Market regulator Securities and Exchange Board of India (SEBI) is likely to give a major relief to market participants on Index Options position limit. The regulator is likely to come up with a much higher threshold as compared to the proposed earlier and also revised position limit for Index Futures. Sources say SEBI panel on secondary market met on Wednesday and cleared all nine proposals related to second wave of reforms for Futures & Options (F&O).
New way of looking Open Interest (OI)
The idea of new method of looking at the open interest (OI) was cleared by SEBI panel comprising exchanges, brokers, depositories and other stakeholders. Once new norms are notified, OI will be measured based on FutEq or delta-based OI. FutEq OI considers the price sensitivity of each contract. SEBI believes this will give a better picture of risk than the existing notional interest method. OI will be measured by sentimentally aggregating the delta adjusted open positions across F&O at a given point in time. The leading exchange NSE has been disseminating the Fut Eq OI since October 2023.
Much higher than proposed Index Options Limit
The crucial and much awaited proposal of measurement of position limit for Index Options was also cleared but with a higher limit. Sources say, the SEBI panel cleared the revised proposal of Net End of Day (EoD) FutEq OI limit for options to Rs 1,500 crore and gross FutEq OI to Rs 10,000 crore (on both long and short delta each). Earlier, SEBI has proposed EoD position limit of Rs 500 crore and gross position of Rs 1,500 crore. The enhanced limit is based on feedback received and positions analysed afresh. As per sources, the view was “a balance is required between market stability and ability to take meaningful exposure by participants”.
Big relief on intraday monitoring of Index Options positions
For market participants, the big relief for traders, brokers and clearing corporations is to rescind the proposal of monitoring of the intraday Index Options position limits. One person aware of the discussion said, “SEBI decided to not go ahead with the proposal of intraday monitoring of positions in index options. SEBI got feedback that it may hurt intraday market making activities."
Brokers and clearing corporations also raised the issue of operational complexity in intraday delta check though SEBI's concerns were justified. Hence, instead of specifying any limit, exchanges have been suggested to create a joint standard operating procedure to monitor intraday positions of top entities from the perspective of surveillance concerns and take remedial measures.
Relatively flexible Index Futures Position Limit
On the Index Futures position limit, the SEBI panel concurred with the view that it is less risky compared to Options. Panel was of the view that market participants can be allowed to take larger India exposure. Post SEBI panel feedback, it is likely to be fixed category wise and on gross notional basis open interest. Like for Foreign Portfolio Investor (FPI) category I and Mutual Funds (MFs) it may be fixed as higher of Rs 500 crore or 15 per cent of total Open interest (OI). For FPI category II other than individuals, family offices and corporates the limit could be higher of Rs 500 crore or 10 per cent of total OI. For FPI category II including individuals, family offices and corporates the limit could be higher of Rs 500 crore or 5 per cent of total OI.
Post March 2020, there was a uniform limit of Rs 500 crore. The existing position limit of higher of 15 per cent of OI or Rs 7,500 crore for brokers including client and proprietary trading is likely to continue as per October 2024 circular.
The benefits of hedging, cash and cash equivalent will be in addition to these limits. Earlier, end of day limit of Rs 1,000 crore and intraday limit of Rs 2,500 crore was prescribed.
Tweaks in definition of MWPL of stocks
The proposal of linking market wide position limit (MWPL) to cash volume was also cleared but with a tweak. SEBI is likely to fix it as minimum of 15 per cent of free float and 65 times of average cash volume across exchanges, with a floor of 10 per cent of free float. This linkage to cash volume is expected to set a limit on derivative position on a stock. SEBI had proposed this idea to reduce the instances of stock going into ban period.
Position creation in stocks during ban period
SEBI is also likely to allow traders to create position after entry of the share in the ban period but only if it results in reduction of portfolio risk. If any new position is initiated, then the end of day delta position of the client in that share would have to be less than start of day delta position. Clearing corporations will create a process for monitoring and penalty structure for this purpose. The start of day portfolio delta will be measured on the basis of constant market conditions.
Portfolio delta of prior and latest positions will be calculated with latest EoD market conditions to ensure that change in portfolio delta because of change in market condition is not considered as a violation. Other changes may be considered as violation and penalty may be levied.
Stocks ban from next day of breach of limit
On the issue of monitoring of MWPL utilisation for stocks, SEBI is likely to give relief and allow share to enter in ban period only on the next day of breach of limits. Clearing corporations will perform intraday monitoring of FutEq OI at least four random times during the trading session. Breaches to be reported to SEBI on fortnightly basis. Exchanges and clearing corporations will display the MWPL utilisation on intraday basis. Exchanges and clearing corporations will develop a process to take corrective actions in case of OI utilisation limit is closer to or beyond the limit.
Eligibility criteria for derivatives on non-benchmark indices
Review of the eligibility criteria for F&O on non-benchmark indices was also approved by SEBI panel. SEBI had proposed to overhaul the criteria for derivatives on non-bench mark indices like a minimum of 14 constituents in the indices, capping the weightage of top constituent at or below 20 per cent and combined weightage of top three constituent’s at or below 45 per cent.
Other proposals
Other proposals like Computation of Exposure Limits for Mutual Funds and AIFs in Derivatives, for Pre and Post Open session for F&O segment and Individual position limits for single stocks was also cleared. SEBI may come up with circular on the finalised measures soon.
New measures not for enforcement but better risk metrics
As per sources aware of the proposal, SEBI’s new measures are not expected to materially affect the small investors but likely to reduce the frequency of stocks going into ban, and may enhance their ability. SEBI is also likely to clarify to the market that these new measures are not to be seen as enforcement tool but to monitor the risk by a better metrics.
These measures are expected to generate good data for SEBI and exchanges to address the issues of possible manipulation and concentration of risk in the market. This, so that exchanges and SEBI can take enforcement measures when needed for the integrity of the market.
SEBI is also expected to give reasonable time to the market to implement the proposals in a phased manner so that measure can be easily adopted and implemented.
Email to SEBI seeking comments on the proposed measures did not elicit any response.
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