FIA seeks guardrails in Sebi's new options strike price framework

FIA backed Sebi's proposed framework for options strike prices while seeking safeguards for contracts with open interest and simpler implementation across exchanges

The Futures Industry Association (FIA), a global body representing brokers and derivatives market participants, has backed the Securities and Exchange Board of India’s (Sebi’s) proposal to introduce a framework for strike prices of options contracts, while also suggesting safeguards to protect positions with open interest and measures to reduce operational complexity.

 

The association suggested minimum common standards and minimum strike floors for implementation across exchanges. “While exchanges should retain flexibility to calibrate strike intervals by segment and product, there should be clear minimum requirements prescribed for the number of in-the-money (ITM) and out-of-the-money (OTM) strikes to be made available,” FIA said in its response submitted to Sebi.

 

In May, Sebi floated a consultation paper proposing a framework governing the introduction and ongoing management of strike prices for options contracts, the equities market's highest volume-generating segment.

 

The proposed measures include rules for introducing options contracts to ensure the availability of a minimum number of ITM and OTM contracts, daily reviews of strike availability around prevailing market prices to maintain trading continuity, and periodic removal of strike prices significantly away from prevailing market levels.

 

The proposal followed concerns that sharp intraday swings in underlying assets could push prices beyond the farthest available strike price, leaving traders without suitable options contracts to hedge or take positions.

 

A strike price refers to the predetermined price at which an options trader has the right, but not the obligation, to buy or sell the underlying security. A strike interval refers to the gap between two strike prices and is designed to balance product availability with market liquidity.

 

In its response to Sebi, the association supported the proposal to introduce new strikes intraday in the direction of price movement but raised concerns about removing strike prices.

 

“If a strike is purged, disabled, removed or otherwise made unavailable while open interest remains, participants may be left with exercise or expiry as the only practical means of exit, which may be inefficient or inappropriate depending on market conditions and the participant’s risk management needs,” it said.

 

FIA emphasised the importance of maintaining a sufficient number of strikes around the at-the-money level to support effective price discovery and hedging. It cautioned that overly restrictive frameworks could impair trading strategies and reduce market efficiency. At the same time, it supported measures that avoid excessive proliferation of illiquid strike prices, suggesting a balanced approach between availability and liquidity.

 

The industry body also highlighted the need for operational simplicity and automation when introducing new strikes. It recommended that any additions to strike prices should be disseminated through existing, standardised exchange mechanisms such as Financial Information Exchange protocols, binary feeds, and contract master files. This, it said, would ensure seamless integration into trading systems without requiring manual intervention, thereby reducing operational risks and complexity.

 

FIA backed the idea of periodically reviewing the strike price framework but suggested formalising it into an annual process involving industry stakeholders. Such a review would help assess whether the framework remains appropriate under evolving market conditions and across different products.