SEBI Proposes Stricter Rules for Index Derivatives – What It Means for Traders

SEBI Proposes Stricter Rules for Index Derivatives – What It Means for Traders

The Securities and Exchange Board of India (SEBI) is tightening the screws on stock and index derivatives trading. In its latest consultation paper, SEBI has proposed linking stock derivative position limits with cash market liquidity and introducing new eligibility criteria for index derivatives. These changes aim to curb excessive speculation and bring more stability to the market.

Key Highlights of SEBI’s Proposal

✅ Stricter position limits in stock derivatives

✅ New eligibility criteria for index derivatives

✅ Pre-open session for futures trading

Stock Derivatives – Position Limits to Be Linked with Cash Market

SEBI is concerned about the rising speculation in the Futures & Options (F&O) segment, which has been impacting the broader market. To address this, the regulator wants to set stock derivative position limits based on two key factors:

1. 15% of a stock’s free-float market capitalization

2. 60 times the stock’s average daily delivery value

The lower of these two will be the market-wide position limit. This move is aimed at reducing manipulation and ensuring better alignment between the cash and derivatives markets.

Index Derivatives – Stricter Eligibility Criteria

SEBI has also proposed that only indices meeting certain conditions should be eligible for derivatives trading. The new rules include:

An index must have at least 14 stocks

The top three stocks should not exceed 45% weight

No single stock can have more than 20% weight in the index

This is to prevent traders from manipulating a few stocks through index derivatives, which can lead to excessive market volatility.

Pre-Open Session for Futures Trading

SEBI is also considering introducing a pre-open session for futures, similar to the cash market. Initially, this will apply to current-month futures contracts on stocks and indices. The goal is to improve price discovery and market efficiency.

Why SEBI Is Tightening F&O Rules

This move comes after SEBI already made derivatives trading tougher in October 2024 by raising entry barriers and increasing trading costs for retail investors. The regulator is aiming to reduce unchecked speculation, improve market stability, and protect retail traders from excessive risks.

Market participants have until March 17, 2025, to provide feedback on these proposals. If implemented, these changes could significantly impact how traders approach the F&O market.

Stay tuned for more updates on SEBI regulations and their impact on trading strategies.

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