Proposed risk measure invaluable to control risks of concentration, possible manipulation: Sebi's Ananth Narayan
In an interview to Moneycontrol, Sebi’s Whole-time Member explained why the new risk measure will improve transparency in the market and why the widely-discussed intraday limits have been set.
We are very happy to discuss recalibrate the intraday limits proposed if anyone has genuine concerns and arguments, said SEBI’s WTM Ananth Narayan
On February 24, 2025, the Securities and Exchange Board of India (Sebi) issued a consultation paper that proposed changes to the way risk is measured in the equity derivatives segment. While market participants have largely welcomed the proposal, they are concerned about the intraday position limits the market regulator proposes to set.
In an interview to Moneycontrol, on the sidelines of the recently held Moneycontrol Global Wealth Summit 2025, Sebi’s Whole-time Member Ananth Narayan explained the intent behind the proposals and to what extent the regulator is willing to reconsider the proposals.
What is the intent behind the February 24 consultation paper? Is it connected to the October 2024 directives?
The steps announced on October 1, 2024, after extensive consultations, were aimed at addressing issues around investor protection and market stability arising specifically from overtrading in index options on expiry days. The impact of this is playing out and is along expected lines.
The February 24, 2025, consultation paper is not about curtailing any part of the market. There are two objectives to this current consultation. The first is about getting our risk metrics right. The second is about changing the market architecture – including giving some relaxation where needed – so that the market becomes a lot more efficient, more transparent, and the trust in the ecosystem increases.
First, on getting the risk metrics right…
Currently, we add the Notional Open Interest in futures with the notional Open Interest in options to arrive at the overall Open Interest (OI). This is like adding apples and kangaroos – the resultant total OI number is really not meaningful. We now propose to use the FutEq or delta-based OI of Options, instead of Notional OI. This would allow for an apple-to-apple addition of OI across Futures and Options (F&O), and the resultant total OI would convey the actual risk and exposure at any point in time.
The delta of a derivative contract is a measure of how much the contract value is expected to change when the price of the underlying asset changes by one unit. For a long Futures contract, the delta is 1: that is, if the underlying price moves up by 1 unit or 1 percent, the value of the contract moves up by 1 unit or 1 percent.
The Notional and FutEq OI for futures is therefore identical. In contrast, for a long call option, for example, the delta will range between 0 and 1, depending on the moneyness of the option. Long deeply in-the-money call options will have a delta of close to 1, while long deeply out-of-the-money call options may have a delta close to 0. FutEq OI of options, therefore, can be very different from Notional OI.
What are the benefits of moving to delta-based OI for an investor?
Total FutEq OI across F&O gives a true measure of the risk being run by an investor at a point in time. System level F&O FutEq OI gives a good picture of the gross exposure in the ecosystem at a point in time. This is valuable information for market participants and allows for comparison with traded volumes in cash markets. In contrast, Notional OI across F&O can be meaningless, or worse, misleading.
For single stock F&O, an immediate benefit of moving to FutEq OI is that instances of stocks being needlessly pushed into ban periods will reduce sharply. Currently, a stock can be pushed into a ban period if it is trading in cheap out-of-the-money options, thereby consuming significant Notional OI, not commensurate with the underlying risk at that point of time.
Going forward, such contracts will only consume the much lower FutEq OI at that point in time, and the utilisation of the Market Wide Position Limit (MWPL) would therefore be much lower. As mentioned in the consultation paper, back-testing for the period July–September 2024 showed 366 stock-days under ban using Notional OI. Under the proposed FutEq OI architecture, those instances dropped to just 27 – a reduction of over 90 percent.
There are benefits for index derivatives as well. Currently, naked positions of participants, including FPIs (foreign portfolio investors), in index options is limited to Rs 500 crore on a net Notional OI basis.
The intent was to limit individual naked positions. However, net Notional OI can be very, very misleading as an indicator of true risk. For example, if one is both long at a lot of at-the-money puts and simultaneously short at a lot of out-of-the-money puts on an index, one could have negligible net Notional OI but still be running significant short positions on the index.
We have even seen a handful egregious cases where the net Notional OI was well within Rs 500 crore, but the actual naked FutEq risk being run by the entity was short in an index by well over Rs 10,000 crore or even Rs 20,000 crore.
This is wrong on multiple counts. One, net systemwide Notional OI for index options can give a very wrong and misleading picture of the actual risk being run in the market. Disclosing FutEq- based market OI, in contrast, would give market participants valuable information around the actual risks and positions in the market at a point in time. Second, for exchanges and risk management, individual-level FutEq OI is invaluable to control risks of concentration and of possible manipulation across cash and derivative markets.
While exchanges’ surveillance systems are constantly monitoring the market for such manipulation, nevertheless, an all-round better measure of risk should give people more vital information about market positioning, and increase confidence in the market.
Is there a large undisclosed risk in the market currently?
Firstly, exchanges and Sebi have surveillance systems that are constantly evolving, and are constantly on the lookout for manipulative practices. You’ve seen many examples of us detecting elaborate manipulation and taking action.
On risks, we have provided data in the consultation paper. A vast majority of participants – say 99.99 percent – have positions below the proposed limit in FutEq terms. In the consultation paper, for a particular period, we have provided the range of FutEq OI of the top 50 participants. Amongst them, in 89 percent of the participant/ days, positions were well below the proposed Rs 500 crore limit. But in one percent of participant/ days, the naked delta risk was higher than Rs 10,000 crore even though the net notional OI was below Rs 500 crore.