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Informist, Monday, May 12, 2025

 

By Rajesh Gajra

 

NEW DELHI – The Securities and Exchange Board of India has received favorable feedback from market participants and investors on the core proposal in its Feb. 24 consultation paper on increasing risk-control measures in equity derivatives trading, according to an official. The consultation paper had proposed replacing notional turnover-based open interest determination in equity derivatives with futures equivalent or delta-based methodology. The market regulator strongly believes this switch will reduce instances of stocks being pushed into a ban period due to breach in open interest limits but without meaningful buildup of risk, and prevent circumvention of intended position limits for index derivatives.

 

The stock market regulator is likely to issue a circular soon, notifying this switch to a futures equivalent, or delta, approach in formulating open interest positions on which limits and other risk-control measures would be applied by stock exchanges, the official said. A futures equivalent or delta calculation for open interest position in the market is the aggregate of clients' net delta open interest positions in futures and options in a particular stock or index.

 

Delta is the change in the options or futures price for a particular change in the price of the underlying. A long futures position has a delta of 1, while long call and short put positions have positive delta between 0 and 1, and short call and long put positions have delta between 0 and -1.

 

Current SEBI rules require stock exchanges to add long and short notional turnover exposure to arrive at a net open interest for each client and the aggregate of all clients is taken to the overall open interest position. "This allows an entity to hold large long and large short notional positions that effectively net out to zero in notional terms, despite carrying significant net Delta risk. As an example, long at-the-money call options and short out-of-the-money call options would not show net notional utilisation, while implying a large net (long) delta risk," SEBI had said in the Feb. 24 consultation paper.

 

This will be the second phase of reforms in equity derivatives rules following the first one when SEBI issued the Oct. 1 circular, outlining six major changes in the index derivatives framework, the most significant being restricting weekly expiry index options to only one benchmark index per exchange.

 

Of the public comments received on the Feb. 24 consultation paper's main proposal on switching to delta-based open interest determination methodology, 88% have agreed, strongly, generally, or partially. Of other eight proposals, seven got public approval of more than 75%, agreeing, strongly, generally, or partially.

 

There was only one proposal on position limits for index futures options on which SEBI has received only 45% public approval, with the balance against it. SEBI had proposed that end-of-day index options open interest be limited to net delta of INR 5 billion and gross delta of INR 15 billion.

 

There have been concerns that the proposed limits on index options open interest position, which is based on delta methodology, could result in forced unwinding during sharp price movements, upwards or downwards, to stay within the limits, which could amplify market runs or declines and destabilise the derivatives market. Futures Industry Association, a world body of derivatives traders and participants, had written to SEBI, arguing that the impact of this proposal could include "ripple effects extending to the underlying equity markets", and contraction in overall market liquidity.

 

SEBI has taken cognisance of such feedback and may relax the net delta limits on end-of-day open interest in index options to INR 15 billion and the gross delta limit to INR 100 billion, according to the official. The market regulator may also not require intraday limits, as proposed earlier in the consultation paper.

 

This, according to SEBI, will not stifle legitimate trading activity by investors and market participants. To balance the relaxations with the consequent rise in risks, SEBI and stock exchanges will raise the surveillance bar and carry out multiple intraday and end-of-day surveillance checks to prevent manipulative activities, according to the official. The focus will be on strict enforcement to prevent breaches of new limits or attempted circumvention and manipulation of the rules, the official said.  End

 

Edited by Avishek Dutta

 

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