The regulator aims to align TM-level position metrics with the updated delta-based client-level framework, ensuring consistency and improved risk assessment.
New Delhi (Economy India): India’s capital markets regulator, the Securities and Exchange Board of India (SEBI), has proposed a major review of position limits for trading members (TMs) in the equity derivatives segment. The move comes in response to recent changes in how client-level derivative positions are calculated, creating inconsistencies between client and member-level risk measurement.
Shift to a Delta-Based Method for Client Positions
In its earlier circular, SEBI shifted client-level position limits for index derivatives from the traditional notional contract value method to a delta-based or Future Equivalent (FutEq) method. This new approach aims to capture the true economic risk associated with open derivative contracts, especially in complex portfolios involving options.
The delta-based system evaluates exposure by factoring in the sensitivity of an option’s price to changes in the underlying asset, providing a more realistic assessment than notional values.
Current Mismatch With TM-Level Limits
While client-level calculations are now more contemporary and risk-sensitive, SEBI noted that trading-member level limits remain tied to the older notional-based methodology.
This inconsistency has created an operational mismatch in the derivatives market:
- Clients’ exposures are evaluated using delta-based calculations
- Trading Members’ exposures still rely on notional values
- The difference leads to inaccurate aggregation of risk at the brokerage level
- It may also result in inefficient margining practices and compliance burdens
Proposal to Align the Framework
SEBI’s consultation proposes shifting TM-level position limits to a delta-based framework, thereby harmonizing exposure measurement across market participants. According to the regulator, the alignment will:
- Ensure uniformity in risk calculations
- Offer better correlation between client and TM positions
- Improve risk management systems of brokers and exchanges
- Strengthen overall market stability in the derivatives segment
Industry Impact and Expected Outcomes
Market participants believe that updating TM-level position limits will:
- Help brokers manage risk more accurately
- Reduce operational discrepancies between client books and member books
- Encourage a more robust and transparent derivatives market
- Enable better monitoring of aggregate exposure, particularly in high-volume index derivatives trading
The derivatives segment has witnessed heightened activity, making accurate exposure measurement critical for preventing systemic risks.
Next Steps
SEBI has invited feedback from exchanges, trading members, and other stakeholders. After evaluating the responses, the regulator is expected to issue a revised circular with modified guidelines.
The move marks another step in SEBI’s ongoing efforts to modernize India’s derivatives risk framework, following earlier reforms related to margin systems, option writing norms, and position limit restructuring.
(Economy India)
