By Abhay Ray 
Introduction
The Securities and Exchange Board of India (SEBI), the country’s capital market regulator, recently released a consultation paper proposing changes in the way risks are calculated in the equity derivatives segment. While the market has largely welcomed this proposal, concerns remain over SEBI’s proposed intraday position limits. In a recent interview with Moneycontrol, SEBI member Ananth Narayan provided insight into the rationale behind these proposals and discussed the extent to which the market regulator is willing to reconsider its stance.
SEBI’s Proposals – Aiming for Investor Protection and Market Stability
Narayan explained that the key objectives behind the steps announced on October 1, 2024, were to enhance investor protection and address stability concerns arising from excessive trading on expiry days, particularly in index options. These concerns have become evident, and the results are aligning with expectations.
Narayan further clarified that the consultation paper released on February 24, 2025, does not aim to reduce any segments of the market. Instead, the two main goals of the current proposal are to fine-tune risk metrics and introduce necessary changes to market architecture, including providing some exemptions where appropriate. This approach, according to SEBI, will help make the market more efficient, transparent, and trustworthy, benefiting all market participants.
Why SEBI is Revising Risk Metrics?
Currently, SEBI calculates the overall open interest (OI) in futures by combining the notional open interest (OI) in futures with the notional OI in options. Narayan pointed out that this method is akin to “mixing apples and oranges” and does not provide a clear or effective risk metric. As a result, the ‘OI number’ generated by this combination is often misleading and does not truly reflect the actual risk in the market.
The proposed shift involves using delta-based OI for options contracts rather than the notional OI. This change would mean that open interest in futures and options would be considered separately, with the overall OI reflecting real risk and exposure at any given moment.
To better understand this, consider the concept of delta in options trading. Delta measures how much the value of an options contract is expected to change when the price of the underlying asset changes by one unit. For example, the delta of a long futures contract is 1—if the price of the underlying asset increases by 1%, the value of the contract also increases by 1%. In contrast, for options, the delta ranges between 0 and 1. A long deep-in-the-money (ITM) call option might have a delta close to 1, while a long out-of-the-money (OTM) call option could have a delta closer to 0. As a result, the delta-based OI for options would differ significantly from the notional OI, providing a more accurate picture of risk exposure.
The Benefits of Delta-Based OI for Investors
The introduction of delta-based OI will offer investors a clearer understanding of the risks they are taking in the futures and options (F&O) segment. This metric will more accurately reflect the gross exposure within the market ecosystem, providing investors with real-time data about their risk. It will also help compare trading volumes with the actual risk in the market, offering a more informed basis for making decisions.
The change will be particularly useful for index derivatives, where the current system of limiting naked positions based on net notional OI can be misleading. For instance, an investor holding a large number of at-the-money puts and shorting a similar number of out-of-the-money puts may have a relatively small net notional OI, but still carry significant risk. The delta-based OI will better reflect the exposure in such scenarios.
SEBI’s Proposal on Intraday Position Limits
One of the more contentious aspects of SEBI’s proposals is the suggestion to introduce stricter limits on intraday positions. SEBI aims to provide better information on the risks running within the market ecosystem, which would help exchanges more effectively monitor individual and system-wide risks, reduce concentration risks, and prevent market manipulation.
According to Narayan, SEBI recognizes that market makers, who provide liquidity, may occasionally take large intraday positions. The regulator has thus proposed an intraday position limit that is higher than the proposed limits for positions at the end of the day. For example, SEBI is considering a net delta OI limit of ₹1,000 crore and a gross delta OI limit of ₹2,500 crore for intraday positions in index options. These limits aim to strike a balance between risk management and the need for liquidity in the market.
The Need for Transparent Risk Indicators
Narayan emphasized that one of the primary motivations for these changes is to improve transparency and provide better risk indicators. SEBI believes that the current system, which relies on notional OI, is insufficient for assessing real market risks. By shifting to delta-based OI, SEBI aims to give investors and market participants a clearer understanding of their actual risk exposure.
Additionally, SEBI intends to enhance disclosure requirements to increase transparency across the market. This will help build trust within the market ecosystem, ensuring that all participants have access to the same information regarding risk and exposure.
Market Reactions and Future Outlook
The market has largely welcomed SEBI’s proposals, acknowledging the need for better risk management in the equity derivatives segment. However, some participants have expressed concerns about the impact of the proposed intraday position limits on liquidity. Narayan indicated that SEBI is open to engaging with market participants to fine-tune these proposals, ensuring that they strike the right balance between risk management and liquidity provision.
The ongoing consultation process, which invites feedback from brokers, investors, and other stakeholders, will play a crucial role in shaping the final regulations. SEBI is committed to refining the proposals based on the feedback received and ensuring that the market remains efficient, transparent, and resilient.
Conclusion
SEBI’s consultation paper represents a significant step toward improving the functioning and transparency of India’s equity derivatives market. By revising risk metrics and considering new approaches to position limits, SEBI aims to enhance investor protection and market stability. While the proposals have garnered broad support, there is an ongoing dialogue between the regulator and market participants to ensure that the new measures are balanced and effective. As the consultation process progresses, it is likely that SEBI will make further adjustments to its proposals, taking into account the concerns of market stakeholders. Ultimately, these changes have the potential to create a more robust and transparent market, benefiting all participants and fostering long-term growth.
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