Exclusive SEBI Set to Unveil Bold Measures to Tame F&O Frenzy

In order to control the rapidly increasing Futures and Options (F&O) market activity, the Securities and Exchange Board of India (SEBI) is considering taking further action. In an effort to alter the way activity in equity derivatives is measured, SEBI is now concentrating on a medium-term approach with a “five-sutra” strategy, following the introduction of a “seven-sutra” short-term plan.

Exclusive SEBI Set to Unveil Bold Measures

Principal Aspects of the Five-Sutra Approach

1. Redefining the Calculation of Open Interest:

Future Equivalent Open Interest (Fut EQ OI) is a new approach that SEBI is proposing for determining Open Interest (OI). This new metric will provide light on the volatility-based inherent risk in derivative positions. As it only aggregates participant activity without taking market risk into account, the current OI formulation does not fairly represent market risk. describing the danger that is present. By restricting sizable Out of the Money (OTM) bets that might force a stock into a ban period, this modification seeks to stop possible market manipulation.

2. Market Wide Position Limit (MWPL) Rescaling:

The Fut EQ OI will be used to modify the MWPL. In order to determine a new cap, SEBI suggests examining the link between Fut EQ OI and Notional OI over a number of months. For example, the MWPL for the following expiry would be reduced if the average Fut EQ OI is 50% of the Notional OI.

3. Correlating Cash Volume with Derivatives Activity:

SEBI intends to connect Fut EQ OI to the Average Daily Delivery Value (ADDV) in the cash market in order to minimize overheating in the derivatives market. By linking the two markets, the risk of market disruptions is reduced since the underlying cash market is guaranteed to have sufficient liquidity to absorb any excess supply or demand from the derivatives market.

4. MWPL Intraday Monitoring:

Instead of only checking Fut EQ OI at the end of the day, SEBI advises monitoring it several times during the day. The purpose of this modification is to stop unforeseen MWPL violations that might result in a scrip entering a ban period.

5. Single Stock Individual Position Limits:

To avoid a concentration of open holdings among a small number of companies, SEBI is thinking about modifying the individual position limitations for specific equities. The new restrictions would connect the position limits in individual stocks to the overall open interest (OI) in the scrip on all exchanges.

Expert Perspectives, Exclusive SEBI Set to Unveil Bold Measures

In his remarks at FICCI CAPAM, SEBWI hole-time member Ananth Narayan made a suggestion on these new measures: “The way we measure positions in the case of F&O is based on nationals added across futures and options, which does not make sense.” Our goal is to transition to a metric that is delta comparable or future equivalent.

Sources with knowledge of the situation claim that these steps have been discussed for the previous 12 months. But the F&O market’s growing volumes and concerns have sped up the process, so much so that SEBI formed an expert working group to suggest both short- and long-term solutions.

As SEBI continues to hone its tactics to guarantee a fair and transparent derivatives market, stay tuned for additional developments marketplace.

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