Sebi for new limits for index derivatives exposure

A panel of India’s securities regulator has recommended a new way of calculating the value of options and futures outstanding and increasing position limits, according to people familiar with the discussions.

In a meeting Wednesday, a Securities and Exchange Board of India committee endorsed a proposal to use delta — a risk measure that estimates the change in a derivative’s price relative to that of its underlying security — for traders to measure the size of a position. Currently, that’s calculated by adding up the value of all the contracts outstanding, a common practice across the world.

The delta-based approach will come with new limits on end-of-day index derivatives exposure, which the committee recommended setting at the equivalent of 100 billion rupees ($1.2 billion) gross and 15 billion rupees net per firm, the people said, requesting anonymity as the discussions are sensitive. That’s much higher than the 15 billion rupees gross and 5 billion rupees net the regulator had suggested in a discussion paper it released in February.

With the proposed changes, Sebi is seeking to better align risk with investors’ market exposure and prevent any potential manipulation in the world’s biggest derivatives market by contracts traded. The current method that uses notional value may not always accurately reflect the actual exposure, it has said.

The advisory panel’s recommendation is not final, and the regulator can still tweak the final rules, the people said. If the changes go ahead, the next step will be for Sebi to issue a notification codifying the new measurement mechanism and position limits.

Sebi didn’t respond to an emailed request for comment.

This would be the latest change for India’s derivatives market, which grew exponentially in recent years and attracted foreign market makers including Citadel Securities and Optiver before Sebi introduced a series of curbs to halt rampant speculation.

The Futures Industry Association, an industry body for global derivatives, has opposed most of the proposals regarding the latest changes, saying they would likely lead to wider spreads and increased volatility. The group, which comprises members including Flow Traders, Hudson River Trading and Jane Street Capital, sought delta-adjusted position limits of 75 billion rupees net, which it described as in line with the current size of India’s derivatives market.