SEBI is set to make changes to the current method of calculating open interest in equity derivatives, shifting from notional terms to a delta-based approach. The regulator also plans to revise position limits for index derivatives in a bid to prevent unnecessary stocks from entering ban periods and to curb the risk of circumventing position limits.
The proposed changes are expected to reduce the frequency of stocks entering ban periods by 90%, simplifying trading for F&O traders. Additionally, the risk of entities holding large positions in index options while showing low open interest will be significantly reduced.
Under the new methodology, open interest in derivatives will be calculated by factoring in a ‘future equivalent’ rather than notional terms. This is aimed at aligning derivatives risk with underlying market liquidity and reducing the potential for manipulation.
In terms of market-wide position limits (MWPL) for single stocks, SEBI is proposing a limit tied to 15% of free-float market capitalization or 60 times the average daily delivery value (ADDV) in the cash market. This metric will be recalculated every three months based on the preceding three-month period.
To enhance price discovery, pre-open and post-closing sessions will be introduced for derivatives trading, initially for current-month contracts and expanding to next-month contracts in the last five days before expiry. This measure aims to reduce volatility at market open and close.
Furthermore, any non-benchmark index will now need to have at least 14 stocks, with no single stock exceeding a 20% weight and the top three stocks collectively not exceeding 45% weight. This diversification requirement aims to reduce index volatility risk and prevent excessive concentration.
Position limits for single-stock derivatives will now be based on actual market-wide open interest, in addition to MWPL-based limits. This is intended to prevent a single player from dominating illiquid stocks and distorting market pricing.
Overall, these proposed changes by SEBI are designed to enhance market integrity, reduce manipulation risks, and ensure a more robust and transparent derivatives market for investors.
