SEBI Expected to Revise Intraday Gross Limits in Index Options

Unlikely to Meet International Demand on EOD Limits

Market Regulator Considers Industry Feedback on Proposed Derivatives Limits

The Securities and Exchange Board of India (SEBI) is likely to revise its proposed intraday gross future-equivalent (FutEq) or delta-based open interest (OI) limits for index derivatives following extensive industry feedback. However, the regulator is unlikely to approve a substantial increase in the end-of-day (EOD) delta-based limit, sources told Moneycontrol.

The Futures Industry Association (FIA), which represents global hedge funds and institutional investors—including Jane Street and Citadel—had requested an increase in EOD net index future equivalent limits to ₹7,500 crore. However, market regulators and fund managers believe such a high threshold could expose the market to excessive risk and potential manipulation.

SEBI’s Focus on Risk Management and Market Stability

On February 24, SEBI issued a consultation paper titled “Enhancing Trading Convenience and Strengthening Risk Monitoring in Equity Derivatives.” The paper proposed key changes aimed at:

• Improving market disclosure to enhance transparency.
• Reducing instances of stocks entering spurious ban periods due to sudden spikes in derivative positions.
• Tracking individual positions and concentrations better in index derivatives to improve risk management and prevent manipulation.

According to Ananth Narayan, Whole-Time Member of SEBI, these proposed changes are intended to enhance risk management and curb potential market abuses, especially in index derivatives trading.

Industry Calls for Higher Intraday Gross Limits in Index Options

The original consultation paper proposed setting the intraday gross delta-based limit at ₹2,500 crore. However, in response to the feedback received from market participants, some industry players have asked for:

• A twofold increase to ₹5,000 crore.
• A threefold or even fourfold increase, citing trading constraints that could impact liquidity and hedging strategies.

Sources indicate that SEBI is likely to raise this intraday limit, given that industry players have voiced concerns about the impact on their trading operations.

Market Concerns Over Raising EOD Limits to ₹7,500 Crore

Despite the likely increase in intraday gross limits, SEBI is expected to reject FIA’s request for a higher EOD net limit of ₹7,500 crore. Fund managers have expressed concerns that such a high limit could leave the Indian derivatives market vulnerable to large-scale manipulation.

• The consultation paper highlighted that only a handful of market participants held more than ₹10,000 crore in net delta-based OI.
• A study of trading positions in November 2024 found that 89% of instances involved OI below ₹500 crore, while only 1% had positions exceeding ₹10,000 crore.
• Given these figures, SEBI appears to be cautious about allowing limits that could disproportionately benefit a few large international players while increasing risks for the broader market.

Traders Warn Against Market Manipulation Risks

According to Mayank Bansal, a leading options trader, raising the EOD net delta-based limit to ₹7,500 crore would enable select players to accumulate large derivatives positions and influence market movements through synthetic forwards and deep in-the-money (ITM) options.

“This kind of positioning raises concerns about violent manipulation, where a trader can build up a massive derivative position, trigger a move in the market, and profit from the shift,” he explained.

SEBI’s focus remains on ensuring that market participants operate within risk-managed environments without exposing the system to potential manipulation by a few dominant players.

Balancing Market Growth with Regulatory Oversight

Sources close to the discussions indicate that SEBI is trying to strike a balance between market convenience and regulatory safeguards.

“The feedback on the paper has been largely positive, but there are valid concerns around gross delta-based limits. Market participants have highlighted how restrictive limits could hamper legitimate trading activity,” a person familiar with the matter said.

As SEBI prepares to finalize new index derivatives limits, industry experts expect the regulator to prioritize investor protection and long-term market stability, while still accommodating the needs of active traders and institutions.