In News:

The Securities and Exchange Board of India (SEBI) has introduced a new regulatory framework to monitor intraday positions in equity index derivatives, effective October 1, 2025. The move is aimed at mitigating systemic risks, ensuring orderly market functioning, and curbing speculative excesses, especially on expiry days.

Key Features of the Framework

• Net Intraday Position Cap: ?5,000 crore per entity in index options (compared to the existing end-of-day limit of ?1,500 crore).
• Gross Intraday Position Cap: Restricted to ?10,000 crore, the same as the current end-of-day limit. This applies separately to long and short positions.
• Applicability: Framework applies only to index options, which dominate India’s derivatives market.
• Objectives:
  • Prevent creation of outsized intraday exposures.
  • Provide predictability and operational clarity.
  • Strike a balance between ease of trading and robust risk management.
  • Facilitate market-making activity on all trading days while ensuring discipline on expiry days.

Understanding Derivatives

Derivatives are financial contracts whose value is derived from an underlying asset, such as stocks, indices, commodities, or currencies. They allow investors to speculate on price movements, hedge against risks, or enhance returns.

Types of Equity Derivatives

• Futures Contracts: Obligates buyer and seller to transact an equity asset at a predetermined price on a future date (e.g., Nifty and Sensex futures).
• Options: Provides the right, but not obligation, to buy (call) or sell (put) an underlying asset at a set price before or on expiry.
• Forwards: Similar to futures but non-standardised and over-the-counter (not exchange-traded).
• Swaps: Involves exchange of cash flows linked to equity returns; used for hedging or investments.

Significance of Equity Derivatives in Markets

• Leverage: Small upfront margin allows control over large positions, magnifying gains (and risks).
• Hedging: Protects portfolios from adverse price fluctuations.
• Arbitrage Opportunities: Exploit price mismatches across markets.
• Diversification: Enhances portfolio risk-spread.
• Liquidity: High trading volumes ensure ease of entry and exit.
• Income Generation: Writing options or structured strategies provide additional returns.
• Cost Efficiency: Lower transaction costs compared to direct investment in underlying assets.

Why SEBI’s Move Matters

• Risk Containment: Prevents destabilisation of markets due to oversized speculative positions.
• Systemic Stability: Reduces chances of flash crashes or manipulative trades, especially during contract expiries.
• Market Discipline: Introduces quantitative caps that align with global best practices.
• Investor Confidence: Ensures orderly trading, which is crucial for attracting both institutional and retail investors.