SEBI's New Risk Metrics for Equity Derivatives

Securities and Exchange Board of India (SEBI) has recently proposed a series of measures focusing at enhancing trading approach and risk monitoring in the equity derivatives market. These proposals include shifting from notional terms to a Delta-based approach for calculating open interest (OI) and revising index derivatives position limits to reduce manipulation risks. This blog post explores these changes and their potential impact on small investors.

Delta-Based Approach in OI

SEBI's proposed to apply a Delta-based method for calculating open interest. The Delta-based approach considers the sensitivity of options contracts to changes in the underlying asset's price, providing a more accurate market exposure. This change is crucial because the existing notional value method can sometimes misrepresent market risk, leading to unnecessary trading restrictions.

For instance, under the current system, stocks may be pushed into the ban period due to high notional open interest without significant actual risk. The Delta-based method will going to prevent such scenarios by showing a clear picture of market risk. The frequency of stocks entering the ban period will come to low.

Impact on Small Investors

SEBI has clarified that these changes will not really affect small investors. By reducing the frequency of stocks entering the ban period, small investors will face fewer trading restrictions, which will allowing them to manage their portfolios more efficiently.

Additional Proposals and Measures

SEBI's consultation paper outlines several other key proposals:

1. Intraday Monitoring: Clearing Corporations will conduct intraday monitoring at least 4 random times during trading sessions to safeguard market integrity and limit settlement risks from intraday spikes in Futures and Options Open interest.
2. Exposure Limits for Mutual Funds and AIFs: The exposure limits for Mutual Funds and Alternative Investment Funds will be recalibrated to align with the new Futures and Options calculations.
3. Criteria for Non-Benchmark Indices: SEBI proposes additional criteria for introducing derivatives on non-benchmark indices, including a minimum of 14 constituents, with specific weight limits for top constituents.
4. Market Wide Position Limits (MWPL): MWPL will be revised to link with cash market activity, potentially reducing unnecessary trading restrictions.

SEBI's Efforts to Prevent Stock Manipulation

SEBI's move towards a Future Equivalent method for calculating open interest is designed to prevent stocks from being unfairly pushed into the ban period due to manipulation. By providing a more accurate measure of market risk, this method aims to reduce unnecessary trading restrictions and enhance market transparency.

In conclusion, SEBI's proposals are aimed at creating a more transparent and risk-managed derivatives market. While these changes are expected to have a minimal direct impact on small investors, they will contribute to a more stable trading environment, which benefits all market participants.

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