The Securities and Exchange Board of India is in the process of refining regulations governing the derivatives market to enhance investor protection while maintaining market stability. SEBI Chairman Tuhin Kanta Pandey emphasized that the regulator is not seeking to curb futures and options trading but is adopting a measured approach to reduce risk exposure for retail investors.
As part of the review, SEBI recently issued a consultation paper outlining proposed reforms, which received over 800 public comments. These responses are now under assessment, with a final decision on rule changes expected soon. Pandey confirmed that many of the proposed adjustments do not require approval in a board meeting and can be directly implemented through administrative procedures, allowing for swift rollout once finalized.
One of the key proposals involves modifying the methodology for calculating open interest in equity derivatives trading. SEBI is considering shifting from the existing notional value method to a “Future Equivalent” method, aimed at preventing artificial inflation in open interest that could trigger stock bans. Additionally, changes to the market-wide position limit are under review. Currently set at 20 percent of a stock’s free-float market capitalization, the revised formula would set the limit at the lower of 15 percent of free-float market cap or 60 times the average daily delivery value in the cash market. These adjustments seek to curb speculative trading without affecting legitimate market activity.
SEBI’s latest efforts follow concerns raised in 2024 over excessive trading volumes in derivatives, particularly among retail investors. A report released last year revealed that nine out of ten retail investors incurred losses in derivatives trading, prompting the regulator to consider additional safeguards.
The ongoing review underscores SEBI’s commitment to ensuring a fair and transparent derivatives market while reinforcing investor protection measures. The finalization of the proposed reforms is expected to bring greater clarity to market participants and strengthen risk management frameworks in the securities sector.
