A short brief on the new SEBI measures for the F&O space

The Indian F&O market has grown significantly over the past five years, and this has triggered various market reactions. In November 2024, SEBI implemented a range of measures targeted at reducing market volatility, especially from daily index expiries—including limiting weekly expiries to only Nifty and Sensex contracts, increasing the lot size from 5-10L to 15-20L, and increasing margins for expiry day trading. While these changes have somewhat reduced market volatility, the story is far from over.

SEBI has proposed a long list of further measures to strengthen the risk monitoring framework in the equity derivatives segment. The new proposals touch everything from Open Interest calculations to position limits, ban period rules, and even an all-new pre-open and post-market session for futures.

I’ll try to explain all these changes briefly in this post.

Open interest calculation

The first and probably the biggest change in the circular is moving to a delta-based calculation of open interest as opposed to the current notional open interest. Before I explain the change, I will attempt to explain delta. Delta is the rate of change in the option relative to every rupee movement in the underlying stock and is used to calculate the risk of a contract. What this means is that an option with a delta of 0.5 would mean a 0.5 rupee change in the option price for every 1 rupee movement in the underlying. Delta ranges between -1 and 1 (-1 to 0 for Put options and 0 to +1 for calls). Now, back to the proposed change, a net delta of all open futures and options will be calculated to determine the market open interest. This approach is better than the current notional open interest calculation today, where every contract is considered to have an OI of 1. The notional OI is not helpful in differentiating the risk of a deep OTM option where the delta is close to 0 against a deep ITM option with a delta value close to 1, with a similar risk profile to a futures contract. This is also known as Futures equivalent (FutEq) OI.

SEBI has instructed the exchanges to disseminate FutEq OI of all F&O contracts, both at the exchange and individual contract levels. Given that the exchange OI is spread across various strikes for an underlying, we can expect the delta OI numbers to be between 40% and 60% of the notional OI based on concentrations of volumes at different points of the option chain.

Position limits for index F&O contracts

This measure affects all the large market participants and could potentially make a longer-term impact on volumes and reduce volatility in the market.

Index options

Right now, one can take overnight positions up to 500 Cr net notional contract value in index options. Introduced in March 2020, it is called the sentimental OI limit by market participants colloquially. Each Nifty option contract has a notional value of around 18-20L. So with a net limit of 500 Cr, you can technically take 2500 lots of unhedged options. If you’re running various spreads in your portfolio, you can take way more positions, but your unhedged quantity stays capped at 2500 lots.

While this might sound like a massive limit for retail traders, it’s actually quite easy to breach with a few crores. And here’s what we’ve been seeing in the market: larger participants who have short positions in ITM/ATM strikes have figured out a workaround. They simply buy cheap deep OTM contracts to stay within the notional OI limit. Sure, they’re technically compliant, but this completely defeats the original purpose of containing risk.

We are now moving from notional OI calculations to FutEq or Delta OI. This means that OI will now be netted off for a portfolio. They’re also increasing the net limit to 1500 Cr—a 3x jump that makes sense given that index market caps have gone up 2-3x since March 2020.

However, SEBI has also introduced a gross limit of 10,000 Cr (the higher of the total long or short FutEq OI). This ensures that no single entity can create a position so large that it becomes a systemic risk for the markets.

SEBI’s consultation paper had some interesting data. They looked at the top 50 OI holders and found that in about 11% of all instances monitored, these entities would cross the 500 Cr limit and reach 10,000 Cr under the new FutEq calculations. This tells us these players were already taking pretty substantial directional bets.

Index futures

There has been little change in futures, and the net OI limit remains at 500 Cr or 5-15% of total futures OI (it varies for different entities).

Given that this is a huge change and large firms will require changes in their systems, SEBI has offered a glide path mechanism from July till December 2025 where traders will be allowed time till the next day to reduce their positions in case of violations to avoid penalties.

Changes to Market Wide Position Limits (MWPL)

Currently, the MWPL, or the maximum open interest possible for an index or stock derivatives contract, is 20% of the free float shareholding. This is now revised to the lower of 15% or 65 times the average daily delivery value of the stock in the cash market (representing 3 months of trading). The reduction from 20% to 15% is due to lower OI due to the change in calculation to FutEq instead of notional.

This additional ADDV check ensures that the F&O contracts are not over-concentrated relative to the activity in the cash market. It also reduces the risk of failure of physical delivery settlement and keeps both markets in cohesion.

In our analysis, we didn’t find any stock derivatives where 65 times the ADDV was higher than the 15% MWPL limits. However, this might come in useful if there is a drop in the equity cash volumes in certain counters.

Position creation in single stocks F&O during ban period

During the early days of COVID in March 2020, SEBI completely restricted rolling over of contracts to a different expiry or strike while maintaining the same OI for stocks in ban period. Traders could only exit their current open positions until the ban period was lifted. However, with the introduction of FutEq OI, SEBI has now allowed entering into a new position or rolling over to another as long as the net FutEq OI of the account is lower than earlier. This is a great move, as traders will now be able to readjust their positions instead of having to square off their positions.

Pre-open and Post-market sessions for the F&O segment

The equity segment has a pre-open session where orders are collected and matched to obtain an equilibrium price for all listed stocks. This is the price at which the stock opens at 9:15 AM, easing any form of gaps in the market without added volatility. However, futures and options tend to be volatile at market open due to divergences from the underlying stocks. To ease this, SEBI is now introducing a pre-open session for all current-month futures contracts. Additionally, the next-month contract will also be part of the pre-open session during the last 5 trading days of the current-month contract.

Change in eligibility criteria for derivatives on non-benchmark indices

SEBI has already defined criteria for the introduction of F&O contracts in indices. These include:

• 80% of the index must comprise stocks individually eligible for derivatives.
• No ineligible stock in the index should have a weightage of more than 5%.
• A continuously monitored product success framework to remain in F&O.

Apart from these, four more criteria are being introduced:

• Minimum of 14 constituents.
• Top constituent’s weight ≤ 20%
• Combined weight of the top three constituents ≤ 45%
• All other constituents’ individual weights must be lower than those of the higher-weighted constituents (i.e., a descending weight structure).

These new requirements will now require changes in the Bank Nifty and Bankex and subsequent re-introduction of these F&O contracts.

Individual entity-level position limits for single-stock F&O

The position limits for single-stock F&O contracts were a combination of free-float, OI and MWPL. This would cause variance for different market participants in contracts with low OI and high MWPL and various other combinations. It’s now been streamlined as a percentage of MWPL, bringing uniformity to all market participants.

Intraday monitoring of OI for single-stock F&O contracts

Currently, OI for both stock and index F&O is monitored at the end of the day at two different levels: the individual client level and the trading member (broker) level.

For individual clients, the limits are 5 to 10% of the total OI (differs with the type of entity registered with the exchanges) and 20% of the MWPL for trading members.

While large traders/prop firms tend to ensure they remain within the limits before market close, there is a possibility that they breach these limits during the day. SEBI is trying to close this loophole. This can be a problem for newly introduced stocks in F&O with low free-float shares, where a large position during the day can create pressure in the underlying cash market. The exchanges will now take four random snapshots of open positions and charge reasonable additional surveillance margins and other penal action.