Critical Deliberations on Index Options Trading to Take Center Stage
The Securities and Exchange Board of India (SEBI) is preparing to deliberate on two crucial issues shaping India’s derivatives market: the gross and intraday limits on index options and the uniformity of equity derivatives expiry days. A high-level SEBI advisory committee is scheduled to convene on May 7 to address these matters, which have drawn considerable interest from stock exchanges, foreign portfolio investors (FPIs), algorithmic traders, and other major market participants. According to individuals familiar with the development, this panel meeting will serve as a platform for discussing stakeholder feedback and finalizing regulatory actions.
Highlights:
SEBI committee meeting on May 7 to address futures & options regulatory framework.
Focus areas: Index options limit structure and standardization of derivatives expiry days.
Final regulatory circular may follow after internal discussions on feedback received.
SEBI Faces Balancing Act on Delta-Based Open Interest Limits
One of the top issues on the agenda is the fixing of intraday index options limits using the Future Equivalent (FutEq) or delta-equivalent methodology. FutEq is a sophisticated metric that aggregates the delta—the sensitivity of option value to the underlying index movement—across an entity’s positions. High-frequency trading (HFT) firms and FPIs have pushed for higher intraday limits in the Rs 5,000–15,000 crore range, citing the need for operational flexibility and the risk of penalization from breaching current limits.
Highlights:
SEBI to finalize index option trading limits based on delta-equivalent exposure.
HFT traders and FPIs advocate for higher intraday limits up to Rs 15,000 crore.
Regulator proposes tighter caps due to systemic risk from excessive delta exposure.
Proposed SEBI Caps and Concerns Over Notional vs. Real Risk
SEBI had circulated a consultation paper on February 24, proposing to set the net intraday limit at Rs 1,000 crore, gross intraday at Rs 2,500 crore, and a net end-of-day (EoD) cap of Rs 500 crore for index options. For index futures, a Rs 1,500 crore EoD limit and Rs 2,500 crore intraday limit were proposed. The move stems from SEBI’s analysis of trading data, which showed that despite notional net exposures appearing low, entities carried significant delta risks exceeding Rs 10,000 crore in some cases. This created regulatory concern around potential market-wide impact in stress conditions.
Highlights:
SEBI’s Feb 24 paper proposes limits of Rs 1,000 crore (net intraday) and Rs 2,500 crore (gross intraday).
Analysis showed some entities masked large delta risks under low notional exposures.
Regulator referencing November 2024 and upcoming April 2025 data to firm up limits.
SEBI Moves to Standardize Derivatives Expiry Days Across Exchanges
The second proposal likely to be finalized pertains to uniform expiry scheduling for equity derivatives contracts across exchanges. In a draft circular issued on March 27, SEBI suggested that exchanges must pick either Tuesday or Thursday as the expiry day for all equity derivatives, including weekly benchmark index options. The regulator aims to avoid clustering expiries at the beginning or end of the week, which can heighten liquidity and concentration risks. The proposal also allows product differentiation among exchanges by granting them the flexibility to choose only one day—Tuesday or Thursday—as their expiry reference.
Highlights:
Proposed uniform expiry day for equity derivatives: Tuesday or Thursday only.
Weekly benchmark contracts to expire once weekly on the chosen day.
Monthly expiries limited to the final Tuesday or last Thursday of each month.
Industry Feedback Mixed on Expiry Day Fixation and Regulatory Oversight
Market feedback on SEBI’s expiry day framework has been divided. While some exchanges and institutions have endorsed the move for risk distribution and smoother liquidity management, others argue that expiry scheduling should be left to exchange discretion. There has also been a proposal for three-day expiry structures, which SEBI is not currently inclined to support. The circular also stated that any modification to expiry dates in the future must receive prior approval from SEBI, tightening oversight over product scheduling in the derivatives space.
Highlights:
Mixed views: Some support expiry standardization; others seek exchange autonomy.
SEBI proposes mandatory regulatory clearance for changes to expiry schedules.
Three-day expiry suggestion yet to gain regulator’s support.
