Sebi proposes fresh steps to tighten derivative market rules to reduce risk

India's markets regulator has proposed lowering position limits for equity stock derivatives and tightening rules for index derivatives, in a bid to further reduce the build-up of risk in these markets.

The new proposals follow changes announced in October, where the Securities and Exchange Board of India (Sebi) raised the entry barrier for trading in derivatives and made it more costly to trade to protect retail investors.

The fresh proposals come against the backdrop of concerns that volatility from the futures and options market is spilling over into the broader stock market, which has slipped sharply after hitting record highs in September 2024.

In a consultation paper released late on Monday, Sebi proposed that the market-wide position limit for single-stock derivatives should be linked to the cash markets.

It proposed to set this position limit at the lower of 15 per cent of the free-float market capitalisation of a stock or 60-times the average daily delivery value.

This will reduce the potential manipulation and better align derivatives risk with the underlying cash market liquidity, Sebi said.

The regulator also proposed that derivatives on indices other than the benchmarks BSE Sensex and NSE Nifty 50 only be offered if the index meets certain criteria.

"Index derivatives are cash-settled, but the nexus between cash and derivative markets nevertheless exists," Sebi said.

"If a high proportion of index weightage is attributable to a small number of stocks, participants could effectively replicate a large (and unmonitored) position in those constituents, giving rise to fears or risks of market manipulation and/ or excessive market volatility," it said.

To curb this, Sebi proposed that derivative contracts be introduced only on indices that have a minimum 14 constituents.

Also, the combined weight of the top three constituents of the indexes should be less than 45 per cent and the top constituent should not have a weight of more than 20 per cent, it said.

Sebi also proposed that the practice of a pre-open session, prevalent in the cash market, be introduced to the futures market, starting with current-month futures on both single stocks and indices.

Sebi has sought feedback on these proposals from market participants till March 17.