SEBI Tightens Risk Monitoring In Equity Derivatives With New Measures

Markets regulator Sebi on Thursday came out with a series of measures to strengthen risk monitoring in equity derivatives, including the intra-day monitoring of market-wide position on single stock derivatives.

As part of the new measures, exchanges will conduct intraday monitoring of Market-Wide Position Limit (MWPL) utilisation at a minimum of four random intervals during the trading day, Sebi said in its circular.

Additionally, the regulator has introduced new eligibility criteria for derivatives on non-benchmark indices and revised individual entity-level position limits based on the updated MWPL framework.

These measures will be implemented in a phased manner beginning October 1, the Securities and Exchange Board of India (Sebi) said.

The regulator noted that the derivatives market enables efficient price discovery, improved market liquidity and permits investors to manage risk.

Stock exchanges and Clearing Corporations (CCs) together provide the platform and products for trading in the derivatives market, while ensuring online real-time risk management, adequate surveillance, as well as smooth settlement of trades.

"The role of product offering, risk management, and surveillance by stock exchanges and clearing corporations is crucial in ensuring the integrity of the securities market ecosystem. This is specifically pertinent in view of the evolving market dynamics in the derivatives segment in recent years, with increased retail participation, offering of short tenure index options contracts, and heightened trading volumes in index derivatives on expiry day," Sebi said.

To limit settlement risk from intraday spikes in future equivalent (FutEq) open interest (OI) limits, Sebi asked exchanges to perform intraday monitoring of MWPL utilisation at least four random times during the trading session to take appropriate actions once OI utilisation breaches certain limits such as levying additional surveillance margin, monitoring for entity-level concentration and additional surveillance checks.

Additionally, exchanges have been asked to report instances of significant utilisation of MWPL or breach of MWPL to Sebi in the fortnightly surveillance meeting.

The regulator has set eligibility criteria for derivatives on non-benchmark indices, mandating that such indices must have a minimum of 14 constituents, with the weight of the top constituent not exceeding 20 per cent and the combined weight of the top three constituents not exceeding 45 per cent.

Additionally, the constituent weights must follow a descending order.

Stock exchanges are required to verify compliance with these criteria at the end of every calendar quarter. Furthermore, exchanges need to submit proposals for such indices with derivative contracts to Sebi within 30 days.

With regards to individual entity-level position limits for single stocks, Sebi has recalibrated limits based on the new Market Wide Position Limit definition.

Under this, clients and NRIs are allowed up to 10 per cent of MWPL, trading members (proprietary) up to 20 per cent and trading members (proprietary + client), FPIs (Category I), and mutual funds up to 30 per cent.

For FPIs under Category II, those other than individuals, family offices, and corporates are allowed 20 per cent, while the sub-category comprising individuals, family offices, and corporates is limited to 10 per cent.

Exchanges and Clearing Corporations (CCs) are required to prepare a joint Standard Operating Procedure (SOP) with Sebi to monitor significant open interest (OI) concentration and take necessary measures when needed.

Regarding pre-open session, Sebi said such sessions will be extended to current-month futures contracts on both single stocks and indices, mirroring the modalities of the cash market's pre-open and post-closing sessions.

In the last five trading days before expiry, these sessions will be extended to next-month futures contracts as liquidity shifts from one expiry to the other on account of the rollover of futures contracts.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)