Measures for Risk Monitoring in Equity Derivatives

Measures for Enhancing Trading Convenience and Strengthening Risk Monitoring in Equity Derivatives

1. Derivatives market enables efficient price discovery, improved market liquidity and permits investors to manage risk. Stock Exchanges and Clearing Corporations (CCs) together provide the platform and products for trading in derivatives market, while ensuring online real time risk management, adequate surveillance, as well as smooth settlement of trades.
   
2. The role of product offering, risk management, and surveillance by Stock Exchanges and Clearing Corporations is crucial in ensuring integrity of securities market ecosystem. This is specifically pertinent in view of the evolving market dynamics in derivatives segment in recent years, with increased retail participation, offering of short tenure index options contracts, and heightened trading volumes in index derivatives on expiry day. Regulation 28 (2) read with Part–C of Schedule II of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 (SECC Regulations, 2018), considers Risk Management, Surveillance, and Product development functions of Stock Exchanges and Clearing Corporations as core functions. In addition, Clearing and Settlement is considered as a core function of Clearing Corporations.
   
3. The Securities and Exchange Board of India Act, 1992 (“SEBI Act”) mandates SEBI to protect the interest of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. One of the means to achieve the aforesaid mandate as provided in the SEBI Act is to regulate the market through measures that enablesregulating the business of Stock Exchanges.
   
4. In order to review the existing regulatory measures for investor protection while ensuring the orderly development and strengthening of equity Futures and Options (F&O) market, as well as to identify measures to assist Stock Exchanges in carrying outtheir aforementioned core functions, SEBI deliberated the matter with Expert Working Group (EWG) on derivatives, to improve risk metrics for the following objectives:
   4.1. Better monitoring and disclosure of risks in F&O
   4.2. Reduce instances of spurious F&O ban periods in single stocks
   4.3. Better oversight over the possibility of concentration or manipulation risk in index options

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