Sebi unveils new OI metric, position limits in fresh F&O overhaul

Sebi introduces delta-based OI calculation and new position limits in F&O market with phased rollout from July to December to curb manipulation and enhance risk control

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The Securities and Exchange Board of India (Sebi) on Thursday unveiled a new set of measures for the derivatives segment, introducing a fresh formulation to calculate open interest (OI) and market-wide position limits (MWPL).

 

The changes aim to improve risk monitoring, reduce the frequency of stocks entering the futures and options (F&O) ban period, and tighten oversight of manipulation risks and concentration in index options.

 

These measures, originally outlined in a Sebi consultation paper, had sparked concerns that they could further dent trading activity. F&O volumes are already down 30 per cent from the peak. However, after extended discussions with the industry, Sebi revised several key proposals.

 

The eight key measures will be implemented in a phased manner between July and December.

 

OI, a key indicator of trader sentiment and market activity, and MWPL, the cap on aggregate open contracts, will now be recalculated using new parameters.

 

The OI will be computed at a portfolio level by calculating net delta-adjusted open positions across F&O contracts. Delta denotes the sensitivity of the derivative’s price to movements in the underlying asset.

 

“Gross addition of such net Future Equivalent Open Interest (FutEq OI) across all Unique Client Codes (UCCs) would form the FutEq OI for the stock/index derivatives,” said Sebi.

 

Under the new norms, MWPL will be set as the lower of 15 per cent of free float or 65x the average daily delivery value (ADDV) across clearing corporations, with a minimum floor of 10 per cent of free float. The metric will be linked to cash market delivery volumes to reduce manipulation risk and will be recalculated every three months based on rolling ADDV.

 

Stock exchanges will conduct intraday monitoring of MWPL utilisation at least four random times daily. This is to help mitigate settlement risks due to intraday spikes.

 

For index options, Sebi has prescribed a net end-of-day FutEq OI limit of Rs 1,500 crore and a gross limit of Rs 10,000 crore.

 

For index futures, category-I foreign portfolio investors (FPIs), mutual funds, and proprietary brokers will have a limit of Rs 500 crore or 15 per cent of futures OI, whichever is higher. For other FPIs, such as individuals, family offices and corporates, the limit is the higher of Rs 500 crore or 5 per cent of futures OI. 

 

Sebi clarified that passive breaches due to a fall in market-wide OI will not be treated as violations.

 

“Stock exchanges shall prepare a joint SOP, in consultation with Sebi, to strictly monitor intraday positions and trading activities of major participants from the perspective of market integrity/surveillance concerns and take appropriate measures,” said Sebi.

 

Sebi said the limits are designed to “strike a balance between market stability and fear of manipulation of underlying constituents associated with a large size index position”. These limits will be applicable at the PAN level.

 

Entities will be allowed additional exposure under conditions such as when their aggregate short index derivative positions do not exceed their underlying stock holdings.

 

Other major changes:

 

A pre-open session will now be extended to current-month futures contracts on both single stocks and indices, similar to the cash market’s pre-open and post-closing sessions.

 

Sebi has also revised the eligibility criteria for derivatives on non-benchmark indices. Such indices must have at least 14 constituents, with the top constituent’s weight below 20 per cent. The combined weight of the top three scrips should be under 45 per cent.

 

Stock exchanges must submit proposals for non-benchmark indices with derivative contracts to Sebi within 30 days. Currently, indices such as Bankex and Nifty Bank have active derivatives.

 

Sebi has imposed individual entity-level position limits for single stocks: mutual funds are capped at 30 per cent of MWPL and proprietary brokers at 20 per cent.

 

Clearing corporations have been directed to draft an SOP within a month, in consultation with Sebi, to monitor end-of-day delta positions of entities and to establish penalty structures.