India’s Regulatory Relief for Intraday Derivatives: A Boost for Market Liquidity?

The Securities and Exchange Board of India (SEBI) has taken a pivotal step to balance regulatory oversight with market liquidity by introducing intraday monitoring of derivatives position limits while suspending penalties for breaches. Effective April 1, 2025, the move reflects a nuanced approach to modernizing India’s derivatives market without stifling trading activity—a decision that could reshape how institutional and retail investors engage with equity index derivatives.

The New Regulatory Framework: Monitoring Without Penalties

SEBI’s circular mandates stock exchanges (e.g., NSE and BSE) to capture four intraday position snapshots at random intervals within predefined time windows. This real-time monitoring aims to prevent excessive speculative buildup while ensuring compliance with existing notional-based position limits. However, penalties for intraday breaches have been temporarily suspended to allow market participants—particularly brokers and trading firms—time to adapt their systems to the new requirements.

The relief is critical, as industry groups like the Association of National Exchanges Members of India (ANMI) and Bombay Stock Exchange Brokers’ Forum (BBF) highlighted challenges in upgrading systems to handle real-time data capture. The current notional-based framework, which measures risk based on the notional value of trades, is set to be replaced by a delta-based system (quantifying sensitivity to price changes in underlying assets) in future reforms. This transition period ensures market stability while systems evolve.

Why the Penalty Suspension Matters

The decision to delay penalties until SEBI finalizes delta-based limits (proposed at ₹100 billion gross and ₹15 billion net per firm) underscores a pragmatic regulatory approach. By avoiding punitive measures now, SEBI allows liquidity providers—such as global market makers like Citadel and Optiver—to continue operating without fear of fines. This is particularly important given India’s derivatives market, which grew exponentially before SEBI introduced curbs to address speculative trading.

Data shows that intraday trading accounts for over 60% of total derivatives volume in India, making liquidity a linchpin for market efficiency. The penalty suspension could prevent a sudden drop in trading activity, which might otherwise occur if traders faced restrictive limits during the transition phase.

Industry Reactions and the Delta-Based Shift

While the relief is welcomed, stakeholders remain divided on the proposed delta-based framework. The Futures Industry Association (FIA) has opposed SEBI’s high gross limit of ₹100 billion, arguing it could inflate market volatility. Instead, they advocate for a ₹75 billion net limit, aligning with current market sizes. SEBI’s advisory panel is expected to finalize these limits by mid-2025, balancing risk mitigation with liquidity needs.

The shift to delta-based metrics will also require clearing corporations (CCs) to enhance risk assessment tools. For instance, the National Clearing Corporation of India (NCCIL) must now integrate real-time delta calculations into its systems—a challenge that underscores the necessity of the current penalty-free period.

Impact on Market Participants

The immediate beneficiary is institutional liquidity providers, who can maintain their intraday trading strategies without regulatory constraints. Retail investors, too, may see reduced price spreads as market makers continue to operate freely. However, smaller brokers lacking advanced systems may struggle with the new reporting requirements, potentially widening the gap between large and small players.

SEBI’s reforms also address expiry day alignment, limiting futures expiries to Tuesdays or Thursdays to reduce weekend volatility. This, combined with the intraday monitoring, aims to create a more orderly market structure.

Conclusion: A Strategic Transition for India’s Markets

SEBI’s decision to implement intraday monitoring without penalties represents a measured step toward modernizing derivatives regulation. By suspending penalties until systems are upgraded and delta-based metrics are finalized, the regulator avoids stifling liquidity while preparing the market for stricter, risk-aware limits.

Key data points reinforce this analysis:
- Volume Stability: NSE’s equity derivatives trading volume remained steady at ~₹200 billion/day in Q1 2025, despite the new rules.
- Delta-Based Potential: The proposed ₹100 billion gross limit aligns with India’s growing market size, which saw derivatives turnover cross ₹800 trillion in 2024.
- Global Comparison: Delta-based systems, common in markets like the U.S. and Japan, better reflect actual risk exposure than notional values.

As SEBI finalizes its delta-based framework, the current relief ensures a smoother transition. Investors should monitor the implementation timeline closely, as the shift could redefine risk management and liquidity dynamics in India’s derivatives market for years to come.