SEBI may ease derivatives norms

The Securities and Exchange Board of India (SEBI) may increase the short position limit for index derivatives by up to 4x, a move that would benefit prop and institutional traders ahead of a new rule that takes effect in April, two people familiar with the matter said.

The regulator had introduced a new position limit on index derivatives in 2020, wherein the short positions based on notional value in index derivatives could not cross the available holdings of the participant. Further, an additional short position limit of ₹500 crore each for index futures and index options was provided.

The short position limit of ₹500 crore, which is currently being tracked by the exchanges end-of-day, will be monitored intraday from April 1, 2025. This is part of the 6 measures initiated by SEBI to curb frenzy in the index derivatives segment last year and is expected to impact volumes and liquidity, especially in the options segment, as the ability to take large positions will get curtailed.

The limit itself, however, now may be increased by up to 4x to ₹2,000 crore, said sources.

“This could come as a huge relief to a lot of prop brokers and high net worth individuals who currently manage this limit on EOD basis. Since this will have to be monitored intraday from April, a parallel increase in the limit from ₹500 crore to a higher amount will help traders manage positions efficiently without increase in hedging cost,” said Ashish Nanda, President and Head – Digital Business, Kotak Securities. An email sent to SEBI did not get a response.

Delta risks

What’s more, the notional value of the position may now be calculated on a delta-adjusted basis, which takes into account risks taken.

For instance, let’s assume a client takes a short position in 10,000 Call options in Nifty having strike of 23,000 expiring on February 28 and another short position in 10,000 Call options in Nifty having a strike of 26,000 expiring on February 28.

According to the current rules, the client’s short exposure will work out to around ₹46 crore (20,000*22950). In a delta adjusted scenario, this will reduce to ₹17.2 crore. The lower notional value implies that that much more positions can be built up within the limit provided.

Last month, SEBI whole-time member Ananth Narayan had said that the regulator is trying to measure risks better in the derivatives segment. Open interest today is measured in terms of the notional value of futures and options put together. This may not be correct and the regulator is in discussions to move to a delta based matrix that would ensure that risks are measured correctly, he had said.