SEBI Proposes Stricter Rules for Equity and Index Derivatives to Reduce Market Risks

India’s markets regulator, the Securities and Exchange Board of India (SEBI), has proposed new measures to tighten position limits for equity stock derivatives and introduce stricter regulations for index derivatives.

The move aims to curb excessive risk build-up and potential manipulation in the derivatives market.

Stricter Position Limits for Single-Stock Derivatives

In a consultation paper released late on Monday, SEBI suggested linking the market-wide position limit for single-stock derivatives to the cash market. It proposed setting this limit at the lower of:

• 15% of the free-float market capitalisation of a stock, or
• 60 times the average daily delivery value.

SEBI stated that this would help reduce the chances of market manipulation and align derivatives risk with the liquidity in the underlying cash market.

Tighter Norms for Index Derivatives

The regulator also proposed stricter eligibility criteria for derivatives on indices beyond the benchmark BSE Sensex and NSE Nifty 50.

SEBI expressed concerns that excessive derivatives trading could impact stock market volatility, noting that market fluctuations have intensified since record highs were reached in September 2024.

To mitigate this, the regulator suggested that derivative contracts should only be introduced on indices meeting the following criteria:

• The index must have at least 14 constituents.
• The combined weight of the top three stocks should not exceed 45%.
• The weight of the top constituent should not exceed 20%.

SEBI stated that these measures would prevent market participants from using index derivatives to create large and unmonitored positions in a small set of stocks, thereby reducing risks of manipulation and excessive volatility.

Pre-Open Session for Futures Trading

To further stabilise the derivatives market, SEBI proposed introducing a pre-open session for the futures market, similar to the practice in the cash market. This initiative would initially apply to current-month futures contracts for both single stocks and indices.

SEBI Seeks Market Feedback

The regulator has invited feedback from market participants on these proposals, with the consultation period open until March 17, 2025. The final regulations will be determined after reviewing stakeholder responses.

These new proposals follow SEBI’s previous reforms announced in October 2024, which raised the entry barriers for derivatives trading and increased transaction costs to protect retail investors.

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