Explained: What SEBI’s proposed open interest changes mean for F&O traders

The Securities and Exchange Board of India (SEBI), the country’s capital market regulator, has proposed a crucial change to the way it measures open interest in the derivatives segment—futures and options (F&O) trades—to increase surveillance in the high-octane segment on Dalal Street. The change marks a shift from the current practice of measuring notional based open interest (OI) across futures and options contracts. Open interest is an important metric in the derivatives segment, gauging market activity in contracts.

Read on to learn about the main proposed changes in detail.

Proposed Changes in Futures Trading & Options Trading Rules 

Under the new method, open interest will be measured on the basis of equivalent (FutEq), and not notional value.

Also known as FutEq in market parlance, future equivalent refers to the number of future contracts necessary to hedge an equivalent position.

It is calculated by aggregating change in price (delta) associated with the position.

In another noteworthy measure, SEBI has also proposed a new method to determine the market-wide position limit (MWPL). According to the regulator, the limit is proposed to be set at 60 times of cash volumes or 15 per cent amount of the free float.

MWPL is an important metric in the futures and options segment that determines the maximum number of open derivative contracts that can be held for a specific stock. 

Besides, SEBI has also proposed to change the current method of gauging mutual funds and alternative investment funds’ exposure to futures, according to a circular dated February 24.

Proposed Change in OI Reading Method | A more accurate snapshot of total risk at given time

Analysts say that a more accurate assessment of open interest may reduce the chances of a stock falling into the F&O ban list significantly and hence boost trading convenience on in the market.

It may also reduce the chances of entities running large positions—especially in index options—while notionally showing low open interest.

Additionally, along with suggested minimum conditions for the creation of F&O indices, a better measurement of risk may lead to lower risks of manipulation across cash and derivatives segments as well as excessive volatility.

Here are some of the other key proposals:

• A dedicated pre-open and post-closing session for equity derivatives
• A linkage between derivative positions with cash market volumes
• The permission to create fresh positions even during an F&O ban if the new positions are meant to reduce risk
• The permission to buy a put option or sell a call option in case of a long futures contract
• Close surveillance of intraday positions in single stocks; clearing corporations will check data four times in a session.
• In options, premium will be measured on the basis of the future equivalent, and not short or long positions
• A three-fold increase in the end-of-day threshold applicable to index futures to Rs 1,500 crore
• An intraday threshold of Rs 2,500 crore for index futures
• Futures contracts with non-benchmark indices as underlying assets under certain conditions
  
  • For this, the index must have a minimum of 14 stocks, with the weightage of the largest stock being up to 20 per cent
  • Also, the cumulative weightage of the three largest stocks should not exceed 45 per cent

SEBI Invites Comments on Latest Proposals 

SEBI has invited comments and suggestions from stakeholders such as retail investors and other market participants, intermediaries, investor associations and academic institutions, by March 17.

The proposed changes confirm an earlier Zee Business report suggesting that the regulator was considering additional measures for the F&O segment. READ MORE

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