FIA, a global trade organisation for the futures, options and centrally cleared derivatives markets, has raised concerns with the market regulator SEBI regarding a likely increase in trading cost, a drop in market liquidity and a likelihood of price manipulation -- if the latter's recent proposals regarding enhancing trading convenience and strengthening of risk monitoring in derivatives are implemented without certain changes.
It said two key proposals on formulation of OI (open interest) and position limits for index futures and index options warrant further evaluation to ensure they do not inadvertently disrupt market stability.
"As currently structured, these measures could dampen market liquidity, increase trading costs, and introduce operational complexities. They may lead to wider bid-ask spreads, heightened market volatility, and reduced participation from institutional investors, ultimately impacting market depth and efficiency," FIA said.
The global F&O trade body said while intended to enhance risk management, these restrictions could create inefficiencies that could inadvertently increase the likelihood of price manipulation.
In the case of formulation of OI, FAI said while it recognises that delta-based limits provide a dynamic framework that adapts to market conditions, they are uncommon in global derivatives markets due to the significant complexities they introduce, FIA said.
It recommended retaining the existing end-of-day (EOD) Gross Notional Open Interest (OI) Limit, which is well understood by the industry, without introducing a delta adjustment.
FIA said implementing delta-adjusted thresholds require multiple layers of calculation, monitoring and dissemination across the trading ecosystem, adding operational burdens and increasing the risk of errors.
Additionally, the fluctuating nature of delta further introduces instability as limits constantly shift with market movements. This added technical complexity makes delta calculations more prone to errors, which could inadvertently disrupt market function rather than enhance risk management, FIA said.
"A more effective approach would be to allow participants to continue managing these exposures within a structured Net FutEq Limit and the CCP margin framework. Global markets such as Hong Kong and the US (CME) follow a similar model, allowing participants to operate under higher position limits while maintaining responsibility for risk management within well-established controls," FIA said.
It said adopting this globally recognised framework would help sustain market liquidity and efficiency while ensuring robust risk oversight
Besides, while the proposed delta limits place significant restrictions on index options market makers, FIA said they do not directly limit liquidity demand from small investors.
"Retail traders could face greater losses when crossing spreads, while market integrity may weaken as misalignments between instruments—such as options within a series or futures versus the underlying asset—become more frequent. Lower volumes and fewer large investors with the ability to stabilize the market through effective risk management may also heighten the risk of price manipulation, further exacerbating market instability," it said.
The trade body, which has offices in Brussels, London, Singapore and Washington, was responding to the stock market regulator's recent consultation papers.
Sindhuja Kashyap, Partner at King Stubb & Kasiva, Advocates and Attorneys said while, as a regulator, Sebi's goal of curbing excessive speculation and strengthening risk management makes sense and is legitimate from an investor protection standpoint, the new measures could create unintended challenges.
"The added complexity might disrupt market efficiency, especially for institutional investors and liquidity providers. Instead of throwing the baby out with the bathwater, a more balanced approach perhaps would be incorporating global best practices which could help mitigate risks while keeping the market dynamic," Kashyap said.
Kashyap said Sebi should refine the proposals carefully to ensure they strike the right balance between oversight and market flexibility. On the proposal o revised index options limits, FIA said the imposition of the proposed FutEq net limit could cause large price movements when there is aggregate demand from small investors to buy volatility.
It said these proposed limits place a disproportionate burden on liquidity providers and institutional participants, while also negatively impacting retail traders by reducing overall market liquidity.
"Although the number of liquidity providers required to meet this limit is generally lower than for the Gross Delta, there are still critical periods—such as the 16 January expiry—where significantly higher limits would be necessary to accommodate end-user demand," it noted.