The regulator may also look to modify the market-wide position limit (MWPL) across exchanges and link it to delivery volumes of stocks to prevent manipulation and cornering of stocks by any entity, the people cited above said on the condition of anonymity. MWPL refers to the total number of stock options and futures contracts one can trade across exchanges .

Glare on retail activity

A key area of concern for the regulator is the level of retail activity in options that remains high, despite two sets of proposals in October and February

“Sebi will continue to monitor this segment closely and re-examine the trading activity of individual investors in index options as India continued to record the highest level of trading activity in index options globally, when compared to the size of its cash equity market,” one of the two people cited above said.

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In October, Sebi raised the lot size of index options to 75 shares from 25, and allowed only one weekly index options expiry per exchange to guard individuals who were losing heavily in the options market. A Sebi study had found that individuals lost a ₹1.89 trillion in FY22-24 due to excess speculation on options expiry day, while HFTs gained.

Index options limits relaxed

In February, it proposed imposing a gross limit on index options to ensure that HFTs didn’t take disproportionately large positions. Some of these proposals were relaxed later after receiving feedback from market participants. Besides a proposal to change the calculation of an option’s open position to accurately and transparently portray the market risk, Sebi also proposed a gross limit of ₹1,500 crore to be monitored on an intra-day basis.

However, this faced much opposition from market participants. The regulator has now decided to raise the gross limit to ₹10,000 crore from ₹1,500 crore and the net limit to ₹1500 crore from ₹500 crore, with no intraday limit for index options. By the end of the day, the client must adhere to the ₹1,500 crore net limit and not exceed the ₹10,000 crore gross limit.

“This is a major relief from the earlier proposal which would have resulted in impact costs rising and thus liquidity being drained from the market,” a broker said on the condition of anonymity, as the measures are yet to be announced. “A major pain point has been removed.”

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However, some trace the rise in options trading to a 2019 Sebi move.

According to a broking industry official who spoke on the condition of anonymity, Sebi had mandated brokers to collect upfront margins from clients trading intraday in the cash market. This margin—20%—was earlier paid by brokers on behalf of clients, helping them leverage without making any margin payments of their own.

Concerned that a client default would hit the broker and pose a systemic risk to the market, Sebi asked brokers to collect upfront margins. This, the broker said, prompted clients to move away from intraday squaring off to cheaper index options, skewing the cash and index options volumes.

Another discount broking official said, introducing position limits for index options would have later opened the door for Sebi to monitor these limits and fix penalties as it did in the previous decade while introducing margins to trade for the cash market. To trade in cash segment, the broker is required to collect a ‘value at risk “and “extreme loss margins” from a client to ensure against default and systemic risk.

Lower market-wide positions

Sebi also reduced market-wide position limits to 15% of a stock’s free float from 20% earlier. Exchanges can stipulate the lower of 15% of a stock’s free float or 65 times the average daily delivery volumes (ADDV) with a floor of 10%. This means if a stock has a free float of ₹100 and delivery of 10 paise, MWPL will stand at ₹15 and the ADDV at ₹6.50. In such a case, the MWPL will be ₹10, or 10% of the MWPL, which has been fixed as the floor.

Index option limits for FPIs raised

The regulator has also proposed calculating open interest of index options based on delta, which measures the change in option price for every point change in the underlying stock or index. Market participants have largely welcomed this move.

Earlier, FPIs could take a position of ₹500 crore each in index options and futures contracts, over and above their underlying exposure. This limit was introduced in the aftermath of the covid-19 pandemic to prevent any market meltdown due to excessive derivatives trading.

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Now, for options, that has been increased to ₹1,500 crore net; and for futures, Sebi is likely to stipulate the higher of 15% of futures open position or ₹500 crore. For trading members (prop plus client), the limit is 15% of open interest or ₹7,500 crore, whichever is higher.