One of the key suggestions is to change the method of computing open interest (OI), which represents an excellent buying and selling position in the derivatives market.
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SEBI also plans to connect the entire market scope limit (MWPL), which limits the total open contracts for single-stock futures and options to the average daily currency volume of the underlying stock, replacing the current nominal-based quantity calculation.
The consultation paper invites public feedback until March 17 to make other recommendations, including the introduction of pre-opening and post-closure meetings for derivatives transactions, revisions to position restrictions for individual entities in single-share F&O, and new eligibility criteria for derivatives on non-base standard indexes to improve trading efficiency.
Mint Three key recommendations and their potential impact on investors were examined.
How will the incremental-based approach used for trading restrictions affect traders?
In March 2020, SEBI imposed restrictions on short-term and long positions of index futures and options, limiting net index positions ₹5 billion. Under this framework, short positions of nominal value cannot exceed participants’ holdings in the underlying stock, while long positions are limited by participants’ cash or cash-based instruments.
Regulators are now proposing to revise these restrictions to reflect market growth. The net limit recommended by SEBI is ₹5 billion and total limit ₹The index option is 15 million. For intraday trading, the net limit will be increased to ₹10 million, total limit is ₹25 billion. These changes explain the rise in index levels and the increase in trading volume.
A major shift proposed by SEBI is to use an increment-based approach to calculate transaction limits. Sebi noted in a February 24 consultation paper that while nominal values may balance positions, they can still take significant delta risks.
In options trading, incremental quantities measure the sensitivity of an option to changes in the underlying asset price, with the range of 0 to 1 for the call option from 0 to 1, while the range of POT option from -1 to 0. For example, the option with delta of 0.5 means each option ₹1 change in stock price, move in option price ₹0.5.
Kunal Nandwani, co-founder and CEO of Fintech’s Utrade Solutions, believes that the DELTA-based approach is consistent with the way professional traders assess risks. He believes that this shift will help reduce unnecessary trading bans for stocks while maintaining appropriate risk control.
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However, Arpit Jain, co-managing director of Arihant Capital Markets, warned that stricter position restrictions can limit traders’ portfolios, forcing them to reorganize their strategies into smaller positions and reduce overall flexibility.
Measuring the transfer of open interest
SEBI also proposes fundamental changes in the way open interests are measured in the derivatives market.
OI represents the total number of outstanding contracts that are not resolved or closed, such as futures and options. It is a key indicator of market liquidity, and a higher OI reflects greater liquidity.
Currently, the OI is calculated in conceptual terms by adding the number of new contracts created during the trading conference and subtracting the number of closed contracts.
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SEBI proposes a transition to future equivalents (FUTEQ) or DELTA-based calculations, which will provide more accurate measures of market risks and risk.
By adopting incremental-based OI calculations, SEBI aims to improve risk assessment, especially for traders using options strategies. Experts believe that this shift will provide a clearer understanding of actual market risks, although this may require traders to adjust their strategies.
According to Jain of Arihant Capital, current OI calculations enable traders to manipulate stock prices, sometimes pushing stocks to unnecessary ban periods. He believes that the new approach will prevent artificial stances from accumulating and better align with actual market risks.
“It adjusts the risk by only calculating the actual price-sensitive positions in futures and options (F&O). For example, if a trader has a deep currency appearance (the market impact is small), the current system still sees it as a huge position. The new approach only calculates their real impact on stock prices, making the system more fair,” Jain said.
Recalibrate market scope location restrictions
The proposal for SEBI to use a delta-based approach to calculate open interest will also require adjustments to market-wide position limits (MWPLs) in single stocks and options.
MWPL sets an upper limit on the total number of public contracts in the F&O market of stocks, and is currently identified as a lower level of two factors: an average daily stock average of 30 times the average daily stock last month, or 20% of the stock held by non-promoters. If the OI of the stock exceeds 95% of its MWPL, the exchange imposes a trading ban until it drops below 80%.
SEBI now recommends recalibrating the MWPL to better reflect actual market risks. Under the new formula, MWPL will be set to 15% of the stock’s free-flow market capitalization, or 60 times the average daily stock over the past three months.
SEBI’s internal tests suggest that this change could significantly reduce the number of stocks hitting the F&O ban period, thereby reducing it from 366 to just 27, down nearly 90%. By making market manipulation more difficult, regulators aim to create a more stable and transparent derivatives market.
Puneet Sharma, CEO and fund manager at Whitespace Alpha, believes that incorporating Delta into MWPL calculations will help prevent instances of low-risk positions that unnecessarily trigger market restrictions.
He believes that this approach will ensure that only significant market activities are regulated, thus making trading conditions smoother.
While the proposed changes can improve efficiency, some traders may face challenges in adapting to revised restrictions and margin requirements, which may lead to higher transaction costs and increased compliance burdens.
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Despite these concerns, SEBI’s recommendations ultimately aim to improve traders’ execution efficiency.
Nirbhay Vassa, group chief financial officer of Abans Holdings, believes that the measures will help smoother entry and exit F&O positions with minimal price disruption, making the market easier to access and predictable investors.
