Sebi Tightens F&O Rules From October 1: MWPL and Single-Stock Limits

The Securities and Exchange Board of India (Sebi) has announced a significant set of changes to the equity derivatives segment, aimed at curbing excessive speculation and strengthening market stability. Effective October 1, 2025, these measures include a revised definition of market-wide position limits (MWPL), intraday monitoring of positions, new individual entity level limits for single-stock derivatives, and adjustments to trading during ban periods. These reforms form part of Sebi’s broader push to enhance risk management and align derivative exposure with underlying market liquidity.

MWPL Linked to Cash Volume and Free Float

One of the key changes involves linking the market-wide position limit to cash volume and free float, replacing the existing method based on the 20 percent of shares held by non-promoters in a scrip. Under the new framework, the MWPL—the maximum number of derivative contracts allowed across exchanges for a particular stock—will be calculated as the lower of 15 percent of the free float or 65 times the cash volume. This calculation will be reviewed every three months using rolling cash volume data for the preceding quarter. Sebi expects this linkage to reduce the risk of price manipulation in the derivatives market and better align risk with the liquidity of the underlying cash market.

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Trading During Ban Period

In addition to MWPL recalibration, Sebi has also amended rules related to trading during the ban period. Currently, when a stock enters the ban period due to excessive open interest, no fresh derivative positions can be created. From October 1, trades will be permitted if they help reduce the risk of the overall portfolio. Specifically, if a scrip enters the ban period, any trades executed should lead to a reduction of futures and options open interest by the end of the day. Presently, brokers and traders can only decrease positions through offsetting trades once the market-wide open interest for any share exceeds 95 percent of its MWPL. These adjustments aim to provide market participants with greater flexibility while maintaining safeguards against speculative excess.

Intraday Monitoring of Position Limits

Intraday monitoring of positions is another major focus of the new regulations. In an effort to control oversized exposures in index derivatives, Sebi has capped net intraday positions at Rs 5,000 crore per entity and gross intraday positions at Rs 10,000 crore. Exchanges will monitor these positions using at least four random snapshots during the trading session. On expiry days, any breach of position limits will attract penalties or require surveillance deposits. However, additional exposure will be allowed if fully backed by securities or cash collateral. The penalty provisions for expiry-day breaches are set to take effect from December 6, 2025, ensuring a window for market participants to adapt to the new monitoring norms.

Individual Entity Level Position Limits

Alongside these intraday measures, Sebi has introduced entity-specific limits for single-stock derivatives. Effective October 1, individuals will be allowed to hold positions up to 10 percent of the MWPL for a stock. Proprietary brokers can hold 20 percent, while foreign portfolio investors (FPIs) and brokers collectively can hold up to 30 percent. These limits aim to prevent concentration of positions in individual stocks and ensure that no single market participant can disproportionately influence derivative prices.

Phased Rollout of Additional Measures

These reforms build on a series of regulatory measures announced in May 2025, some of which were implemented in July. Sebi has indicated that further steps will be rolled out in phases. From November 3, 2025, new eligibility criteria will apply to derivatives on non-benchmark indices. Subsequently, from December 6, 2025, pre-open and post-closing sessions will be introduced for the F&O segment, extending trading opportunities and enhancing market oversight.

Historical Context of Sebi Measures

The latest measures are consistent with Sebi’s ongoing efforts in recent years to moderate speculative activity in equity derivatives. Previous interventions include the reduction of weekly expiries, increases in lot sizes, removal of calendar spread benefits on expiry days, and the requirement for upfront premium collection from option buyers. Sebi has also focused on tightening intraday monitoring to prevent excessive risk accumulation during trading hours.

Expected Impact on the Market

By linking MWPL to cash market volume and free float, Sebi aims to make derivatives exposure more reflective of underlying market liquidity, reducing the likelihood of market manipulation and speculative concentration. The introduction of intraday position limits and entity-level caps provides additional safeguards against oversized exposures, ensuring that individual participants do not disproportionately influence market movements. Allowing trades during the ban period, with the condition that they reduce overall exposure, offers flexibility for risk management without compromising regulatory oversight.

The phased introduction of eligibility norms for derivatives on non-benchmark indices, as well as pre-open and post-closing sessions, signals Sebi’s broader objective of improving market transparency, liquidity, and stability. These changes are expected to gradually enhance risk management frameworks for brokers, FPIs, and individual traders, while aligning derivative activity more closely with the dynamics of the underlying cash market.

Analysts suggest that these regulatory measures will have a substantial impact on trading strategies in the F&O segment. Market participants will need to closely monitor MWPL calculations, intraday limits, and entity-level position caps to ensure compliance and avoid penalties. Exchanges will play a critical role in surveillance, using multiple intraday snapshots and monitoring tools to enforce the new rules effectively.

Conclusion

Sebi’s phased approach, with certain measures taking effect immediately on October 1, 2025, and others later in November and December, provides market participants time to adapt to the revised framework. By combining position limits, intraday monitoring, and enhanced oversight during ban periods, the regulator aims to maintain orderly markets while reducing systemic risk associated with excessive speculation.

In summary, the F&O market will see a new regulatory landscape from October 1, 2025, characterized by MWPL linkage to cash and free float, intraday monitoring of positions, single-stock entity-level limits, and adjusted trading during ban periods. These reforms are part of Sebi’s broader effort to strengthen market stability, reduce speculative excess, and align derivative exposure with the underlying cash market. Market participants, including brokers, FPIs, and individual investors, will need to carefully manage their positions to comply with the new framework, ensuring that their trading activity remains within prescribed limits while minimizing risk.

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