[Abhishek Sanjay is a third-year B.A., LL.B. (Hons.) student at NALSAR University of Law, Hyderabad]
The Indian equity derivatives market has evolved into a complex, high-velocity ecosystem defined as much by algorithmic precision as by speculative depth. In recent years, expiry-day volumes have surged, open interest has ballooned, and sophisticated option strategies have proliferated at scale. These concerns are compounded by the increasingly sophisticated trading strategies employed across market strata, exposing fault lines in the existing notional-based position monitoring framework.
On May 29, 2025, the Securities and Exchange Board of India (SEBI) issued a circular that proposes a fundamental overhaul of the risk management architecture in equity derivatives. At its core lies a shift from notional open interest to a delta-adjusted computation, termed FutEq OI, designed to more accurately reflect effective exposure. These developments arrive at a time when India’s derivatives market has become increasingly fragmented, driven by rapid product innovation and escalating retail access. The rise of complex options strategies, volatility-based products, and speculative flows has transformed the underlying logic of position-taking in F&O markets, rendering existing oversight tools outdated. The circular, however, introduces enforceable obligations and penalties not through formal rulemaking under section 30 of the SEBI Act, but via general directions issued under section 11, raising concerns about the procedural soundness of the framework. SEBI’s attempt to recalibrate the system through delta-weighted metrics is being carried out under the assumption that more accurate exposure measurement necessarily translates to better risk control.
This post attempts to assess whether that assumption holds. In the first section below, the author sets out the contours of the new regulatory framework and identifies its operational design. In the second section, the author critiques the framework’s reliance on delta as a regulatory proxy, arguing that it not only obscures second-order exposures, enables position masking, and introduces scope for passive breaches due to data lags, but is also procedurally ultra vires. The third section aims to contextualise SEBI’s model within global regulatory practice, drawing from the Commodity Futures Trading Commission (CFTC), European Securities and Markets Authority (ESMA), and other jurisdictions that have resisted adopting delta as an enforcement metric. Further, the author proposes an alternative that addresses SEBI’s core concerns without replicating the limitations of its present design.
Breaking down the Circular
Until mid-2025, India’s equity derivatives market operated under a notional-value based system for measuring exposure. Open interest was calculated by simply adding the face value of all outstanding futures and options contracts, without distinguishing between different risk levels. A trader holding a single futures contract and another holding multiple deep out-of-the-money options would contribute equally to the market-wide position tally if the notional value matched. The framework offered regulatory simplicity but ignored the actual risk carried by participants. As derivative strategies became more sophisticated, this gap between measurement and reality became increasingly untenable. Under the old regime, Market-Wide Position Limits (MWPL) for individual stocks were set at 20% of free-float shares. When open interest crossed 95% of this limit, the stock entered a ban period where fresh positions were disallowed, and only reductions could be made. These thresholds were checked once a day, at market close. However, the system treated all positions equally, regardless of their structure or real exposure, creating blind spots in surveillance and enforcement.
The SEBI circular replaces this model with a new framework built around delta-adjusted exposure. Delta, which measures how sensitive a derivative is to movements in the underlying asset, is now used to assign weight to each position. Long futures still carry a value of one, but options are weighted lower depending on how far they are from the current market price. The aim is to capture not just the size of a position, but how much directional risk it actually carries. This shift essentially changes the structure of regulation. MWPL is now based on a combination of free-float and average delivery volume, and positions are monitored through delta-weighted totals, termed Future Equivalent Open Interest (FutEq OI). If a stock breaches 95% of this new limit, traders must reduce their actual delta exposure by the next trading day, not just offset it with opposite trades. For index options, new position caps have been imposed: ₹1,500 crore net and ₹10,000 crore gross exposure per participant. Index futures continue under notional limits, but with adjusted thresholds and reporting obligations. Surveillance, too, becomes more active. Exchanges are required to conduct multiple intraday checks, impose surveillance margins if limits are approached, and report major breaches to SEBI. A glide path allows time for adaptation until December 5, 2025, after which full compliance with real-time delta tracking becomes mandatory.
The resultant framework is a shift from broad and blunt tools to a framework that seemingly promises greater precision. However, in doing so, SEBI not only raises the bar for compliance but embeds complexity into regulatory oversight, which as will be shown in the next section, is inadequate and misplaced.
