The Securities and Exchange Board of India (SEBI) is gearing up for a crucial meeting on May 7, 2025, where its committee on secondary market regulations will deliberate on long-pending decisions concerning index options trading limits and expiry days for derivatives. These decisions are poised to impact a wide section of market participants, including foreign portfolio investors (FPIs), high-frequency traders (HFTs), stock exchanges, and brokers.

Key Proposals Under Review

The SEBI panel, comprising representatives from stock exchanges, brokers, depositories, industry bodies, and even the government, will discuss two major regulatory proposals:

1. Intraday and end-of-day (EoD) open interest (OI) limits in index options

2. Standardisation of expiry days for derivative contracts across exchanges

The Push for Higher Open Interest Limits

SEBI’s concern arises from the current monitoring framework, which calculates net positions by combining long and short notional positions. While this may appear balanced, it often masks the actual delta exposure, allowing large positions that pose systemic risk.

In a consultation paper dated February 24, SEBI proposed the following limits:

• Net intraday limit of ₹1,000 crore

• Gross intraday limit of ₹2,500 crore

• Net EoD limit of ₹500 crore

• Gross EoD limit of ₹1,500 crore

These proposed figures were based on a detailed analysis of trading data from November 2024, where most top 50 OI holders had net FutEq exposures within ±₹500 crore. However, it was also discovered that in 1% of cases, entities held delta risks exceeding ₹10,000 crore while remaining within notional OI limits.

FutEq (Future Equivalent) is calculated by aggregating the delta-weighted price impact of positions—a measure SEBI believes better reflects the real market risk being carried.

Why Traders Want Higher Limits

Market participants, especially large algorithmic (HFT) traders and FPIs, argue that the proposed limits are too restrictive. There’s a strong push from this segment for much higher intraday limits, ranging from ₹5,000 crore to ₹15,000 crore, to ensure operational flexibility and to avoid penalties during market volatility.

A key concern raised by these participants is that strict limits might penalize traders inadvertently during rapid price swings, which could impact liquidity and efficiency in the derivatives market.

SEBI's Cautious Approach

SEBI, however, is treading cautiously. The regulator wants to balance market efficiency with systemic stability. The next step will involve analyzing open interest data from April 2025 to gain updated insights before issuing a final circular. This final analysis could influence whether SEBI maintains its current proposals or adjusts the thresholds based on market feedback.

Uniform Expiry Days for Derivatives in Focus

The second major item on the agenda is SEBI's proposal to standardize expiry days for all equity derivatives contracts. In a draft circular issued on March 27, SEBI proposed:

• Each exchange can choose either Tuesday or Thursday as the weekly expiry day for its benchmark index options.

• All other equity derivatives contracts on that exchange must also expire in the last week of every month, on the same chosen day (i.e., Tuesday or Thursday).

• SEBI also intends to ban Monday and Friday expiries to reduce concentration risk and market stress on volatile days.

The move aims to optimize spacing between expiries across exchanges and curb concentration risk, which can spike market volatility.

Market Feedback on Expiry Day Proposal

While SEBI’s intent is clear—to bring uniformity and reduce risk—some exchanges and market players are opposed to the restriction. Some participants argue that exchanges should retain the freedom to choose expiry days, allowing competition and product differentiation.

A few suggestions have even been made to introduce three expiry days in a week, to offer more options and enhance liquidity. However, SEBI is sticking to its position that expiry days should not fall on Mondays or Fridays, as these are often more volatile due to global market influences or weekend carryover risks.

SEBI has also proposed that any change in expiry day by an exchange must receive prior approval from the regulator. This is intended to avoid abrupt changes and ensure regulatory oversight in line with systemic risk considerations.

What Happens Next?

The May 7 meeting will be crucial. SEBI’s advisory panel will deliberate on:

• Market feedback from the consultation paper

• April 2025 trading and OI data

• The feasibility of modifying proposals based on stakeholder demands

Once this review is complete, SEBI is expected to issue a circular with final rules, which will impact how traders, FPIs, and exchanges operate in the derivatives segment.

Implications for Market Participants

If SEBI sticks with its original proposal:

• Traders will face tighter limits, which could restrict large directional bets

• Exchanges may lose flexibility in structuring derivative products

• Risk control frameworks may become stricter, especially for FPIs and HFTs

On the other hand, if SEBI loosens the limits based on market feedback, it could boost liquidity and expand participation in the options market, especially among foreign investors and proprietary desks.

Either way, the upcoming SEBI decision is set to reshape India’s index derivatives market, which has grown exponentially in volume and complexity over the past few years.

Final Thoughts

The index derivatives market in India is at a crossroads. With SEBI stepping in to address systemic risk, the regulator’s final stance will have far-reaching implications. While traders seek flexibility, SEBI is focused on transparency, control, and safety.

As we approach the May 7 meeting, all eyes will be on SEBI’s final circular, which could redefine limits, expiries, and risk thresholds for years to come.

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