The measures, intended to prevent market manipulation, included changing the method of calculating limits on clients’ outstanding positions, commonly referred to as open interest (OI)—a measure of money flowing into the market—and intraday monitoring of these limits.

“With the delta-based limits and intraday monitoring introduced from July 2025, it’s only fair that we assess their impact through the September quarter and beyond before deciding further actions,” Narayan told Mint in an interview a day before his term as a whole-time Sebi member ended.

He sought to clear the air on speculation surrounding an issue that has become a talking point across market circles—whether weekly Nifty and Sensex options will be discontinued in favour of longer-term contracts—ever since Sebi chair Tuhin Kanta Pandey first spoke about extending derivatives contract tenures during a Ficci event in August.

Narayan underscored that it was imperative for Sebi to tread the fine line between a type 1 error—ensuring bad things don’t happen to investors—and a type 2 error—overzealous compliance, which leads to throwing the baby out with the bathwater.

Earlier, options’ open interest was calculated notionally—based on the total number of lots or contracts held, without considering actual risk or exposure. The delta approach, introduced since July this year, reflects an option’s actual price sensitivity to an underlying stock index, such as the Nifty or Sensex, thereby determining a client’s true directional exposure.

Similarly, the sentimental OI limit—the excess over and above a client’s actual hedging limit—was increased to a net ₹1,500 crore from ₹500 crore earlier for options. Sebi also introduced a gross limit of ₹10,000 crore, which sums up the client’s long and short exposure, that exchanges now monitor on a daily basis. This prevents disproportionately large positional build-up relative to the underlying cash market, which can create systemic risks.

Narayan underscored that changing the calculation from a notional ₹500 crore was imperative as certain clients were exploiting the earlier framework.

“Since 2020, participant limits were measured on a “net notional” basis—but some players were exploiting this framework, running massive risks while technically staying within limits. We found instances of participants carrying intraday index option exposures of ₹40,000–50,000 crore cash equivalent, or even more, while reporting notional utilization below ₹500 crore. This was clearly unacceptable—it created systemic vulnerabilities and opened doors for manipulation.”

Now, with the new form of calculation in use since July, Sebi will examine the impact on participation and on the imbalance between the derivatives and cash market volumes, which, in notional terms, was often hundreds of times larger than the turnover in the underlying cash market, explained Narayan.

Reforming F&O

Concerned over the rising retail frenzy, especially on options expiry day, Sebi first set its sights on the derivatives segment in January 2023, mandating risk-based disclosures about derivatives across broker trading screens and applications.

However, these disclosures did little, forcing Sebi since July last year to propose several measures after many rounds of consultations with market stakeholders. Key among them were limiting the number of weekly expiries to one per exchange from multiple expiries earlier and introducing an extreme loss margin on expiry day, which took effect since November last year.

However, with the retail frenzy persisting—a recent Sebi study found that nearly a crore individuals trading on F&O in FY25 suffered losses aggregating over ₹1 trillion, up from ₹86,728 crore in FY24—Sebi adopted the latest tightening measures from July this year.

In addition to assessing the impact of these measures on retail participation and volumes, Narayan said Sebi continues to consider feedback from market stakeholders on deepening the cash market and increasing liquidity in longer tenure derivatives contracts.

Deepening F&O, cash segments

“Market feedback suggests that margins on longer-term derivatives may be more conservative than necessary. Perhaps, margins on longer-term calendar and other spreads can be rationalised,” Narayan said.

A calendar spread involves the purchase and sale of options on the same underlying asset but with different expiration dates. According to Narayan, margins on the short side tend to be aggressive, making such strategies inexpedient for speculators who take on the risk that hedgers seek to cover themselves against. These will have to be reviewed.

If longer-term options become more liquid, it could increase hedging and retail investment activity in such products, subject to regulatory approval, said Narayan, who himself was an ace bond trader with banks like Citi and Standard Chartered, before diving into academia and then joining Sebi from the SP Jain Institute of Management & Research, where he was associate professor.

“Higher liquidity in longer-term derivatives could provide much-needed hedging avenues for real money investors. It can also allow funds to contemplate long-term investment products, including capital-protected structures, such as by investing a chunk of the funds into government securities to protect the principal at maturity, and deploying the balance into long-term derivatives. All this will, of course, be subject to an appropriate regulatory framework,” he said.

However, he warned that if expiry-day index option volumes continue to dwarf cash-market activity, Sebi might need to revisit the number of expiries.

Furthermore, he said cash markets could become deeper if the stock lending and borrowing mechanism (SLBM)—which facilitates shorting of stocks by participants through borrowing them on interest from institutional investors and high networth investors (HNIs)—becomes more investor-friendly and simple, akin to trading in equity. This could open opportunities for added returns to retail and institutional long-only investors.

Not only buying, but also selling through mechanisms like SLBM, facilitates more efficient price discovery, according to many market intermediaries.

Avoiding over-regulation

Narayan said that Sebi would be mindful about whatever it does, recognising that exchanges, clearing corporations, and brokers derive significant revenues from F&O.

For context, equity options accounted for over three-fourths of NSE’s standalone transaction income, a key revenue stream for exchanges, at ₹3,123 crore in Q1FY26, with cash and equity futures accounting for the rest.

“Therefore, reforms must not be abrupt or destabilizing with unintended consequences, and should avoid type 2 errors of over-regulation/ excessive intervention,” he said.

“Whatever Sebi does next—or chooses not to do—I am sure will be guided by data, analysis, and meaningful consultation,” said Narayan.

Key Takeaways

Sebi to determine fate of weekly index option expiries only after it assesses the impact of the delta-based limits and intraday monitoring measures introduced in July 2025.
Future regulatory action will be guided by the need to avoid both Type 1 errors (failing to protect investors) and Type 2 errors (over-regulation).
The new delta-based OI calculation and the increased sentimental OI limit (to ₹1,500 crore) were necessitated because some players were exploiting the earlier “net notional” framework.
Sebi will consider market feedback on rationalising margins on longer-term derivatives like calendar spreads, which could boost liquidity and enable funds to create new long-term products.
Deepening the cash market could be achieved by making the Stock Lending and Borrowing Mechanism more investor-friendly, similar to equity trading, which would aid efficient price discovery and offer long-only investors chance to earn interest on idle equity assets.