The Securities and Exchange Commission (SEBI) consulting filing, “enhances the ease of trading and enhances risk monitoring of stock derivatives,” released long-term market demand last month to increase the economic representation of its open interest (OI) measurement method.
The proposal will not only help retail investors, but also institutions such as mutual funds that manage retail funds. Existing methods for measuring OI by adding the nominal value of futures and options are limited. It accidentally bypassed the defense track for market risks and the door was bypassed.
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Regulatory independence: Indian regulators sometimes adopt global best practices, while others map their own paths. For example, the Reserve Bank of India (RBI) guidelines predated the Western subprime loan crisis in 2008, which limited the economic principles of securitization structures. But in hindsight, these work well.
Give an example. The London Bank Exchange Rate (LIBOR) was once the global lending benchmark interest rate (LIBOR), was determined by a process called “Fixing” and had execution defects that were the same as its name. But India’s benchmark, Mumbai’s bank financing rate (Mibor) did not follow what was considered “best practices” before it was phased out in 2023.
Although there may not be any way SEBI proposed to calculate future equivalents (or delta) of OIs for SEBI, the concept is reasonable. Therefore, there is no reason India should not implement it. The Commodity Futures Trading Commission in South Korea and the United States has adopted the Delta method. Sebi’s proposal reaches a great position to balance economic correctness with ease of implementation.
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How easy is it to implement? “Delta” represents the ratio of the price change of derivatives to the change in the price of the underlying stock or the value of the index. Futures prices are often associated with the price of their basic assets one-to-one. If both prices achieve perfect synchronization, the Delta is 1. For options, the absolute value of the delta is between 1.0 and 0.0, and extreme value is observed only if the option is almost certainly in the case of making money (currency currency options), or almost certainly not doing so (except money).
In the proposed approach, the futures delta will increase along with the option delta, with the long-term position delta and short-range distance negative. This makes it possible to measure the risk of the total market portfolio in terms of any given market price change.
Of course, this does not cover all types of risks, such as price transfers of underlying assets or so-called rate of change of gamma, and other risk measures such as Vega or Theta. In derivatives trading, risks are calculated regularly, hedged or traded. Even small trading clothing can track and monitor these so-called Greeks. SEBI has been sharing daily delta data for some time. Therefore, introducing a delta-based OI measure may not surprise traders (we can forgive anyone who has influencers).
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Long and short: Existing OI measures allow participants to show zero net risk, a figure higher than the under-spread position of actual market risk. An expose in a nominal way ₹100 In long-term futures, the disproportionate view of conceptual value does not necessarily cancel. ₹100. Nevertheless, today’s OI metrics will still read 0. This gap allows participants to use the smallest spending to run the system and push stocks toward futures and options (F&O) trading bans (because unmonetary options are cheaper). Such a temporary ban will often cause its spot price to fall and make money for those extraordinary participants who have the action triggered the ban. The proposed rules draw curtains on this game.
The debate is more subtle about the total value of the delta-based location versus the total value of the net worth. Recalling the London Whale JPMorgan Chase lost $2 billion. The risk of derivatives of net exposure is net exposure but fails to promptly cause red flags. Net exposure metrics are best when the long position moves perfectly at the short direction, but in the opposite direction (theoretically, a perfect hedge).
However, this will never happen. Therefore, SEBI’s proposal to track sum net positions (and set separate restrictions) is pragmatic. In the current system, even if the OI remains ₹5 billion limit. But the proposed method will make it difficult to carry out large hidden risk exposure. Given the growth of the Indian market and the risk of a single trading equipment with large exposure, it is hoped that exposure restrictions will balance the demand for liquidity.
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A long journey: The proposed method will make manipulating F&O more expensive and difficult to manipulate. However, Sebi should consider providing a floor for Delta’s value, rather than having it anywhere near 0. This will prevent any large amount of currency from being manipulated outside the currency. That is to say, rules alone cannot eliminate market manipulation. Regulators and exchanges must also enhance surveillance. Real-time pattern recognition by AI-led leaders can further help control this malfeasance.
The author is a quantitative risk management professional with visiting teachers at IIM Kolkata and IIM Ahmedabad.
