Sebi Considers Revising ₹500 Crore Derivative Exposure Limit for Institutional Investors


Last Updated: 13th January 2025 - 03:11 pm
The Securities and Exchange Board of India (Sebi) is contemplating revisions to the ₹500 crore derivative exposure limit for institutional investors such as foreign portfolio investors and mutual funds. This limit, originally implemented during the early days of the COVID-19 pandemic in March 2020, is now under review as Sebi seeks to adapt to the evolving market landscape.
Revisiting the Exposure Limits
Sebi’s whole-time member, Ananth Narayan, recently discussed potential changes to the methodology for measuring open interest (OI) in derivatives at Samvad, a symposium on the securities market. Open interest, which represents the total outstanding buy and sell positions in the derivatives market, has been a critical metric for managing market stability. However, the current method of adding notional volumes of futures and options contracts to calculate OI has been deemed flawed.
Narayan explained that option pricing involves multiple risk factors, collectively known as the Greeks, with delta being a key determinant. Delta measures the sensitivity of an option's price relative to changes in the underlying asset. Sebi proposes shifting to a delta-based metric for measuring OI, aligning with global best practices. This approach would provide a more accurate reflection of market risk by accounting for the actual exposure rather than the nominal value of contracts.
Changes to Market-Wide Position Limits
In addition to revising the exposure limits, Sebi plans to adjust the market-wide position limit (MWPL) methodology. Currently, MWPL for single stock futures and options is tied to the notional volumes of the underlying stocks. Sebi proposes linking these limits to the average daily delivery volumes of the underlying stocks instead. This change aims to reduce the risk of market manipulation and excessive volatility, ensuring a more stable trading environment.
Narayan noted that during the COVID-19 crisis, the ₹500 crore limit was introduced to control market volatility. However, the notional limits set at that time are now considered inadequate for measuring actual market risk. The revisions are intended to better reflect the current market dynamics and support more accurate risk assessment.
Global Best Practices and Future Implementation
The move towards a delta-based measurement aligns Sebi’s practices with international standards, offering a more nuanced and accurate understanding of market risk. Narayan assured stakeholders that the changes would be introduced gradually, following thorough discussions with advisory committees. A consultation paper is expected by February, providing detailed insights into the proposed revisions.
Conclusion
Sebi’s proposed revisions to derivative exposure limits and open interest measurement methodologies mark a significant shift towards more accurate risk management in India’s derivatives market. By adopting a delta-based approach and linking MWPL to delivery volumes, Sebi aims to enhance market stability and prevent excessive volatility. These changes reflect the regulator’s commitment to evolving with global best practices and ensuring a robust financial market infrastructure.
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