SEBI overhauls F&O regulations to boost risk monitoring and market alignment

The Securities and Exchange Board of India (SEBI) has issued a comprehensive circular introducing sweeping changes to the regulatory framework of the equity derivatives market. The new measures aim to strengthen risk controls, improve alignment with the cash market, and ensure fair and orderly participation across all market participants.

One of the most significant changes is the recalibration of the Market Wide Position Limit (MWPL). Until now, MWPL was based solely on a stock's free float. The revised structure introduces a dual benchmark: the lower of 15% of free float or 65 times the average daily delivery value (ADDV), with a minimum floor of 10% of free float. This shift is designed to make position limits more reflective of actual trading activity and to reduce unwarranted F&O bans.

SEBI has also refined how open interest is calculated. Instead of simply counting notional positions, the new framework will measure open interest using a Delta-adjusted Future Equivalent (FutEq) approach. This offers a more risk-sensitive metric by adjusting each position based on its sensitivity to the underlying asset's price movements.

In a bid to discourage speculative pressure during F&O ban periods, SEBI now mandates that any positions taken after a stock enters a ban must result in a net reduction of delta-based open interest. Exchanges and clearing corporations will track these delta positions daily, with specific guidelines on what constitutes an acceptable reduction.

To further curb systemic risk, exchanges must monitor MWPL usage intraday at least four random times per session. This real-time surveillance will help detect sudden build-ups in positions and trigger early warning systems, including additional surveillance margins or scrutiny of participant-level concentration.

SEBI has also increased position limits in index derivatives. For index options, the net end-of-day FutEq position is capped at Rs 1,500 crore, while gross long and short positions cannot exceed Rs 10,000 crore each. These limits will be phased in from July to December 2025, allowing institutions to adjust their systems for delta monitoring.

Index futures now come with tiered position limits based on participant type, such as FPI Category I, mutual funds, or trading members. Limits are calculated as the higher of a specified percentage of market-wide open interest or a fixed rupee amount, ensuring flexibility for different types of investors.

Another key reform is the introduction of a pre-open session in the derivatives market, aligned with the cash market structure. This will initially cover current-month futures and extend to next-month contracts during the rollover week, supporting better price discovery and transition between expiries.

To prevent index manipulation, SEBI has tightened eligibility criteria for launching derivatives on non-benchmark indices. Requirements now include a minimum of 14 constituents, caps on the weight of top stocks, and a descending order of constituent weights to ensure balanced representation.

Entity-level position limits for single stocks have also been revised, now linked directly to the recalibrated MWPL. This recalibration applies different thresholds for clients, proprietary trading members, mutual funds, and various FPI categories. Exchanges will develop new monitoring frameworks to flag excessive concentration or risk from large positions.

All these changes will be phased in between July and December 2025. The circular mandates exchanges and clearing corporations to update their rules, systems, and standard operating procedures (SOPs) in line with the new framework.

With these reforms, SEBI intends to create a derivatives market that is more transparent, tightly supervised, and better aligned with the real economy, without curbing genuine risk management or price discovery.

Powered by Capital Market - Live News