Context:
The Futures Industry Association (FIA), a global derivatives market body representing members ranging from clearing corporations to foreign portfolio investors, has voiced strong opposition to the Securities and Exchange Board of India’s (Sebi’s) proposed overhaul of open interest (OI) calculation and position limits for index futures and options (F&O).
SEBI’s Proposal (February 24, 2025)
- Objective
- Bring back alignment between the F&O markets and cash markets
- Reduce instances of ban of stocks
- Strengthen risk management
- Key Changes Indicated
- Change Open Interest (OI) calculation with the use of a delta adjusted (future equivalent) formula
- Review market wide position limits
- Introduce specific position limits for single stocks and index derivatives
- FIA’s Concerns
- The Futures Industry Association (FIA) representing global derivatives players including clearing corporations and FPIs strongly opposes SEBI‘s proposals.
- Key Objections
| Issue | FIA’s Concern |
|---|---|
| Liquidity Drain | Could lead to wider bid-ask spreads, reduce institutional participation, and undermine market depth. |
| Increased Trading Costs | Higher operational and compliance costs due to complex calculations and monitoring requirements. |
| Market Volatility | Restrictions may cause higher price swings and instability. |
| Price Manipulation Risks | Paradoxically, inefficiencies could increase the chance of price manipulation. |
| Operational Challenges | Delta-adjusted OI method is rare globally, adding significant complexity and error risk. |
| Position Limit Gaps | Potential loopholes, with large positions still possible in short-term out-of-the-money options. |
Industry Pushback
| Stakeholders | Likely Impact of SEBI’s Proposal |
|---|---|
| Traders | Face higher costs and reduced flexibility. |
| Market Makers | Possible liquidity constraints, leading to wider spreads and less competitive pricing. |
| Retail Investors | Increased costs and higher trading risks. |
| Institutional Investors | May pull back participation, harming market depth and efficiency. |
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.
FIA’s Recommendations
- Rethink the proposed framework for OI calculation and position limits.
- Introduce a more practical threshold:
- EOD (End-of-Day) Net Future Equivalent limit of ₹7,500 crore.
- Focus on simplified, globally accepted practices rather than complex adjustments.
SEBI’s Justification (Regulator’s perspective)
- The proposals aim to
- Align derivatives trading with the underlying cash market activity
- Reduce manipulation-prone scenarios
- Prevent stock ban instances
The SEBI-FIA standoff highlights a critical debate between tighter regulatory controls and maintaining market liquidity and efficiency. While SEBI’s intention is to strengthen the system, the FIA warns that poorly calibrated restrictions could end up destabilizing the very markets they aim to protect.
Source: BS
