SEBI: Stricter Rules for Equity and Index Derivatives

Reduction in stock derivative position limits and index derivatives rule tightening in order to curb market risk. Follows the measures of October 2024, which increased entry barrier and trading costs in derivative securities to protect retail investors.
There are also concerns regarding the high volatility of the futures and options (F&O) market, which appears to be spilling over into the broader stock market, which has declined after record highs in September.

Proposed Amendments to Stock Derivatives

• Single stock derivatives shall have market wide position limits (MWPL) as per their linkage to cash markets.
• The position limits shall be determined as the lower of the following:
  • 15% of the stock’s free float market capitalization, or
  • 60 times the average daily delivery value.
• Objective: Reduce potential market manipulation and align derivatives risk with cash market liquidity.

Proposed Changes in Index Derivatives

• Derivative contracts shall be available only on indices which meet the required liquidity and diversification conditions.
• New contracts would be allowed only when an index has at least 14 constituents.
• Formation of Weightage limits
  • The top three stocks combined must not represent more than 45% of the index.
  • The single largest stock must not represent more than 20% of the index.
• Reason: To prevent market manipulation through concentrated positions in a few stocks.

Introduction of Pre Open Session in Futures Market

• Introduce pre open sessions by SEBI for current month futures contracts on both single stocks and indices.
• Improve the price discovery and thereby soften the extreme volatility at market opening.

SEBI is actually soliciting feedback until 17 March 2025 from market participants.
If implemented, it would reduce the exposure to risk, limit the excessive speculation, and tie in derivatives trading with the fundamentals underlying stock tra