SEBI Introduces Settlement Scheme for Brokers Amid Algorithmic Trading Compliance Issues

SEBI Weighs Revision of Trading Limits: A Balancing Act Between Flexibility and Risk

The Securities and Exchange Board of India (SEBI) is currently reviewing proposals to revise trading limits in the equity derivatives market, particularly focusing on gross and delta-adjusted open interest (OI) calculations. This comes on the back of detailed feedback from global trading firms and market associations, most notably the Futures Industry Association (FIA), which represents institutional players including hedge funds and proprietary trading firms.

Industry Push for Higher Trading Leeway

In recent months, the FIA and other stakeholders have lobbied SEBI to ease restrictions on open interest limits, arguing that the current caps are out of sync with the scale and sophistication of today’s markets.

At the heart of their request:

• A higher cap on end-of-day (EOD) net index futures equivalent positions, with a proposal to raise the threshold from ₹1,500 crore to ₹7,500 crore.
• More room for intraday trading, particularly for delta-neutral strategies that adjust positions dynamically throughout the day.

SEBI’s Consultation Paper: Setting the Context

SEBI's February 24, 2025, consultation paper—titled “Enhancing Trading Convenience and Strengthening Risk Monitoring in Equity Derivatives”—outlined a series of proposed reforms aimed at:

• Improving transparency and disclosures in derivatives trading
• Reducing unnecessary ban periods on individual stock derivatives
• Tightening surveillance on large and concentrated positions, especially in index options and futures

One of the most debated proposals in the paper was the shift toward delta-based OI calculation, where exposures are assessed after adjusting for the option’s sensitivity to market movements (delta). This methodology is considered more accurate and is in line with practices followed by major global exchanges.

Intraday Limits: Industry Asks and SEBI’s Consideration

In the initial draft, SEBI had suggested capping intraday gross delta-based OI at ₹2,500 crore. For large institutional traders and high-frequency market makers, this was seen as too conservative.

Industry feedback was swift and pointed:

• Several firms asked for the cap to be raised to ₹5,000 crore,
• Others argued for limits closer to ₹10,000 crore, citing operational needs and hedging demands.

While SEBI has acknowledged this feedback, no final decision has been announced yet. However, there are indications that the regulator may consider a moderate increase, keeping a tight watch on risk implications.

EOD Net Limits: The Tighter End of the Rope

The FIA’s proposal to raise the EOD net limit to ₹7,500 crore has met with more resistance.

SEBI’s rationale:

• Raising EOD thresholds could create excessive concentration risk.
• Internal analysis showed that only a small number of firms would benefit from such a high cap, suggesting the move could distort competition.
• There is concern that elevated limits might open the door to market manipulation or create systemic vulnerabilities.

What This Means for the Market

SEBI’s broader intent is clear: to facilitate efficient trading while avoiding speculative excess. With India now the largest equity derivatives market in the world by contracts traded, the need for sophisticated risk frameworks has never been greater.

At the same time, institutional traders, especially algorithmic and quantitative firms, are pushing for greater operational headroom—not for speculative plays, but for better execution and market-making efficiency.

Summary Snapshot

Limit Type	SEBI's Proposal	Industry Request	SEBI’s Likely Response
Intraday Gross Delta OI	₹2,500 crore	₹5,000–₹10,000 crore	Likely to be revised upward
EOD Net Index FutEq Limit	₹1,500 crore	₹7,500 crore (FIA)	Unlikely to accept full proposal

Final Thoughts

SEBI’s current review reflects a pragmatic and measured approach to market reform. While it is open to relaxing some limits, especially for intraday risk-neutral strategies, the regulator is drawing a firm line when it comes to longer-term concentration risk.

As consultations continue, the eventual framework is expected to strike a careful balance between flexibility and oversight—ensuring that India's derivatives market remains efficient, transparent, and resilient.