Top Sebi panel to meet today on F&O 2.0 regulations and expiry days

As per sources, the panel will deliberate on the feedbacks received on key proposals of relooking at how the risk is measured in equity F&O segment, other related issues and also on fixing the F&O expiry days.

Market regulator Sebi’s panel on secondary market is slated to meet on May 7 to finalize the next set of changes in equity derivatives, or Futures & Options (F&O) segment.

Sources have told Moneycontrol that the panel is likely to deliberate the feedback received on key proposals of relooking at how risk is measured in equity F&O segment, among other issues, as well as on fixing F&O expiry days. Sebi had floated a consultation paper on both proposals and after collating feedback, the regulator will share its views.

The Sebi panel will deliberate on key proposals of the consultation paper titled ‘Enhancing Trading Convenience and Strengthening Risk Monitoring in Equity Derivatives’, and has proposed a second leg of regulatory changes for equity F&O through this paper.

The key issues to be covered in the panel meeting are:

New Method of Measuring Open Interest (OI)

Sebi is considering the idea of moving to a FutEq OI or delta-based open interest instead of notional OI. A delta-based OI considers the price sensitivity of each contract, and Sebi believes this will give a better picture of risk than the existing method of relying on notional OI. Open Interest implies the number of contracts which are open and not settled in the market. FutEq OI is calculated by aggregating change in price (delta) associated with the position, and this is expected to ensure shares are not artificially pushed into the ban period.

Linking of MWPL with Cash Volume

The linking of market-wide position limit (MWPL) with cash market volume is also expected to be considered by the Sebi panel. MWPL is a trading limit set by stock exchanges to prevent excessive speculation and maintain market integrity on a particular stock. Sebi had proposed this mechanism to 15 percent of free float of market capitalization, or 60-times the cash market volume, across exchanges. This linkage to cash volume is expected to set a limit on derivative positions in a stock, and may also reduce instances of stocks going into the ban period. Instead, the proposed new measure may open up ways to allow trades even during the ban period, if such trades lead to reduction of risk.

Intraday Monitoring of MWPL

Sebi also wants intraday monitoring of market wide position limit (MWPL) utilization for single stocks. Currently, MWPL is checked at the end of day across all exchanges. The regulator is of the view that solely monitoring MWPL at the end of day may not be adequate to address the real time risk. Sebi wants clearing corporations to perform intraday monitoring at least four times during a trading session on a real-time basis, it is learnt, and it is expected to limit settlement risk from intraday spikes in delta-based open interest.

Fixing Intraday Position Limits

Another key issue for the Sebi panel to deliberate is about fixing of intraday position limits for index futures and options. The regulator’s proposal based on November 2024 data had suggested an intraday limit of Rs 1,000 crore and gross intraday limit of Rs 2,500 crore for index options, and net end of the day (EoD) limit of Rs 500 crore and gross limit of Rs 1500 crore.

For Index Futures, Sebi has proposed to enhance the EoD limit to Rs 1,500 crore from existing Rs 500 crore and Rs 2500 crore for intraday limit. This limit was last set in March 2020, and the proposed limit is based on a three-fold rise in index levels and trading volumes since then.

Large algo traders and foreign portfolio investors (FPIs) have sought very high limits ranging from Rs 5000-15000 crore, as higher limits are sought to avoid penalties in case of a limit breach. Sebi is also expected to analyse the April data of intraday positions, before finalizing the above limits. Stock market brokers are not happy with the proposed limits, as they fear it could further bring down F&O volume, a key source of their revenue.

Pre and Post Open Session for F&O

Another idea is of a pre-open and post market session for F&O, just like the cash segment, and is likely to be discussed in the Sebi panel meeting. Extending pre-open and post-closing sessions to F&O could improve alignment between the two segments, and enhance price discovery.

Criteria for F&O on Non-benchmark Indices

Sebi has also proposed to overhaul the criteria for derivatives on non-benchmark indices, with measures like a minimum of 14 constituents in the indices, capping weightage of top constituent at or below 20 percent, and combined weightage of top three constituent’s at or below 45 percent.

Individual Position Limits for Single Stocks

To allay the fears of manipulation, the individual level position limits for single stocks is also being proposed by Sebi. Like for clients and prop brokers, 5 percent of MWPL or 20 percent of FutEq is being proposed. Similarly, for prop and client-facing stock broker as well as category 1 FPIs and mutual funds, Sebi has proposed the limit of 20 percent of MWPL or 30 percent of FutEq across all exchanges. For corporates, family offices etc, the proposed limit was 10 percent of MWPL or 15 percent of FutEq.

Fixing the Expiry Days

Secondary market panel is also likely to discuss on another key issue of fixing the F&O expiry days for exchanges. Sebi in its March 27 draft circular has proposed that expiry of all equity F&O contracts will be uniformly limited to one of the 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 derivative contracts will be in the last week of every month, on their chosen day i.e. Tuesday or last Thursday of the month.

As per sources, the contentious issues where difference of opinion have emerged among stakeholders are fixing of index position limits, linkage of MWPL to cash volume, and fixing of expiry days for F&O. On the rest of the proposals, members of the Sebi panel were more of less aligned, it is learnt.