Sebi Proposes Fresh Measures to Tighten Derivative Market Rules to Minimize Risk

India's market regulator, Securities and Exchange Board of India (SEBI), has proposed lowering position limits for equity stock derivatives and tightening rules for index derivatives in an effort to further reduce risk accumulation in these markets.

The new proposals follow changes announced in October by SEBI, which raised the entry barrier and increased the cost of trading derivatives to protect retail investors.

The new proposals come amid concerns that volatility in the futures and options markets is spilling over into the broader stock market, which has fallen sharply since reaching record highs in September 2024.

SEBI proposed in a consultation paper released late Monday that the market-wide position limit for single-stock derivatives be linked to cash markets.

It proposed setting this position limit at either 15% of a stock's free-float market capitalisation or 60 times the average daily delivery value.

SEBI stated that this will reduce the potential for manipulation and better align derivatives risk with underlying cash market liquidity.

The regulator also proposed that derivatives on indices other than the benchmarks BSE Sensex and NSE Nifty 50 be offered only if they meet specific criteria.

"Index derivatives are cash-settled, but the nexus between cash and derivative markets nevertheless exists," said the securities regulator.

"If a high proportion of index weightage is attributable to a small number of stocks, participants could effectively replicate a large (and unmonitored) position in those constituents, giving rise to fears or risks of market manipulation and/ or excessive market volatility," it stated.

To address this, SEBI proposed that derivative contracts be introduced only for indices with at least 14 constituents.

It also stated that the combined weight of the indexes' top three constituents should be less than 45 percent, with the top constituent having no weight greater than 20 percent.

SEBI also proposed that the pre-open session, which is common in the cash market, be extended to the futures market, beginning with current-month futures on both single stocks and indices.

SEBI has requested feedback on these proposals from market participants until March 17.