Sebi tightens derivatives rules to protect investors and improve market discipline

Capital markets regulator Sebi has introduced a comprehensive set of reforms to strengthen risk monitoring and make the equity derivatives market safer and more transparent for investors. This comes amid rising retail participation, surging expiry-day volumes, and the growing complexity of index options.

“Derivatives market enables efficient price discovery, improves market liquidity and permits investors to manage risk,” Sebi said in a circular.

One of the key changes made is how open interest will now be measured. Instead of just counting futures and options contracts, Sebi has asked clearing corporations to use a new method called “Future Equivalent Open Interest” or FutEq OI.

This uses a concept called “delta” to calculate how much exposure each option or futures contract actually carries. It gives a more accurate picture of the real risks traders are taking.

Sebi also revised the market wide position limit (MWPL), which determines how much total derivative trading can happen on a particular stock.

The new formula now considers both the stock’s free float and its average daily delivery value. This change will reduce unnecessary “F&O ban” situations and align derivative trading more closely with actual stock market activity.Another big change is the treatment of stocks that hit the F&O ban. Once a stock enters the ban period, traders must now reduce their net positions each day. They are not allowed to increase their exposure even if prices move. This is aimed at curbing manipulation and excessive speculation in illiquid counters.For index options, Sebi has set limits on how much any one trader can hold. A trader cannot exceed Rs 1,500 crore in net exposure or Rs 10,000 crore in total long or short positions.

If anyone crosses this, they must show that they have enough cash or stocks to back those trades or reduce their positions the next day. This rule will come with a “grace period” until December 2025, after which strict monitoring will begin.

To further strengthen oversight, Sebi has instructed stock exchanges to monitor trading activity not just at the end of the day but multiple times during the day. Any unusual spikes in open interest will be flagged and reported.

A new pre-open session is also being introduced for derivatives, similar to the cash market, to help smoother price discovery before the market opens.

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