Sebi Mulls Reviewing Position Limits For Trading Members In Equity Derivatives

Markets regulator Sebi on Thursday proposed to review the existing position limits for trading members (TMs) in the equity derivatives segment.

Recently, the regulator shifted client-level limits for index derivatives from notional contract value to a delta-based or Future Equivalent (FutEq) method, which better reflects the risk of open positions.

However, TM-level limits continue to be calculated using the old notional-based method, resulting in a mismatch between how client and TM positions are measured.

To address this and improve market monitoring, Sebi has proposed aligning TM limits with the same FutEq metric used for clients, according to its consultation paper.

The regulator has suggested introducing a slab-based absolute limit for TMs in index options, linked to the average daily market-wide Future Equivalent (FutEq) Open Interest (OI).

Sebi said the objective of the regulatory proposal is "to align the metric of position limit for TMs to that specified for the clients i.e. FutEq or Delta, and to augment such limit with an absolute limit keeping in mind the OI level in different indices".

The proposal, Sebi said would enable "TMs to compute their own FutEq positions intraday so that during market hours they can take suitable action if their utilisation approaches or crosses TM level proposed limits".

Under the proposed framework, depending on the level of OI in the current quarter, TM limits for the next quarter would range from Rs 2,000 crore to Rs 12,000 crore.

For index futures, no changes have been proposed since notional OI and FutEq OI are identical due to delta being one.

For index options, however, TM limits would shift to 15 per cent of market-wide FutEq OI instead of notional OI, combined with the new slab-based absolute limits. The applicable TM limit will be the higher of these two thresholds.

To support compliance, stock exchanges will publish daily market-wide FutEq OI, which will set the TM limit for the following day.

Clearing corporations will also provide delta values of option contracts intra-day so that TMs can calculate their FutEq exposures.

Sebi said TMs should continue to meet position limits on an end-of-day basis, and exchanges and clearing corporations will issue a detailed SOP within 60 days.

Currently, TMs are allowed the higher of Rs 7,500 crore or 15 per cent of total market-wide OI, calculated in notional terms.

Sebi noted that when OI is low, the flat limit of Rs 7,500 crore may allow a single TM to hold a disproportionately large share of the market, potentially affecting market integrity.

The Securities and Exchange Board of India (Sebi) has invited public comments on the proposal by December 26.