SEBI Tightens Grip on Derivatives: What Every Trader Must Know!

SEBI issued a circular on February 24, 2025, addressing concerns over derivatives trading. It highlighted cases where large investors were artificially inflating Open Interest (OI) by investing in low-delta options and pushing stocks into the ban period.

To tackle this issue, SEBI has proposed new regulations. Let’s break down what these new rules entail and what they mean for investors.

What’s Happening?

Under previous regulations, Open Interest (OI) in the derivatives market was calculated based on notional value. However, the consultation paper suggests changing how Open Interest is calculated for shares. Currently, it is based on the notional value of F&O trades. This approach causes the Market Wide Position Limit (MWPL) to reach 95% faster, triggering an F&O ban on the stock sooner.

New Rules: Delta-Based OI System

SEBI has proposed changing the way OI is calculated. Previously, it was measured solely based on notional value, but now it will be measured using a delta-weighted approach.

For instance, if an OTM call option is priced at Rs 100 and has a delta of 0.1, only Rs 10 will now be added to OI instead of the full Rs 100. This will help prevent artificial inflation of OI and make the market more stable.

Importance of Delta & Impact of the New Rules

Delta measures how much an option’s price changes relative to its underlying stock.

For example, if an option has a delta of 0.5 and the stock price rises by Rs 10, the option’s price will increase by Rs 5.

SEBI’s back-testing from July 1, 2024, to September 30, 2024 of these changes showed a significant impact. The number of cases where stocks entered the ban period dropped by over 90% — from 366 cases under the old rules to just 27 under the new system. This will not only reduce market volatility but also make stock price manipulation more difficult.

Real-Time Monitoring for Greater Transparency

Previously, OI monitoring was done just once a day, allowing some large investors to artificially inflate OI during trading hours. Now, to manage systematic and settlement risks, clearing corporations will monitor the MWPL utilisation (in reference to FutEq) of single stocks at least four times a day at random intervals.

These readings will be shared with all market participants, improving transparency and risk control.

Additionally, no investor will be able to suddenly inflate OI during the day. Real-time data will also be available, allowing investors to adjust their strategies quickly.

Benefits of Pre-Open & Post-Close Sessions

SEBI has proposed extending pre-open and post-close sessions to the derivatives market. Previously, this was available only in the cash market, but now it is being considered for futures and options trading as well.

This move aims to improve price discovery and reduce sudden volatility during these periods, providing investors with better opportunities to execute their strategies.

New Rules to Prevent Manipulation in Non-Benchmark Indices

SEBI has also set new standards for sectoral and thematic indices to ensure that no single stock has excessive influence over the market.

Under the new regulations, an index must include at least 14 stocks, with no single stock having a weightage of more than 20%. Additionally, the combined weightage of the top three stocks cannot exceed 45%. This ensures that no major company can dominate an entire index.

What’s Next?

SEBI has invited public feedback on these proposals until March 17, 2025. If you trade in derivatives, are concerned about market manipulation, or want a more stable and transparent market, you can share your views on SEBI’s official website.

This article is for informational purposes only. This is not investment advice. Disclaimer: Teji Mandi Disclaimer