopt a new method for calculating open interest (OI), known as the future equivalent or delta-based framework. It will also raise the gross position limit for index options to ₹10,000 crore, according to sources.
The February consultation paper had suggested a much lower gross limit of ₹1,500 crore for index options, drawing objections from several market makers, including high-frequency traders, who argued it would stifle legitimate trading.
Most of the proposals in Sebi’s consultation paper have been cleared, but the plan to impose intraday limits has been shelved following industry feedback. The regulator’s Secondary Market Advisory Committee has approved the revised measures, and a formal circular outlining the new rules is expected soon.
The new OI method will track price movements in derivatives relative to their underlying securities, offering a more accurate read of market activity and trader positioning.
Market-Wide Position Limit (MWPL) — which determines the maximum allowable open futures and options (F&O) contracts for a stock — will now be defined as the lower of 15 per cent of free float or 65 times the average daily delivery value. Experts say this better matches derivatives exposure with cash market liquidity.
For single stocks, foreign portfolio investors and mutual funds will be capped at 30 per cent of MWPL, while individual traders will be restricted to 10 per cent. Sebi believes this will help curb manipulation and reduce the frequency of stocks hitting the ban period.
To monitor concentration and exposure risks, Sebi will step up surveillance of intraday positions. Exchanges will be required to develop standard operating procedures to track trader activity, including four random intraday checks each day to detect potential misuse.
Other approved changes include capping weekly F&O expiries at two days, down from the current multiple-expiry setup. Any changes to the expiry calendar will need prior Sebi approval. This could affect new entrants in the equity derivatives space, especially the Metropolitan Stock Exchange, which had planned to launch derivatives contracts expiring on Fridays every week.
Sebi has also launched a fresh survey on F&O trader profitability, with results due by mid-June. A previous study covering 2021-22 to 2023-24 found that 93 per cent of individual traders lost money in derivatives.
Last November, Sebi introduced steps to curb excessive speculation in F&O. While index options volumes (in premium terms) fell 15 per cent year-on-year, they are still 11 per cent higher than two years ago. Similarly, individual trader participation, though down 5 per cent year-on-year, is up 34 per cent compared to 2022.
Experts say the regulator remains uneasy about the high activity in index options despite earlier interventions. The latest round of reforms aims to balance trading efficiency with tighter risk controls.
THE FINE PRINT OF RISK
· Open interest to be recalculated using ‘future equivalent’ metric
· Index options capped at ₹10,000 cr gross and ₹1,500 cr net; no intraday limits
· MWPL to be tied to free float and average daily delivery value
· Benchmark index expiries limited to two days a week
· Heightened surveillance; fresh study on F&O trader profitability
[The Business Standard]
