Sebi announces measures to strengthen risk monitoring in equity derivatives
Key Measures Announced
1. Delta-Based Open Interest (OI) Calculation
- SEBI will adopt a Delta-based method to calculate open interest in index and stock options.
- This approach reflects actual market risk more accurately than the traditional notional method.
2. Revised Position Limits
- Gross options position limit: ₹100 billion
- Net options position limit: ₹15 billion
- These limits aim to prevent excessive risk buildup without hampering genuine hedging or trading strategies.
3. Intraday Monitoring of Derivatives Positions
- From April 1, 2025, stock exchanges must conduct at least four random intraday snapshots to track open positions in index derivatives.
- This will help detect and act on any breach of limits during trading hours.
4. Mandatory Upfront Premium Collection
- Effective February 1, 2025, brokers must collect the entire option premium upfront from clients.
- The change curbs the practice of leveraging without sufficient capital, especially for intraday traders.
5. Withdrawal of Calendar Spread Benefit on Expiry
- On contract expiry days, traders will no longer be able to claim margin benefit for calendar spread positions.
- This change aims to control basis risk and reduce potential misuse on high-risk expiry days.
6. Increase in Minimum Contract Size
- From November 20, 2024, the minimum contract value for index derivatives will be ₹15 lakh, up from the current ₹5 lakh.
- This helps ensure participants have sufficient capital, discouraging excessive speculative trades by small investors.
7. Restriction on Weekly Expiries
- Each exchange will be allowed to offer weekly expiry contracts on only one index.
- The measure reduces market fragmentation and curbs frequent high-risk expiry-day speculation.
8. Additional Margin on Expiry Day
- A 2% Extreme Loss Margin (ELM) will apply to short option positions on expiry days from November 20, 2024.
- This is a safeguard against unexpected market moves during volatile periods.
Implementation Timeline
| Measure | Effective Date |
|---|---|
| Increase in contract size, expiry margin, weekly expiry restriction | November 20, 2024 |
| Upfront premium collection, removal of calendar spread margin | February 1, 2025 |
| Intraday monitoring of position limits | April 1, 2025 |
| Full framework implementation deadline | December 6, 2025 |
Objective and Rationale
SEBI’s latest measures are driven by:
- Rising retail participation in the F&O segment, often with limited risk awareness.
- Increased volatility and systemic risk, due to speculative trades and margin misuse.
- Better alignment with global practices, particularly the use of Delta-based OI calculations and stricter margin norms.
- Encouraging responsible trading, especially on expiry days and in high-risk instruments like weekly options.
These reforms reflect SEBI’s commitment to ensuring market stability, protecting retail investors, and reinforcing the risk containment framework as India’s capital markets mature.
Conclusion
SEBI’s changes represent a proactive shift in regulating the equity derivatives space. By refining risk calculations, tightening monitoring, and enforcing stronger capital requirements, the regulator is building a more robust and investor-friendly market. While active traders may face some operational and margin-related adjustments, the long-term benefits are expected to include reduced systemic risk, fairer market practices, and greater investor confidence.
