SEBI’s New F&O Risk Monitoring Framework

Context

SEBI has announced a phased overhaul of regulations for the equity Futures and Options (F&O) segment, to be implemented from July to December 2025.

Background and Rationale

With the rapid growth of retail participation and increased trading volumes in equity derivatives, SEBI recognized the need to enhance surveillance and risk monitoring mechanisms. The new framework seeks to curb excessive speculation, reduce unwarranted market bans, and improve transparency in the F&O market, thereby protecting investors and maintaining orderly market conditions.

Key Features of the New SEBI Framework

Introduction of Future Equivalent (FutEq) Open Interest

• Current Scenario: Open interest (OI) was traditionally measured as the sum of notional positions without accounting for the actual risk sensitivity of contracts.
• New Approach: SEBI has mandated the use of a Delta-adjusted Future Equivalent (FutEq) method to calculate open interest. This approach adjusts each position based on its sensitivity (delta) to the underlying asset’s price movements, providing a more risk-sensitive and accurate measure of exposure.
• Impact: This change prevents artificial imposition of F&O bans by reflecting true market risk and discourages manipulation.

Revised Market Wide Position Limits (MWPL)

• Old Method: MWPL was based solely on a stock’s free float.
• New Method: MWPL will now be the lower of 15% of free float or 65 times the average daily delivery value (ADDV) of the stock, with a minimum floor of 10% of free float.
• Objective: To better align position limits with actual trading volumes and liquidity, reducing unnecessary bans and speculative excesses.
• Implementation: Effective from October 1, 2025.

Position Limits for Index Derivatives

SEBI has enhanced position limits for index options:

• Net end-of-day FutEq position capped at ₹1,500 crore per PAN.

• Gross long and short positions capped at ₹10,000 crore each.

• These limits will be phased in between July and December 2025, providing institutions time to adjust systems for delta monitoring.

Risk Reduction Mandate During Ban Periods

• Once a stock enters the F&O ban period, any new positions taken must result in a net reduction of delta-based open interest by the end of the trading day.
• This rule discourages speculative pressure and manipulation during ban periods.
• Exchanges and clearing corporations will monitor these delta positions daily to ensure compliance.

Intraday Monitoring and Surveillance

• Exchanges and clearing corporations must conduct intraday monitoring of MWPL usage at least four random times per trading session.
• Early warning systems will be triggered for sudden position build-ups, including additional surveillance margins and scrutiny of participant-level concentration.
• Breaches are to be reported to SEBI during fortnightly surveillance meetings.
• Exchanges will display MWPL utilization intraday and prepare a joint Standard Operating Procedure (SOP) for monitoring in consultation with SEBI.

Eligibility Criteria for F&O on Non-Benchmark Indices

New criteria require:

• Minimum 14 constituents in the index.

• Top constituent weight capped at 20%.

• Combined weight of top three constituents capped at 45%.

• Effective from November 3, 2025.

Individual Entity Position Limits

For single stocks:

• Individuals: 10% of MWPL.

• Proprietary brokers: 20% of MWPL.

• Foreign Portfolio Investors (FPIs) and brokers: 30% of MWPL.

• Effective from October 1, 2025.

Introduction of Pre-Open Session for F&O

• Similar to the cash market, a pre-open session will be introduced for current-month futures contracts on single stocks and indices.
• During the last five trading days before expiry, this will extend to next-month futures contracts to facilitate smoother price discovery.
• Effective from December 6, 2025.

Significance and Expected Impact

• Market Integrity: By linking MWPL to both free float and cash market liquidity, SEBI aims to reduce manipulation and speculative excesses.
• Risk Sensitivity: The FutEq method provides a more realistic measure of risk, enabling better surveillance and reducing unwarranted bans.
• Investor Protection: Enhanced monitoring and position limits will help curb excessive speculation, safeguarding retail and institutional investors.
• Operational Efficiency: Intraday monitoring and pre-open sessions will improve market transparency and price discovery.
• Phased Implementation: The gradual rollout allows market participants to adapt systems and comply with new regulations effectively. 

Conclusion

SEBI’s new framework on F&O risk monitoring represents a significant regulatory advancement designed to strengthen risk management, ensure market stability, and protect investors in the rapidly evolving equity derivatives market. The introduction of delta-based open interest measurement, revised position limits, and enhanced surveillance mechanisms collectively aim to foster a more transparent and resilient financial market ecosystem in India.

Source: The Hindu

UPSC Prelims Practice Question

Q. Consider the following statements regarding the Securities and Exchange Board of India (SEBI):

1. SEBI is a statutory body established under the SEBI Act, 1992.
2. SEBI regulates both the primary and secondary markets in India.
3. SEBI is responsible for approving Foreign Direct Investment (FDI) proposals in India.

Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

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