F&O Phase 2 Regulations: SEBI Relaxes Proposed Limits On Index Options Trading

The Securities and Exchange Board of India on Thursday relaxed the proposed curbs on trading in Index Options, by introducing a much higher threshold for net and gross position limits.

SEBI is 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-day limit was Rs 500 crore only with a gross limit of Rs 1,500 crore.

Another important change is the adoption of a new method to measure open interest. This involves computing “Future Equivalent Open Interest” (FutEq OI) using delta-adjusted positions across futures and options. This approach is expected to present a more accurate picture of market risk.

The Market Wide Position Limit (MWPL) for single stocks has also been recalibrated. It will now be the lower of 15% of the stock's free float or 65 times its Average Daily Delivery Value, with a minimum threshold of 10% of free float.

This adjustment ties derivatives exposure more closely to cash market activity. This will prevent artificial restrictions and manipulation.

The Market Wide Position Limit (MWPL) for single stocks has also been recalibrated. It will now be the lower of 15% of the stock's free float or 65 times its Average Daily Delivery Value, with a minimum threshold of 10% of free float. This adjustment ties derivatives exposure more closely to cash market activity and is designed to prevent artificial restrictions and manipulation.

In another shift, stock exchanges will now monitor MWPL usage not just at the end of the day but at least four times a day at random intervals.

SEBI has also extended the pre-open session to derivatives, similar to the pre-open in the cash market. This will initially cover current-month futures contracts. Also, in the last five trading days before expiry, it will include next-month futures to help manage rollover activity smoothly.

In order to help market participants transition to these limits, SEBI has introduced a glide path until Dec. 5, 2025.

Limits at the individual entity level have also been revised. For example, clients and smaller FPIs (like individuals and corporates) can now hold up to 10% of a stock's MWPL.

Trading members acting on their own account can go up to 20%, and those acting for clients or large funds can go up to 30%.

Exchanges and clearing corporations will keep a close watch on anyone holding a large percentage of open interest in any stock and will take action if it poses risks to market integrity.