The Securities and Exchange Board of India’s proposals to introduce gross limits for intraday derivatives trading in futures and options is likely to hit trading by foreign portfolio investors (FPIs), high net worth individuals and prop desks of stock brokers, shrinking their exposure. This, in turn, will have an impact on derivatives volumes as a whole.
According to the proposals, the revised intraday limits for options will be ₹1,000 crore on a net basis and ₹2,500 crore on a gross basis. The end-of-day limits will be ₹500 crore and ₹1,500 crore, respectively.
“On the options side, the regulator has prescribed an intraday gross limit of ₹2,500 crore on a delta-adjusted basis. This could curtail the capital that can be used by FPIs, HNIs and prop desks of stock brokers to just ₹250-300 crore and leave the balance capital idle,” said a broker.
Some of the FPIs and large prop desks of stock brokers have ₹3,000-3,500 capital deployed in trading, of which a significant portion is deployed in index options trading, which could shrink by a tenth, the person added.
“FPIs are being put off with so many changes and could shift to other markets or just make an exit. Derivatives volumes could potentially shrink by 60-70 per cent from the peaks,” said a senior broking official.
If an entity is short ₹2,500 crore notional ATM Call option, its delta adjusted value will be -1250 crore (-0.5*2500). If the same entity is short ₹2,500 crore notional ATM Put option, the delta adjusted value will be +1250 crore (0.5*2500). The gross limit will be ₹2,500 crore (1250+1250). The capital that can be deployed by this entity will be about ₹325 crore, assuming a 13 per cent exchange margin.
The above is for the unhedged position. For an entity that uses capital to deploy only hedged positons, this figure will drop to ₹150 crore.
“Since all large books would be running a mix of hedged and unhedged strategies, the maximum amount an entity can now deploy would be much lower than ₹300 crore,” said the first broker.
According to Tejas Khoday, CEO, FYERS, traders won’t be able to hold large offsetting positions to mask real exposure by hedging, and the effective capital usage or capital deployed could reduce significantly. The index F&O open interest will also be impacted in a big way, he said.
The regulator had introduced a new position limit on index derivatives in 2020, wherein the short positions based on notional value in index derivatives could not cross the available holdings of the participant. Further, an additional short position limit of ₹500 crore each for index futures and index options was provided.
The short position limit of ₹500 crore, which is currently being tracked by the exchanges end-of-day, will be monitored intraday from April 1, 2025. This is part of the six measures initiated by SEBI to curb frenzy in the index derivatives segment last year.
On Monday, Goldman Sachs trimmed its target price for BSE as 70 per cent of its average daily turnover came from proprietary traders, whose activity could be curtailed by upcoming regulatory changes.