The Securities and Exchange Board of India (SEBI) is exploring a series of comprehensive reforms, including a cap on large-scale intraday index derivatives trades, enhanced governance for market infrastructure institutions, and new measures to protect investors. This move comes as the regulator scrutinizes high-frequency trading activities.
The Securities and Exchange Board of India (SEBI) is set to propose a new, stricter limit on large-scale intraday index derivative trades. According to sources familiar with the matter, the regulator’s secondary market panel is likely to recommend a cap of Rs 1,500 crore on these high-volume transactions. This development follows SEBI’s ongoing scrutiny of high-frequency trading (HFT) firms, including Jane Street.
Currently, there are no specific limits on how much a large player can bet on intraday index derivatives. Earlier this year, in February, SEBI had floated a significantly higher threshold of Rs 10,000 crore, but the proposal faced considerable pushback from market stakeholders and was subsequently withdrawn. The new, much lower cap of Rs 1,500 crore signals a more cautious and targeted approach by the regulator.
Sources indicate that SEBI has instructed stock exchanges to tighten their oversight on the intraday positions taken by large market participants. This is part of a broader review of the derivatives market framework, where the regulator’s committee is actively considering both intraday position limits and brokers’ exposure caps to mitigate systemic risks.
Broader Market Reforms Also on the Table
The proposed cap on intraday trades is just one part of a wider agenda. In a recent meeting on August 19, the secondary market committee discussed several other key reforms aimed at strengthening market governance and enhancing investor protection.
A central theme of the discussions was governance reforms for market infrastructure institutions (MIIs) like stock exchanges and depositories. Proposals include appointing two independent executive directors to head separate business verticals. These individuals would also serve on the MIIs’ governing boards, ensuring greater accountability. The committee is also seeking to clearly define the roles and responsibilities of executive directors and other key officials, particularly those in critical functions such as compliance, risk management, technology, and cybersecurity.
Investor-Focused Changes and Compensation Reforms
In a move to streamline investor-centric processes, SEBI is considering the merger of Investor Protection Funds (IPF) from stock and commodity derivatives exchanges into a single, consolidated pool. This would simplify the compensation process for investors. Furthermore, the committee is examining a proposal to use the interest earned on IPF investments to compensate the dedicated staff who manage these funds.
For mutual fund investors, a significant convenience-boosting reform is under discussion: a systemic withdrawal and transfer facility for those holding units in demat form. This initiative is expected to simplify the management of mutual fund holdings and provide investors with greater flexibility.
The committee is also reviewing the framework for performance-linked pay for top officials at MIIs. The goal is to link their variable compensation directly to accountability and the implementation of strong governance standards, ensuring that incentives are aligned with the best interests of the market and its participants.
Addressing IPO Volatility and Price Discovery
Concerns over price volatility and discovery during the initial stages of trading for IPOs and relisted shares are also being addressed. SEBI is reviewing the Special Pre-Open Session (SPOS) mechanism to tackle these issues and ensure a more stable and fair market opening.