SEBI Rethinks Gross Limit Plan for Index Options Traders
Why in the news
SEBI is likely to revisit its plan for a gross limit on index option positions after market players criticised it strongly.
What SEBI proposed
- Gross limit: sum the deltas of long and short option positions separately (gross) rather than net them.
- Purpose: curb manipulation, improve risk control and stop large manipulative positions in single stocks and index derivatives.
- Delta-based open interest: compute OI on a delta basis; delta shows how much an option’s price moves when the underlying index or stock moves. The market welcomed this part.
About open interest
Open interest is the count of outstanding, unsettled derivative contracts (options or futures) on an asset. It tracks every open position in a contract, not the volume traded.
Concerns raised
| Concern | Explanation |
|---|---|
| Liquidity | Brokers, proprietary desks and institutions fear thinner markets and wider bid-ask spreads that raise trading cost; big prop desks, HFTs and FPIs hit hardest |
| Hedging | Large funds’ portfolio hedges could weaken, which may threaten market functioning |
| Risk principle | Buying and selling options at various strikes itself lowers risk; summing long and short deltas separately goes against that |
SEBI’s stand and next steps
- SEBI accepts that delta alone does not capture risk; volatility and time decay matter too.
- It sees a gross limit as a simple substitute for separate limits on many parameters.
- A review is under way, and the proposal is likely to be amended based on industry feedback.
Significance
SEBI wants to curb manipulation and systemic risk, but market dynamics and unintended effects on liquidity, costs and hedging are pushing it to rework the plan.
Exam angle
- Regulator: SEBI.
- Delta measures price sensitivity of an option to its underlying.
- Open interest counts unsettled contracts, not traded volume.