SEBI comes out with new framework for monitoring intraday position in index options

Markets regulator SEBI came out with a new framework for monitoring intraday positions in equity index derivatives, a move aimed at preventing risks caused by large exposures.

Under the new framework, the net intraday position has been capped at ₹5,000 crore per entity in index options as against the end-of-day limit of ₹1,500 crore, the Securities and Exchange Board of India (SEBI) said in a circular.

The gross intraday position has been restricted at ₹10,000 crore, the same as the existing end-of-day limit. This applied separately to long and short positions, it added.

The framework, effective from October 1, “would facilitate market-making activity on all trading days while putting a check on creation of outsized intraday position on the expiry day for orderly trading”.

Additionally, it provides predictability, operational clarity, and a fair balance between ease of trading and risk management, SEBI said.

The framework will be restricted to index options only, which generally dominate the derivatives landscape.

In simple words, Sebi’s new rule would oversee large trading positions held by individual entities during the trading day. This will help in preventing excessive risk-taking and maintaining market order.

The new rules have been issued after SEBI observed growing instances of outsized intraday Future Equivalent (FutEq) or delta equivalent positions created by certain entities in index options on expiry days, leading to volatility and risk to market integrity.

The move follows SEBI temporarily barred the U.S.-based hedge fund Jane Street from the Indian securities market after finding it guilty of manipulating the indices by taking bets in the cash, and, futures and options markets simultaneously for making handsome gains.

In its circular issued late Monday night, the regulator said that stock exchanges would monitor positions through at least four random intraday snapshots, including one between 2:45 p.m. and 3:30 p.m., a period when heightened activity is generally observed.

For entities breaching the limits, stock exchanges will examine trading patterns and seek a rationale for such positions from the clients.

The breaches of position limits will attract a penalty or additional surveillance deposit, as decided jointly by stock exchanges, SEBI said.