Navigating SEBI’s Framework for Position Limits in Index Derivatives

On May 29, 2025, Securities and Exchange Board of India’s (“SEBI”) published a circular on “Measures for Enhancing Trading Convenience and Strengthening Risk Monitoring in Equity Derivatives” in the form of updated guidelines on position limits in index futures and index options contracts^[1]. The guidelines are important for market integrity and avoiding undue risk concentration in the financial system.

Updates on Position Limits in Index Derivatives

SEBI’s framework for index futures applies specific position limits to individual market participants, notably without imposing any blanket market-wide limits. For entities such as Proprietary Trading Members, Foreign Portfolio Investors (“FPIs”), Mutual Funds, and Clients, their exposure is closely tied to their existing assets. Specifically, their total short positions in index derivatives (including short futures, short calls, and long puts) cannot exceed the value of the stocks they hold. Conversely, their aggregate long positions (long futures, long calls, and short puts) are restricted by their holdings of cash, government securities, and similar liquid assets. This linkage between derivative exposure and underlying assets is a fundamental risk management principle, ensuring that speculative positions are backed by actual holdings.

Beyond these fundamental safeguards, additional, higher limits are available, tailored to different categories of market participants. For instance, FPI Category I, Mutual Funds, Proprietary Trading Members, and Clients can hold positions up to a greater of 15% of the total futures Open Interest (OI) for that index or INR 500 crore. For FPI Category II entities (not including individuals, family offices, or corporates), this limit is higher of 10% of futures OI or INR 500 crore. And for FPI Category II (individuals, family offices, and corporates), it’s the higher of 5% of futures OI or INR 500 crore. Just to be clear, these index futures limits are measured on a gross notional basis. They are computed gross for Mutual Funds but net for FPIs, clients, Mutual Fund sub-schemes, and proprietary positions. Stock Exchanges and Clearing Corporations are working with SEBI to create a joint Standard Operating Procedure (“SOP”) to monitor breaches and setup penalties, including additional surveillance margins. If someone goes over these limits, they will have to pay an additional deposit, which will be kept by the Stock Exchanges for a month.

For Trading Members who handle both their own trades and client trades, there’s a combined position limit that came into effect on October 15, 2024. This limit is the higher of 15% of the futures OI or INR 7,500 crore, also measured on a gross notional basis. A joint SOP is also being developed for monitoring these combined limits and their penalty structure.

The monitoring of these limits happens continuously. At the end of every trading day, FPIs report their cash and security holdings to their Clearing Members (Custodians), who then pass that info to the Clearing Corporation. Stock Exchanges keep a close eye on FPI limits by giving unique codes and requiring daily position confirmations. The total FPI position is even disclosed by the Clearing Corporation the next trading day. If there’s a breach, that extra deposit kicks in. For Mutual Funds, they tell their Clearing Members about each scheme, and Stock Exchanges assign unique client codes. For monitoring, Mutual Funds are treated similarly to FPIs, with their schemes considered clients.

A big step towards better oversight was the start of intra-day monitoring of position limits for equity index derivative contracts on April 01, 2025. Stock Exchanges now take at least four random snapshots of positions throughout the day. It’s important to know, though, that there are no penalties for intraday breaches, and they would not be considered violations. A joint SOP is being developed with SEBI for strict intraday surveillance. Furthermore, passive breaches of position limits, where a drop in the market’s overall Open Interest causes a participant’s unchanging or reduced position to exceed limits, will not be considered violations either.

The rules for index options are pretty similar to index futures, and there aren’t any market-wide limits here either. For Mutual Funds, FPIs, Proprietary Trading Members, and Clients, your exposure is limited by your stock holdings for short positions and by your cash/cash equivalents for long positions, both measured in Future Equivalent (“FutEq”) terms. Additional limits for index options include a Net end-of-day FutEq limit of INR 1,500 crore and a Gross end-of-day FutEq limit of INR 10,000 crore (this applies to both long and short delta). An SOP is in the works for monitoring these, and until it’s ready, the current penalty practices apply.

A significant glide path for implementing index options position limits is currently in effect, running from July 01, 2025, to December 05, 2025. During this time, Stock Exchanges will tell entities by 9 PM on a trading day (T) if their Future Equivalent Open Interest (“FutEq OI”) is over the limits. If you have too many long positions, you need to report cash or equivalents by 12 noon on T+1. If, even after that, your position is still over the limit, you have to bring it down by the end of T+1, based on that day’s delta value. If you cannot calculate same-day delta, using T-day market close data from Stock Exchanges for T+1 adjustments is fine. If you do not fix it by T+1, you will get an Additional Surveillance Deposit. After December 05, 2025, firms are expected to have their own delta computing systems, and any excess position will immediately trigger a deposit or penalty. This grace period is for you to get your systems ready, not to take big overnight positions. Stock Exchanges will be watching for repeated breaches to make sure no one misuses this period, and a joint SOP will deal with such cases.

For Trading Members combining proprietary and client options positions, the limit, effective since October 15, 2024, is the higher of 15% of the options OI or INR 7,500 crore, measured on a gross notional basis. Until the SOP is finalized, the current penalty rules for overall Trading Member limits stay. Just like with futures, passive breaches in index options would not be considered violations. The monitoring processes for FPIs and Mutual Funds, and the intra-day monitoring, for index options are the same as for index futures.

Conclusion

This circular is crucial for upholding the strength and stability of our derivatives market. SEBI seeks to mitigate big risk and ensure equitable trading through clear position limits with active monitoring of them. These limits provide secure guardrails for all market participants and help maintain the integrity and effectiveness of India’s financial system. Hence, it is vital for all market participants to abide by these rules.