The Securities and Exchange Board of India (SEBI) will soon take up important deliberations related to index options limit and the fixing of expiry days that hold a lot of importance to a large section of market participants, including stock exchanges and foreign institutional investors (FIIs).
A SEBI committee responsible for advising the regulator on secondary market related regulations is scheduled to meet on May 7 and will take up these important but pending matters.
“The proposal will be discussed at this panel and feedback etc. received on both key proposals will also be deliberated there after which SEBI may come up with a final circular,” said a source familiar with the matter.
The panel comprises officials from a wide spectrum of market intermediaries including exchanges, brokers, industry bodies, and depositories apart from a government representative as well.
Market participants are eagerly waiting for the finality of proposed gross and intraday Future Equivalent (FutEq) or delta equivalent based open interest limits. FutEq is calculated by aggregating change in price (delta) associated with the position.
“The key issue is fixing the intraday options limit as various stakeholders specially the big algo (HFT) traders and FPIs are seeking very high limits, the demand is ranging from Rs 5,000 to Rs 15,000 crore,” said another source aware of the development.
The higher limit is being sought so that traders are not penalised in case of a limit breach, added the source.
The regulator, however, has its own set of concerns. As per a SEBI consultation paper floated on February 24, existing monitoring mechanism for index options adds long and short notional positions to arrive at a net figure. It allows an entity to hold large long and large short notional positions that effectively net out to zero in notional terms, despite carrying significant net delta risk.
SEBI, in its consultation paper, proposed net intraday limit of Rs 1,000 crore and gross intraday limit of Rs 2,500 crore for index options. Further, net end of the day (EoD) limit of Rs 500 crore and gross limit of Rs 1,500 crore was proposed.
For index futures, SEBI proposed to enhance the EoD limit to Rs 1,500 crore from the existing Rs 500 crore and Rs 2,500 crore for intraday limit. SEBI had set the limit last in March 2020 and the proposed limit was based on the three-fold rise in index levels and trading volumes.
Incidentally, SEBI proposed these limits based on its study of November 2024 of the top 50 open interest holder’s data that showed that most top entities for the month of November had net FutEq OI in the ±500 crore range, with fewer entities at higher exposures.
SEBI further found that in 1% of instances, entities were carrying significant delta risk of over Rs 10,000 crore while staying far below that in net notional terms. SEBI is also expected to analyse the open interest data of April to get some more insights before arriving at a decision.
The other key proposal is related to fixing the derivatives expiry days for exchanges. SEBI in its March 27 draft circular has proposed that expiry of all equity derivatives contracts of an exchange will be uniformly limited to one of either Tuesdays or Thursdays. Every exchange will continue to be allowed one weekly benchmark index options contract on their chosen day -- either Tuesday or Thursday. Also, besides benchmark index options, all other equity derivatives contracts expiry will be in the last week of every month on their chosen day i.e. Tuesday or last Thursday of the month.
SEBI’s idea is to ensure that optimal spacing between expiries across exchanges is ensured, while avoiding choice of either the first day of the week or the last day as an expiry day. SEBI is of the view that spacing out of expiry days through the week reduces concentration risk and provides an opportunity to exchanges to offer product differentiation to market. Some market participants have suggested for 3 day expiry also and few are of the opinion that fixing of expiry day should be left to the exchanges only and SEBI should not intervene.
SEBI has also proposed that exchanges will have to seek prior approval of regulator before modifying the expiry days.
An email sent to SEBI seeking comments did not elicit any response till the time of publishing this story.
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