SEBI Plans To Relax Proposed Limits On Index Options Trading

The Securities and Exchange Board of India is likely to ease the proposed curbs on trading in Index Options, by introducing a much higher threshold for net and gross position limits, sources privy to the matter told NDTV Profit.

The sources indicated that SEBI is leaning towards allowing a net end of the day limit of Rs 1,500 crore and a gross limit of Rs 10,000 crore (each side) for Index Options. As per the previous proposal of the regulator, the net end of the day limit was Rs 500 crore only with a gross limit of Rs 1,500 crore.

Notably, intraday trading in index options is likely to be exempt from any cap, as per the people in the know. Instead, a robust surveillance protocol will be implemented where exchanges, in coordination with SEBI, will monitor intraday positions up to four times a day. If a trader's exposure breaches certain thresholds, the regulator will investigate for possible concentration or manipulation.

The decision to moderate its earlier stance comes after SEBI reviewed a wide range of public comments received in response to its consultation paper. A key distinction was drawn between long-term regulatory policy and the more immediate needs of market surveillance.

The regulator is also moving towards a delta-based open interest metric instead of the traditional notional method. This approach accounts for the actual economic exposure of options trades rather than their notional size, which can be misleading.

In a consultation paper released on Feb. 25, SEBI proposed a shift to a ‘future equivalent’ method of calculating open interest (IO) in the equity derivatives market on Monday. This was suggested in place of a notional value-based method of calculation of IO, to prevent the stocks from being manipulated and pushed into a ban period.

The notional value calculation is based on the addition of values of all futures and contracts without giving significance to the actual risk. This may make a stock look heavily traded and trigger a ban period in an unfair method. Whereas, a future equivalent method calculates the open interest based on how much a contract moves with a stock instead of its total value. Hence, this proposed method would show a more realistic image of market risk.