The recent proposals by the Securities and Exchange Board of India to introduce gross limits for intraday derivatives trading in futures and options are expected to have a significant impact on trading activities of foreign portfolio investors (FPIs), high net worth individuals, and prop desks of stock brokers. This could result in a decrease in their exposure levels, ultimately affecting derivatives volumes as a whole.
Under the proposed guidelines, the intraday limits for options trading will be set at ₹1,000 crore on a net basis and ₹2,500 crore on a gross basis. The end-of-day limits will be reduced to ₹500 crore and ₹1,500 crore, respectively.
One of the key changes introduced by the regulator is the prescribed intraday gross limit of ₹2,500 crore for options trading on a delta-adjusted basis. This could restrict the capital available to FPIs, HNIs, and prop desks of stock brokers to around ₹250-300 crore, leaving a significant portion of their capital unutilized.
As a result, entities with substantial capital deployed in trading, such as FPIs and large prop desks, may see a reduction in their trading exposure by up to a tenth. This could lead to a potential shift of FPIs to other markets or even prompt them to exit the market altogether, causing derivatives volumes to shrink by 60-70% from peak levels.
The impact of these changes can be better understood through an example scenario. For instance, an entity with a short position of ₹2,500 crore in notional ATM Call option and ₹2,500 crore in notional ATM Put option will have a delta-adjusted value of -₹1,250 crore and +₹1,250 crore, respectively. The gross limit for this entity will be ₹2,500 crore, implying that only about ₹325 crore of capital can be deployed, considering a 13% exchange margin.
Furthermore, for entities that predominantly use capital for hedged positions, the maximum amount that can be deployed may drop to as low as ₹150 crore. With most large trading books employing a mix of hedged and unhedged strategies, the effective capital usage will be significantly lower than the initial estimates.
In conclusion, these regulatory changes may lead to a reduction in effective capital usage for traders, impacting index F&O open interest significantly. The upcoming transition to monitoring short positions intraday from April 1, 2025, is part of SEBI’s efforts to curb excessive speculation in the index derivatives segment, following the introduction of new position limits in 2020.
Moreover, market analysts have already started to anticipate the potential implications of these changes, with Goldman Sachs revising its target price for BSE based on the expected impact on proprietary traders. As the market braces for these regulatory adjustments, stakeholders are closely monitoring the evolving landscape of derivative trading in India.
