𝐌𝐨𝐧𝐢𝐭𝐨𝐫𝐢𝐧𝐠 𝐎𝐟 𝐏𝐨𝐬𝐢𝐭𝐢𝐨𝐧 𝐋𝐢𝐦𝐢𝐭𝐬 𝐅𝐨𝐫 𝐈𝐧𝐝𝐞𝐱 𝐃𝐞𝐫𝐢𝐯𝐚𝐭𝐢𝐯𝐞 𝐒𝐞𝐠𝐦𝐞𝐧𝐭

SEBI on October 15, 2024, issued an important circular concerning position limits in the equity derivative segment. Based on inputs from market participants and discussions within SEBI’s Secondary Market Advisory Committee (SMAC), a key amendment has been made to position limits at the Trading Member (TM) level for index futures and options contracts.

𝐖𝐡𝐚𝐭’𝐬 𝐭𝐡𝐞 𝐀𝐦𝐞𝐧𝐝𝐦𝐞𝐧𝐭?

Previously, position limits for TMs were set at the higher of INR 500 crores or 15% of total open interest (OI) in the market. However, the updated circular increases the position limits significantly. Now, TMs can hold positions up to INR 7,500 crore or 15% of total market OI, whichever is higher. These limits will apply separately to index futures and index options.

SEBI has implemented a dynamic monitoring system for open interest positions, evaluating position limits based on the total open interest at the end of the previous trading day. Notably, in cases of passive breaches—where participants exceed limits due to a drop in market OI without changing their positions – no penalties or forced unwinding will be enforced.

𝐖𝐡𝐚𝐭 𝐢𝐬 𝐚𝐧 𝐎𝐈?
It is the total number of active, unsettled contracts in a futures or options market. Increasing OI suggests a strengthening trend.

𝐄𝐟𝐟𝐞𝐜𝐭𝐢𝐯𝐞 𝐓𝐢𝐦𝐞𝐥𝐢𝐧𝐞:

While the revised position limits take immediate effect, the provisions for passive breaches will be implemented from April 01, 2025.

𝐋𝐞𝐚𝐫𝐧𝐢𝐧𝐠 𝐟𝐫𝐨𝐦 𝐭𝐡𝐞 𝐏𝐚𝐬𝐭:

A similar change in the U.S. derivatives market. In 2020, the U.S. Commodity Futures Trading Commission (CFTC) expanded position limits on certain commodity contracts to allow greater flexibility for traders, especially during periods of market volatility. This was done to prevent forced unwinding of large positions when liquidity was tight, a situation that arose previosuly during the 2008 financial crisis when rigid position limits exacerbated the market downturn.

In India, a relatable case that could be relevant here is the 2013, National Spot Exchange Limited (NSEL) crisis. During the fallout, several brokers had positions exceeding limits, which led to forced liquidations and contributed to market panic. SEBI‘s introduction of passive breaches could help prevent similar market disruptions by providing flexibility in dynamic market conditions.

This circular marks another step by SEBI to promote transparency, fairness, and stability in the Indian derivatives market.

Stay informed with Regstreet Law Advisors as we continue to monitor and provide insights into the evolving landscape of financial regulations. Any comments or feedback is welcome at info@regstreetlaw.com

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