SEBI (Securities and Exchange Board of India) has created a detailed regulatory framework for derivatives trading in India.
These rules aim to protect investors, manage systemic risk, and ensure that derivatives markets function fairly and efficiently.
Here is a summary of the key rules currently in place:
Objectives of SEBI’s Derivatives Regulation SEBI’s framework for derivatives trading is designed to:
- Protect investors through transparency and fair practices
- Maintain market integrity by reducing counterparty and default risks
- Promote efficiency, innovation, and strong price discovery
- Support development of organized, liquid derivatives markets
Rules for Exchanges Offering Derivatives Trading Stock exchanges must meet SEBI’s eligibility conditions to offer derivatives:
- Use an online screen-based trading platform with strong backup systems
- Maintain system capacity to handle 4–5 times the expected peak load
- Set up an independent clearing corporation for trade settlement
- Implement real-time surveillance for monitoring positions and prices
- Ensure real-time dissemination of trade data
- Begin trading with at least 50 members in the segment
- Set up a separate governing council and membership structure for derivatives
- Provide investor grievance redressal and arbitration across all regions
- Maintain adequate inspection capability and compliance record
- For currency derivatives, maintain minimum net worth of Rs. 100 crores
Membership and Business Conduct Rules SEBI defines strict eligibility and conduct standards for brokers and clearing members:
Net Worth Requirements Equity Derivatives:
- Clearing Member : Rs. 25 crores
- Self-Clearing Member : Rs. 5 crores
Currency Futures:
Trading Member : Rs. 2 crores
Clearing Member : Rs. 50 crores
Liquid Net Worth
- Clearing Members must maintain at least Rs. 10 crores (equity) or Rs. 25 crores (currency) in liquid assets at all times
Certification Requirements - Members and at least two approved users must pass SEBI-approved certification exams
Client Onboarding and Conduct - Mandatory KYC and Risk Disclosure Documents
- Signed Member-Client Agreement
- Maintain segregation of client and proprietary funds in separate client bank accounts
- Time-stamped order confirmations with unique client ID
- Ensure dealers do not mix client trades with their own accounts
Margining System and Risk Management SEBI mandates a sophisticated margining system to manage risk:
Initial Margin - Based on 99% Value-at-Risk (VaR) and worst-case scenario loss across 16 price-volatility scenarios
- For Index Derivatives : Price scan range = 3 standard deviations
- For Stock Derivatives : Price scan range = 3.5 standard deviations
- Minimum Margin : 10% (Index Futures), 15% (Stock Futures)
- Short Option Minimum Charge : 5% (Index Options), 10% (Stock Options)
- Extreme Loss Margin : 2% for short options on expiry day (effective November 20, 2024)
Mark-to-Market (MTM) Margin - Futures : MTM margin calculated daily using the last 30-minute weighted average price
- Options : Net Option Value added to or subtracted from the margin requirement
Client Margin Collection - Members must collect and report client margins electronically to the exchange every day
- Client margins are kept in a separate client bank account and cannot be used for broker or other client liabilities
Collateral Management
- Collateral is revalued weekly with haircuts applied to non-cash securities and mutual funds
- Equity collateral is marked to market and subject to SEBI’s haircut norms
Exposure and Position Limits To control excessive risk, SEBI sets limits on exposure and positions:
Exposure Limits
- Index Futures and Short Index Options: Notional exposure ≤ 12 times liquid net worth
- Stock Derivatives: Exposure limit = higher of 10% or 1.5 standard deviation of notional exposure
- Currency Futures: 6% of gross open positions or USD 10 million, whichever is higher
Position Limits Client Level
- Index : Reporting required if client holds ≥15% of total open interest
- Stocks : Limit is lower of 15% of free float market cap or 60 times average daily delivery value (delta-weighted)
- Currency Futures : 6% of OI or USD 10 million, whichever is higher
Trading Member Level
- Index : Rs. 500 crores or 15% of OI
- Stock Derivatives : 20% of market-wide position limit
- Currency :
- Non-bank TMs : 15% of OI or USD 50 million
- Bank TMs : 15% of OI or USD 100 million
Market-Wide Position Limit (MWPL)
- Minimum Rs. 50 crore per stock
- Calculated as the lower of:
- 15% of free float market cap
- 60 times average daily delivery value (delta-weighted)
FPI and NRI Limits FPIs:
- Index Derivatives ≤ Rs. 500 crore or 15% of OI;
- Stock Derivatives ≤ 20% of MWPL;
- hedging positions exempt with approval
NRIs: Same as client-level limits
Permitted Derivative Products SEBI has allowed the following derivative instruments:
- Index Futures (since June 2000)
- Index Options (since June 2001)
- Stock Options (since July 2001)
- Stock Futures (since November 2001)
- Sectoral Indices (since December 2002)
- Mini F&O Contracts on Index and Sectoral Indices (since December 2007)
- Long-Duration Index Options and Volatility Index (since January 2008)
- Bond Index and Exchange-Traded Currency Derivatives (since April and August 2008)
- Commodity Derivatives Options on Goods (since 2017)
- Weekly Index Options (one expiry per exchange, effective November 20, 2024)
Eligibility for Stock Derivatives - Belong to top 500 stocks by market cap and trading value (6-month average)
- Median quarter-sigma order size ≥ Rs. 25 lakh
- MWPL ≥ Rs. 50 crores
- Removed from F&O segment if criteria not met for 6 continuous months
Recent SEBI Updates - Minimum contract size: ₹15–20 lakh for index derivatives (effective November 20, 2024)
- Upfront option premium collection mandatory (effective February 1, 2025)
- Intraday position monitoring with four snapshots daily (effective April 1, 2025)
Conclusion SEBI’s derivatives trading rules form a strict and well-defined regulatory system designed to:
- Minimize risks
- Prevent misuse of leverage
- Ensure transparent, fair, and orderly markets
- Ensure that only informed and capable investors participate
All brokers, traders, clearing members, and exchanges must strictly follow these regulations to maintain orderly market operations.