The Securities and Exchange Board of India’s (Sebi) new rules aim to improve the risk metrics for better monitoring and disclosures in futures and options, reduce instances of spurious F&O (futures and options) ban periods in single stocks and better oversight over the possibility of concentration or manipulation risk in index options.

The approved regulatory framework announced on Thursday was first proposed in a February consultation paper. It incorporates feedback from market participants and was finalized after discussions with Sebi’s Secondary Market Advisory Committee.

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Delta-adjusted OI

A key change is the shift to a more risk-sensitive metric—delta-adjusted open interest—for monitoring positions across futures and options. Clearing corporations have already adopted this metric. 

Called the future equivalent open interest (FutEq OI), it refers to the net exposure of a participant in the derivatives segment after adjusting for the delta—a measure of how much an option or future's price moves in relation to the underlying asset.

For example, a long futures position has a delta of +1, while options vary from -1 to +1 depending on whether they are puts or calls, and whether they are bought or sold. Sebi will now compute all exposure in delta-adjusted terms to assess actual directional risk.

New position limits

From 1 July, Sebi will begin imposing a new limit structure for index options. Traders will be allowed a net FutEq OI of ₹1,500 crore and a gross limit of ₹10,000 crore (both long and short positions), beyond which they must demonstrate adequate cash or securities backing.

Large investors will have till 5 December to build systems to track delta exposure internally. Daily alerts will be issued for breaches, and by 6 December, real-time compliance will be mandatory.

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Position limits for index futures will also kick in on 1 July. Large entities such as mutual funds, foreign portfolio investors (FPI) (Category I), proprietary trading firms, and clients can hold up to 15% of market-wide index futures open interest or ₹500 crore, whichever is higher. Category II FPIs will have lower thresholds.

Market-wide position limits (MWPL) for single stocks—currently defined as 20% of free float—will be revised from 1 October. It refers to the total number of stock options and futures contracts one can trade across exchanges.

The new cap will be the lower of 15% of the free float or 65x the average daily delivery value (ADDV), with a floor of 10%. This approach links derivatives limits to actual liquidity in the cash market. 

Sebi believes that tying MWPL to delivery volumes will better reflect underlying stock depth and curb artificial price movements driven by F&O positions.

Sebi will also crack down on position creation during ban periods—when open interest in a stock crosses 95% of its MWPL. From 1 October, any new trade in such scrips must reduce delta-adjusted exposure. 

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The regulator has directed the clearing corporations to devise a monitoring system and penalty structure within a month.

Starting 3 November, stock exchanges must monitor MWPL usage intraday, at least four random times per session, and report significant breaches to Sebi. 

From 6 December, a pre-open session—a discovery phase similar to the one in cash markets—will also apply to current-month index and single-stock futures, especially in the rollover week before expiry.

Single-stock F&O cap

From 1 October, new entity-level caps for single-stock F&O exposure will apply. These range from 10% of MWPL for clients, NRIs and small FPIs, to 30% for mutual funds, proprietary books and large institutional FPIs. These measures are in addition to the measures implemented by Sebi in October last year. 

The regulator raised the lot size of index options from 25 to 75 shares and restricted each exchange to just one index expiry per week, after a detailed Sebi study found that retail traders lost ₹1.89 trillion between FY22 and FY24, largely due to expiry-day speculation.

In contrast, high-frequency traders profited, triggering regulatory concern over the uneven playing field.

Following that, Sebi’s February 2025 consultation paper proposed stricter limits on index derivatives, including a controversial intra-day gross limit of ₹1,500 crore. 

However, this drew strong opposition from market participants who argued it would impair liquidity and disincentivize hedging.

Responding to the feedback, Sebi not only dropped the intra-day enforcement but also tripled the net limit and increased the gross limit more than sixfold to allow for more flexibility while retaining end-of-day discipline.