SEBI’s New Measures to Reduce Risks in F&O Trading

SEBI’s New Measures to Reduce Risks in F&O Trading

The Securities and Exchange Board of India (SEBI) has introduced a fresh set of proposals aimed at reducing risks in the derivatives market, aligning F&O trading more closely with the cash market, and curbing potential manipulation. These changes are expected to enhance market integrity while making trading smoother for market participants.

Key Highlights of SEBI’s Proposal

1. New Open Interest (OI) Calculation Using ‘Future Equivalent’ Approach

Currently, open interest in F&O is measured based on notional values, which may not truly reflect market sentiment. SEBI now proposes a delta-based framework, which aggregates futures OI with the delta-adjusted options OI. This approach will provide a more accurate measure of outstanding positions and price sensitivity.

2. Market-Wide Position Limits (MWPL) Linked to the Cash Market

MWPL, which determines the maximum number of F&O contracts allowed for a stock, is currently set at 20% of the stock’s free-float market cap. SEBI proposes reducing it to 15% of free-float market cap or 60x the Average Daily Delivery Value (ADDV), whichever is lower. This move is expected to reduce stocks entering the ban period by 90%, providing greater flexibility to traders.

Additionally, traders will now be able to offset positions instead of only squaring them off when a stock enters the ban period. For example, a trader holding long futures can reduce risk by buying put options or selling call options.

3. Individual Entity-Level Position Limits

To prevent any single player, such as Foreign Portfolio Investors (FPIs), mutual funds, or brokers, from exerting excessive influence, SEBI is considering imposing entity-level position limits in single stocks.

4. Higher Limits for Index Futures & Options

SEBI has proposed:

Increasing the end-of-day limit for index futures from ₹500 crore to ₹1,500 crore

Setting an intraday limit of ₹2,500 crore to support market-making activity

Similar adjustments are being considered for index options.

5. Pre-Open & Post-Closing Sessions for Derivatives

To improve price discovery, SEBI is exploring the introduction of pre-open and post-closing sessions in F&O, similar to the cash market. This will be particularly beneficial, given that fewer than 40 stock options currently have complete liquidity.

6. New Rules for Sectoral & Thematic Index Derivatives

Exchanges will now be able to launch derivatives on sectoral and thematic indices, provided:

The index has at least 14 constituents

The top stock’s weight does not exceed 20%

The top three stocks together do not exceed 45%

This move will expand trading opportunities in sectoral indices.

How These Changes Will Impact Traders

For most traders, these changes are unlikely to create major disruptions but will enhance the stability and transparency of the F&O market. The key benefits include:

✅ Fewer stocks entering the ban period, making trading smoother

✅ Better risk management through a refined OI calculation method

✅ Increased position flexibility with offsetting instead of forced square-offs

✅ More opportunities with derivatives on sectoral indices

Final Thoughts

SEBI’s new measures indicate a more structured, risk-controlled approach to derivatives trading. While it will require traders to adapt to the new framework, these changes ultimately aim to create a safer and more efficient trading environment.

For traders, staying updated on these evolving regulations will be crucial for navigating the F&O market effectively.

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