Shortcomings of the New Framework
SEBI’s power to regulate the securities market is drawn from section 11 of the SEBI Act, which authorises it to take such measures “as it thinks fit” to protect investors and ensure market integrity. However, it is pertinent to note that Section 11 is not a substitute for section 30. Where SEBI intends to impose substantive obligations or create enforceable liabilities, particularly those carrying financial or penal consequences, it must resort to its regulation-making powers. It requires that obligations be framed through formal regulations, published, and laid before Parliament. The circular, however, does none of this rendering it procedurally ultra vires.
Instead, it creates a compliance regime enforced through delegated surveillance by stock exchanges and clearing corporations, and it instructs them to penalise breaches via Additional Surveillance Deposits or other disciplinary measures. The penalties are not defined, and there is no specification of amounts, no laid-down criteria, no procedural safeguards, and no route for appeal. The framework thus creates obligations that look like law, operate like law, and penalise like law, without having passed through the legal process. The Apex Court in NSDL v. SEBI has drawn a clear line between administrative circulars under Section 11 and quasi-legislative rulemaking under section 30 and SEBI has essentially crossed that line. It has imposed market-wide exposure thresholds and instructed private bodies to enforce consequences, all through an operational circular that has never been subjected to public scrutiny or legislative control.
The legal deficiencies of the framework are compounded by its design flaws. Delta, as a measure of exposure, fails to capture higher-order risks that define derivatives trading: gamma, a measure which accelerates price sensitivity; vega, an indicator which responds to volatility; and theta, which signifies the depletion of value over time. A portfolio that is delta-neutral may still carry high gamma or volatility risk, but under SEBI’s framework, it remains invisible to enforcement. The system confuses what is measurable with what is meaningful, mistaking static sensitivity for dynamic risk. The incentives created by this model are no less problematic. Deep out-of-the-money options carry negligible delta, and consequently liquidity in peripheral strikes is disincentivised.
This limitation is not merely academic or theoretical. It opens the door to engineered compliance. An entity can structure a portfolio that is formally within the limits while being materially risky. Positions can be offset synthetically and straddles, ratio spreads, and other strategies can be designed to meet delta requirements while preserving directional bets. The framework allows the form of compliance to override the substance of risk. A system built on delta can be useful for estimating exposure but it is not equipped to enforce it.
The resulting compliance structure is therefore stratified as this framework does not affect all participants equally. Large institutions with real-time systems and proprietary risk engines will manage the compliance burden with ease. Smaller brokers, FPIs, and intermediaries operating without intraday infrastructure will either have to invest disproportionately or risk penalty. What appears as an accommodation for infrastructure gaps is, in practice, a regulatory asymmetry: one system for the equipped, another for the rest. The inconsistency within the framework is also evident in its treatment of instruments. Futures are still governed by notional limits, with caps varying by participant category. Options, by contrast, are now governed by delta. But the two products are often used together, and the exposure from one is offset against the other. A trader managing both must now comply with two separate metrics for the same directional view. The result is not regulatory clarity, but operational confusion.
The Way Forward
SEBI’s instinct to move beyond notional limits is sound, but its choice to anchor surveillance solely in delta is both too narrow and too rigid. What the framework gains in computational precision, it loses in market intuition. Risk in derivatives is rarely linear and almost never static.
In contrast, the CFTC in the United States enforces position limits through fixed contract counts and notional thresholds, applying them to specific commodities and financial products. Delta is used within internal margining models, not as a public compliance trigger. Similarly, the ESMA, under the MiFID II framework, requires that option positions be converted to their futures equivalents using delta. But this is only one step in a broader exposure calculation. Final position limits are determined through a mix of liquidity thresholds, historical volatility, and concentration risk. In both cases, delta is not treated as a regulatory endpoint but as one of many datapoints.
For India, adapting such models in full may be impractical, particularly given the high retail footprint and volume concentration in index options. However, the core principles are transferable. Rather than hard-coding delta into compliance limits, SEBI could treat it as one of several risk indicators. A blended framework that accounts for delta, notional size, volatility exposure (vega), and concentration in specific strikes could more accurately reflect the true risk a participant brings to the market. Position monitoring could remain daily, but incorporating alerts when multi-dimensional thresholds are approached, allow for earlier and more targeted intervention. Equally important is the accounting of the heterogeneity of participants. As argued earlier, large institutions can process real-time data and optimise risk systems while smaller brokers and retail intermediaries cannot. A tiered compliance regime, based not on status but on risk contribution, offers a more balanced alternative.
A surveillance system should not be defined by what it can measure but shaped by what it needs to see. SEBI cannot afford to conflate risk measurement with risk understanding, nor can it afford to kick this can down the road.
– Abhishek Sanjay