Global F&O players push back against Sebi's proposed rule revamp

Association raises concerns with Sebi over liquidity, trading costs, and market stability in a 13-page response to Sebi

The Futures Industry Association (FIA), a global derivatives market body representing members ranging from clearing corporations to foreign portfolio investors, has voiced strong opposition to the Securities and Exchange Board of India’s (Sebi’s) proposed overhaul of open interest (OI) calculation and position limits for index futures and options (F&O).

 

In a detailed 13-page response to Sebi’s consultation paper, the FIA warned that the proposed measures could inadvertently increase the risk of price manipulation, reduce market liquidity, raise trading costs, and introduce operational complexities.

 

The FIA observed, “These changes may lead to wider bid-ask spreads, heightened market volatility, and reduced participation from institutional investors, ultimately undermining market depth and efficiency. While intended to enhance risk management, these restrictions could create inefficiencies that may paradoxically increase the likelihood of price manipulation.”

 

Sebi’s consultation paper, released on February 24, proposed a new methodology for calculating OI using a delta or future equivalent framework. It also suggested a review of market wide position limit and the introduction of position limits for single stocks and index derivatives.

 

The FIA argued that the delta-adjusted approach, uncommon in global derivatives markets, introduces substantial operational challenges.

 

“Implementing delta-adjusted thresholds requires multiple layers of calculation, monitoring, and dissemination across the trading ecosystem, increasing operational burdens and the risk of errors,” the association said. 

On Sebi’s proposed position limits for index F&O, the FIA highlighted that entities could still take large positions in short-term out-of-the-money option, which the proposed measures may fail to address.

 

The association also pointed out that gross delta limits could hinder commonly used trading strategies, such as long straddles, which consume limits without presenting additional risks beyond the premiums paid.

 

On the other hand, other strategies may carry lower risks than indicated by gross delta calculations.

 

The FIA also emphasised that such limits could severely restrict volatility traders and market makers, who play a critical role in ensuring market liquidity.

 

“This persistent demand, coupled with severely constrained liquidity supply, would create a fundamental imbalance in the market,” the association warned.

 

Currently, OI is calculated by aggregating notional OI in F&O. Sebi’s proposed shift to the delta approach aims to provide a more accurate representation of the underlying market. OI is a key metric for gauging trader activity and sentiment.

 

Sebi has said that the new measures are designed to reduce the frequency of stocks entering the ban period.

 

New regulatory steps to curb excessive trading activity in the F&O segment have already led to a sharp decline in volumes.

 

A Sebi study revealed that over 90 per cent of individual traders incur losses in the F&O segment. However, the FIA argued that reduced liquidity could further harm retail traders.

 

“Retail traders could face greater losses when crossing spreads, while market integrity may weaken as misalignments between instruments — such as options within a series or futures versus the underlying asset — become more frequent,” the FIA added.

 

The association has recommended retaining the existing end-of-day (EOD) gross notional OI limit without introducing delta adjustments. If Sebi proceeds with the delta-adjusted limit, the FIA has suggested a threshold of ₹7,500 crore.

 

Sebi has proposed increasing the EOD limit for index futures from ₹500 crore to ₹1,500 crore. 

At a crossroads

 

> Liquidity at risk: FIA argues Sebi’s proposals could drain liquidity and hike trading costs

> New OI formula: Sebi pushes for delta-adjusted OI calculation and revised position limits

> Regulator’s justification: Aims to align F&O with cash markets, curb stock ban instances

> Industry pushback: Traders, market makers, and retail investors may face higher risks

> FIA’s counter: Calls for a rethink, suggests ₹7,500 crore as the EOD Net FutEq limit