SEBI's New Rules To Make Derivatives Market Safer

In a bid to improve investor protection and bring greater transparency to the equity derivatives market, SEBI (Securities and Exchange Board of India) has introduced a wide range of reforms. These changes come at a time when retail participation is growing rapidly, especially in index options, and expiry-day trading volumes are hitting record highs.

Let’s break down these reforms in simple terms.

Why These Reforms Matter

Derivatives are powerful tools that allow traders to hedge risks, discover prices more efficiently, and improve market liquidity. However, the increasing complexity of these instruments has also raised concerns about volatility, speculation, and risk management. SEBI’s new rules aim to strike a balance between encouraging participation and ensuring safety.

New Way to Measure Open Interest: FutEq OI

One of the biggest changes SEBI has made is how Open Interest (OI) is calculated.

Until now, open interest was measured by simply counting the number of futures and options contracts. But this method didn’t accurately reflect the risk carried by each contract.

SEBI has now introduced a better method called Future Equivalent Open Interest (FutEq OI). This uses a concept called “delta”, which tells us how much real exposure each option or future contract has. It gives a much clearer picture of the total risk that traders are taking on.

Updated Rules for F&O Ban Stocks

SEBI has also made important changes to the way stocks under the F&O ban are handled.

Earlier, traders could continue building positions in these stocks during the ban period, leading to price manipulation and volatility.

Now, once a stock enters the ban list, traders must reduce their net positions each day.

No new exposure is allowed during the ban, even if prices move favorably.

This change will help curb excessive speculation, especially in less-liquid stocks.

New Formula for Market-Wide Position Limits (MWPL)

The Market-Wide Position Limit (MWPL) sets a cap on how much total derivative activity can take place in a stock.

SEBI has revised the MWPL calculation method. The new formula now considers:

The stock’s free-float market cap (shares available for trading), and

Its average daily delivery value (actual buying/selling in the cash market).

This update will better reflect the real trading activity of a stock and reduce unnecessary F&O bans, making the system more efficient.

Limits on Index Option Positions

For index options, SEBI has set strict limits on how much exposure a single trader can take:

• Net position limit: Rs 1,500 crore

• Gross position limit (long or short): Rs 10,000 crore

• If a trader exceeds these limits, they must either:

• Prove that they have enough cash or stocks to cover the position, or

• Reduce their exposure by the next trading day.

This rule will be enforced strictly starting December 2025, with a grace period until then.

Intraday Monitoring for Better Oversight

To keep a closer eye on market activity, SEBI has told stock exchanges to monitor trades multiple times a day, not just at the close.

This real-time tracking will help detect:

Unusual spikes in open interest

Sudden changes in trading patterns

If any red flags are found, they must be reported immediately. This is expected to enhance early risk detection and prevent market manipulation.

New Pre-Open Session for Derivatives

Just like the cash market, the derivatives segment will now have a pre-open session before trading starts.

This pre-market window will allow for:

Better price discovery

Smoother opening trades

Reduced volatility at market open

It will bring the derivatives market one step closer to global best practices.

Final Thoughts

SEBI’s latest reforms mark a strong step forward in modernizing India’s derivatives market. By improving risk measurement, tightening position limits, and increasing transparency, the regulator aims to create a safer environment for both retail and institutional investors.

As retail participation grows and markets evolve, these reforms ensure that speculation is kept in check while genuine investment and risk management activities are supported.