SEBI's Proposed Changes to Equity Derivative Risk Measurement Explained

SEBI Wants to Rethink Open Interest. Here's Why That Matters for India's Derivatives Market

In a market that thrives on leverage, speed, and speculation, measuring risk accurately is non-negotiable. And that’s precisely what SEBI is aiming for with its latest proposal—a fundamental overhaul in how open interest (OI) is calculated for equity derivatives.

If you’re an options trader, a fund manager, or even a risk officer at a brokerage, this might be one of the most consequential regulatory changes on the horizon. Let’s walk through what SEBI has proposed, why it’s doing this now, and what the ripple effects could be.

The Problem with the Status Quo: Apples, Oranges, and a Blunt Tool

For years, India’s derivatives market has operated under a rather blunt method for measuring OI. In its current form, open interest is calculated by multiplying the number of contracts by the underlying asset price and a fixed contract multiplier, regardless of whether you’re dealing with a futures contract or an option.

But here’s the issue: this approach treats all contracts as equal in terms of risk, when in reality, they’re not. A futures contract carries full directional exposure, while an option behaves very differently—its sensitivity to the underlying price (what traders call “delta”) varies dramatically.

SEBI Whole-time Member Ananth Narayan perhaps put it best when he said the system was “adding apples to oranges.” That’s not just a colourful analogy—it captures the essence of the problem. Inaccurate risk measurement has led to unnecessary trading bans, poor signal quality, and even opened the door for manipulative tactics in single-stock derivatives.

SEBI’s Proposal: Delta-Based, Future-Equivalent Open Interest

In a consultation paper released on February 24, 2025, SEBI has proposed a shift towards what it calls future-equivalent OI, or a delta-based methodology. Rather than lumping all derivative contracts under one notional metric, the new system will weight each position based on its delta—i.e., how much the contract actually moves with the underlying asset.

For instance:

• A futures contract will still carry a delta of 1 (full exposure).
• But an at-the-money (ATM) call option might have a delta of 0.5. So if the stock moves ₹10, the futures gains ₹10, but the ATM option only moves ₹5.

The delta-based method captures this nuance, making it a far more accurate reflection of real risk exposure.

What’s Driving the Shift? Let’s Break It Down

1. Cutting Down Unnecessary Trading Bans

Under the current setup, stocks can hit Market-Wide Position Limits (MWPL) prematurely, triggering trading restrictions even when the actual risk is modest. SEBI believes that with a delta-based approach, up to 90% of these unnecessary bans could be avoided.

This would be a major win for small investors and active traders who often get blindsided by sudden bans in otherwise calm markets.

2. Blocking Risk Camouflage in Index Derivatives

While the current system overstates risk in single-stock derivatives, it does the opposite for index options. The problem here is netting. A trader holding long ATM calls and short far OTM calls may appear flat in notional terms—but in reality, carries significant net delta exposure.

This masking of risk can lead to hidden leverage, allowing participants to hold large speculative positions while staying under the radar of risk surveillance teams.

3. Preventing Loophole-Based Manipulation

Illiquid options on individual stocks have sometimes been used to artificially inflate OI, triggering trading halts just after negative news breaks. SEBI wants to close that window for abuse by aligning risk assessment with actual economic exposure.

A Closer Look: Where the Impact Will Be Felt

Area	Current System Flaw	Expected Benefit from New Method
Single-Stock Derivatives	Overstates OI, causing premature MWPL triggers	Fewer false alarms and smoother trading
Index Derivatives	Understates real exposure due to netting	Improved detection of concentrated risks
Retail & HNI Traders	Frequent, unexplained bans disrupt strategies	More predictable trading environment
Market Surveillance	Risk gets buried in complex spreads or combos	Cleaner, more transparent risk tracking

SEBI Isn’t Reinventing the Wheel—Just Fixing the Axle

To be clear, delta-based risk measurement isn’t a novel concept. It’s standard practice in developed markets like the US and Europe. What SEBI is doing is localising global best practices for India’s high-volume, high-volatility ecosystem.

And the timing couldn’t be better. As retail participation soars, algo-driven strategies gain traction, and institutional hedging gets more sophisticated, the need for granular, real-time risk oversight becomes essential—not optional.

In Conclusion: This Could Be a Watershed Moment

This isn’t just a technical tweak for the quant team. It’s a foundational shift in how the Indian market understands, quantifies, and regulates derivative risk. With SEBI proposing a future-equivalent OI framework, the goal is clear: build a market that’s more stable, less prone to distortion, and far more reflective of the risks that traders actually hold.

For traders, this could mean cleaner signals and fewer disruptions. For compliance officers and regulators, it promises greater transparency. And for India’s growing army of retail investors, it’s one more reason to believe the market is becoming a safer, fairer place to participate