Context:
Since February 24, 2025, the SEBI consultation paper has affected OI calculations, limits on positions, and new trading sessions before and after continued derivatives trading. The delta calculation has been staunchly opposed by the Futures Industry Association, or FIA, a global body representing foreign portfolio investors.
What Is Open Interest?
Open interest is the total number of outstanding derivative contracts for an asset—such as options or futures—that have not been settled. Open interest keeps track of every open position in a particular contract rather than tracking the total volume traded.
SEBI”s Key Proposals
- Change in OI Calculation
- Current: Simple addition of notional OI in futures and options Proposed: Aggregation of delta adjusted options positions with futures OI to better reflect price sensitivity.
- Delta Based Position Limits: Delta (ranging from 1 to +1) would become the benchmark for position limits, representing option price sensitivity relative to underlying asset movements.
- Pre Opening and Post Closing Sessions
- New trading windows for derivatives proposed to enhance price discovery.
- Eligibility Criteria for Non Benchmark Index Derivatives
- New standards to offer derivatives on indices other than market benchmarks.
FIA Has Conclusively Identified Concerns as
- Operational Complexity
- Delta based calculations necessitate constant recalculation and monitoring, which increases error susceptibility and heavy burden.
- Liquidity Risks
- Frequent delta adjustments may force participants out, leading to low liquidity and high volatility.
- Price Manipulation Risks
- The shifting limits could unconsciously lead to “unintentional market distortions.”
- Contrary to Global Standards
- Delta based OI calculations are such issues that most prominent markets such as Hong Kong and Chicago Mercantile Exchange (CME) fail to utilize.
- Adversely Impacts Frequent Trading Strategies
- Strategies such as index arbitrage or long options positions would be subjected to penalties under delta threshold but would incur no coverage increase in risk.
Debate over Proposed Limits
- SEBI proposes an increase in the end of day (EoD) limit for entities to be ₹1,500 crore instead of ₹500 crore. FIA states that if delta methodology is adopted, the EoD limit should be ₹7,500 crore to accommodate such fluctuating risk thresholds.
Market Perspective
- There are no serious defaults in the present system, which interrogates the need for an overhaul. FIA suggests SEBI reconsider and analyse other adaptations of global methodologies before it embarks upon complicated changes.
While SEBI’s intent to strengthen risk monitoring is laudable, the FIA’s indorsement throws a huge trellised shadow around “practical and operational risks” capable of disrupting liquidity and market efficacy. A balanced, globally benchmarked approach adapted to best practices in standard risk management should therefore be developed to address all concerns around this proposal.
