SEBI Panel Convenes to Tighten Derivatives Oversight: Position Limits and Governance Reforms on the Table

India’s capital markets are poised for a regulatory overhaul as the Securities and Exchange Board of India’s Secondary Market Advisory Committee (SMAC) convenes today, August 19, to deliberate on a series of critical reforms. The meeting, held in Mumbai, is expected to culminate in a set of recommendations that will be forwarded to the SEBI board for formal consideration.

Among the most closely watched items on the agenda are proposals to revise position limits for trading members in the equity derivatives segment and introduce new intraday limits for index derivative positions. These measures aim to curb excessive speculation, enhance market stability, and align India’s trading framework with global best practices.

Key Developments Under Review

- SMAC is reviewing position limits for brokers in equity derivatives to prevent concentration risks  
- Intraday limits for index derivatives are being considered to reduce volatility and systemic exposure  
- Governance reforms for market infrastructure institutions (MIIs) are a central theme of the meeting  
- Recommendations will be submitted to the SEBI board for final approval  

Position Limits and Intraday Controls

The committee is expected to propose tighter controls on the maximum exposure that trading members can take in equity derivatives. This includes both gross and net position limits, with a special focus on intraday trading in index options and futures.

- The move follows concerns over excessive speculative activity, especially on expiry days  
- SEBI data shows over 90 percent of index options trades occur on expiry day, with 30 percent in the final hour  
- Proposed intraday limits aim to reduce flash volatility and improve price discovery  
- Brokers may be required to maintain higher margins for large intraday positions  

Governance Overhaul for Market Infrastructure Institutions

In parallel, SEBI is pushing for a governance revamp across MIIs, including stock exchanges, clearing corporations, and depositories. The regulator is proposing the appointment of two independent executive directors to oversee critical verticals such as compliance, risk, technology, and investor grievances.

- Executive directors will be inducted into MII governing boards alongside the managing director  
- Clear role definitions for key officials including CTO, CISO, CRO, and compliance heads are being proposed  
- External directorships for MDs and EDs will be restricted to prevent conflicts of interest  
- The reforms aim to prioritize public interest and systemic stability over commercial objectives  

Investor Protection and Operational Reforms

The committee is also examining operational enhancements to improve investor convenience and fund governance. These include:

- A proposal to merge Investor Protection Funds of stock and commodity exchanges into a single pool  
- Allowing interest earned on IPF investments to be used for compensating dedicated IPF staff  
- Introducing a systemic withdrawal and transfer facility for mutual fund investors holding units in demat form  
- Reviewing the Special Pre-Open Session mechanism for IPOs and relisted shares to improve price discovery  

Performance-Linked Pay and Accountability

Another reform under discussion is the framework for performance-linked compensation for top officials at MIIs. The proposal emphasizes linking variable pay to governance standards, risk management outcomes, and investor protection metrics.

- Variable pay will be tied to measurable accountability benchmarks  
- The move is expected to enhance transparency and align executive incentives with regulatory goals  

Looking Ahead

The outcome of today’s SMAC meeting could reshape the contours of India’s equity derivatives market and strengthen the governance of its financial infrastructure. With rising trading volumes, increasing retail participation, and growing systemic complexity, SEBI’s proactive stance signals a commitment to safeguarding market integrity and investor confidence.

Sources: NDTV Profit, BusinessWorld, Economic Times, Fortune India, Telegraph India.