Sebi Panel Proposes Delta-Based Position Limits, Says Report

Futures and Options Trading: Market regulator, Securities Exchange Board of India (Sebi) is considering a new method of deriving the value of options and futures outstanding and increasing position limits.

According to a Bloomberg report a Sebi committee proposed a that ‘Delta’ should be used in F&O trading to measure the size of a position. The proposal was made as Sebi’s panel on secondary market met on May 7 to finalise a new set of changes in equity derivatives, or Futures & Options (F&O) segment.

In the context of F&O trading, Delta is a theoretical measure of how much sensitive a put or call option is to changes in the price of the asset on which the option is made. Presently, the size of a position is determined by totaling the value of all the contracts outstanding.

How Does Delta Based Approach Differ

The report said that the Delta based method will also come with new-limits on end-of-day index derivatives exposure. The Sebi committee has proposed that the new limits will be set at the equivalent of 100 billion rupees ($1.2 billion) gross and 15 billion rupees net per firm.

Earlier in February, Sebi proposed a net future equivalent limit of Rs 500 crore and a gross limit of Rs 1,500 crore in a consultation paper. The new approach for calculating the size of positions and the new limits are expected to align the risk in F&O trading with the market exposure investors have and curb market manipulation.

The report added that the current method uses notional value which might not accurately reflect the actual exposure. Notably the committee’s recommendations are not final in nature and can still be tweaked. If the market regulator goes ahead with the proposed changes, a notification will be issued detailing the new measurement mechanism and position limits. If approved the new limits will be among the latest set of changes for India’s F&O market which has seen considerable growth in recent times.

According to Bloomberg’s report the Futures Industry Association (FIA) which is an industry body for derivatives trading has voiced concerns against most of the changes proposed by Sebi. The FIA has said that the changes are likely to create wider spreads and heightened volatility. Key members of the FIA include Flow Traders, Hudson River Trading and Jane Street Capital. The FIA has urged the regulator to use delta-adjusted position limits of 75 billion rupees net.