The Securities and Exchange Board of India (SEBI) has proposed significant changes to the derivatives trading framework, particularly revising the gross and net position limits for intraday and end-of-day index futures and options. These proposed measures are expected to impact Foreign Portfolio Investors (FPIs), High Net-worth Individuals (HNIs), and proprietary trading desks, potentially reducing their exposure and, in turn, affecting overall derivatives market volumes.
SEBI’s Proposed Revisions
SEBI's proposed revisions introduce strict limits on intraday and end-of-day positions in index derivatives:
Intraday Limits:
₹1,000 crore on a net basis
₹2,500 crore on a gross basis
End-of-Day Limits:
₹500 crore on a net basis
₹1,500 crore on a gross basis
Additionally, similar restrictions are planned for index futures trading.
How This Impacts FPIs and Prop Traders
These regulatory changes could significantly reduce capital deployment by FPIs and proprietary trading desks. Currently, large proprietary traders and FPIs deploy around ₹3,000-3,500 crore in derivatives trading daily. If these limits are enforced, their capital usage might shrink by approximately 10%.
Potential Consequences:
A significant drop in derivatives trading volumes, with estimates suggesting a decline of 60-70% from peak levels.Reduced ability to hedge market exposure efficiently due to limitations on offsetting positions.A decline in open interest in index F&O contracts, affecting overall market liquidity.
How This Impacts FPIs and Prop Traders
These regulatory changes could significantly reduce capital deployment by FPIs and proprietary trading desks. Currently, large proprietary traders and FPIs deploy around ₹3,000-3,500 crore in derivatives trading daily. If these limits are enforced, their capital usage might shrink by approximately 10%.
Potential Consequences:
A significant drop in derivatives trading volumes, with estimates suggesting a decline of 60-70% from peak levels.Reduced ability to hedge market exposure efficiently due to limitations on offsetting positions.A decline in open interest in index F&O contracts, affecting overall market liquidity.
Hedging Limitations and Market Reaction
According to Tejas Khoday, CEO of FYERS, traders will no longer be able to hold large offsetting positions to hedge risks, thereby increasing capital requirements and reducing overall leverage.As a result of these regulatory concerns, Goldman Sachs has already trimmed its target price for BSE, citing a drop in proprietary trading activities.
Disclaimer
This article is for informational purposes only and should not be considered financial or investment advice. Investors are advised to conduct their own research and consult financial experts before making any investment decisions. Sensexnifty.com does not take responsibility for any financial losses incurred based on this information.
