SEBI Shakes Up Derivatives Game With New Rules for Measuring Open Interest, MWPL

The Securities and Exchange Board of India has tweaked some rules for the equity derivatives segment for enhancing trading convenience and strengthening risk monitoring in the segment. The market regulator has notified new ways of measuring open interest in the derivatives segment, linking of market wide position limit (MWPL) with cash volume and free float,  enhanced position limits for Index Futures and Index Options, among other things.

The market regulator said there will be a pre-open session in the derivatives market as well, just like there is one for the cash market. “In the last five trading days before expiry, these sessions shall extend to next-month futures contracts as liquidity shifts from one expiry to the other on account of rollover of futures contracts,” SEBI added. The pre-open session changes will be effective from December 6.

In a circular dated May 29, the SEBI said open interest in the derivatives segment will be measured at a portfolio level by computing the future-equivalent open interest or delta based open interest, rather than notional open interest.

Notional open interest reflects only the size of the position rather than the actual value. It is the sum of the open interest of futures and options contracts without considering the actual risk. However, delta-based open interest is calculated after considering the price sensitivity of each contract, giving a better picture of risk.

The capital markets watchdog also said that the MWPL will be linked to cash market delivery volume to reduce the potential manipulation and better align the risk in the derivatives market with the liquidity in the cash market. MWPL will now be lower than 15% of the non-promoter holding and 65 times the Average Daily Delivery Value. Previously, MWPL was supposed to be 20% of the free-float. SEBI said this change come into effect from October 1.

SEBI has also allowed trades in the ban period, but only if it reduces the risk of the portfolio. Once a stock enters the F&O ban period, any trading in its derivative contracts must lead to a reduction in open interest by the end of the day, SEBI said in the circular. Also, any rise in delta-based open interest due to price movement and not fresh trades, will not be treated as a violation.

According to the circular, the Index Options position, Net end of day delta-based open interest limit for options will be Rs 1,500 crore, and gross limit will be Rs 10,000 crore. Neither gross long interest nor gross short interest shall exceed the Rs 10,000-crore limit.

The limits for Index Futures have been fixed on the basis of categories. Position limit for FPI Category I, mutual funds and trading members will be higher than 15% of futures open interest or Rs 500 crore. For category II FPIs, the limit will be higher than 10% of open interest or Rs 500 crore. These position limits for index futures will be effective from July 1, the SEBI said.

The regulator has also proposed individual entity level position limits for single stocks and eligibility criteria for derivatives on non-benchmark Indices. It has also prescribe intraday monitoring regulations to the exchanges and clearing corporations.