SEBI Proposes New Method Of Calculating Open Interest In F&O Market

Market regulator Securities and Exchange Board of India proposed a shift to a ‘Future Equivalent’ method of calculating open interest (IO) in the equity derivatives market on Monday. This is being 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.

“These changes will not materially affect small investors beyond reducing the frequency of stocks entering the ban period, thereby simplifying their trading experience,” the paper read.

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.

It is important to understand that if a ban period is triggered for a stock, new positions will not be opened for the existing F&O contracts for that particular stock. Only exiting a previously opened position will be allowed to a trader.

The market regulator has also suggested changes regarding the market-wide position limits or MWPL, which decide how much trading can take place in a stock. Currently, it is set at 20% of a stock’s free-float market capitalisation. SEBI is proposing a new formula where MWPL will be the lower of 15% of free-float market capitalisation or 60 times the average daily delivery value (ADDV) in the cash market.

As per the suggestion paper released by the regulator, back-testing of market data from July to Sept 2024 showed that the change could reduce stocks entering the ban period by over 90%—from 366 instances down to just 27.

At present, MWPL breaches are checked only at the end of the trading day. SEBI now plans to introduce intraday monitoring at least four random times per session. This will help prevent large, sudden risks and allow traders to react quickly to changes.

SEBI is also tightening the eligibility criteria for derivatives on non-benchmark indices. Currently, many sectoral and thematic indices have a few dominant stocks that can lead to excessive concentration of risk.

Under the new proposal, any non-benchmark index will need to have at least 14 stocks, with no single stock exceeding 20% weightage. The top three stocks together cannot have more than 45% weightage, and all other stocks must have decreasing weights. This rule will ensure that index derivatives remain diversified and less prone to manipulation.

The suggestions are open for public consultation till Mar 17, 2025.