Proposed F&O Regulations on FPIs and Prop Traders: A Deep Dive into the Impact
As of March 4, 2025, the Securities and Exchange Board of India has unveiled a series of proposals aimed at revising position limits for intraday and end-of-day derivatives trading in index futures and options. These changes are set to have a profound impact on foreign portfolio investors (FPIs), high net worth individuals, and proprietary desks of stockbrokers, potentially reshaping the landscape of derivatives trading in India.
The proposed revisions outline intraday limits for index options, with a net basis cap set at ₹1,000 crore and a gross basis ceiling of ₹2,500 crore. End-of-day limits are also specified, ranging from ₹500 crore to ₹1,500 crore. These adjustments are expected to significantly restrict the capital available for trading activities by FPIs, HNIs, and prop desks, thereby reducing their market exposure and overall trading volumes.
Market Disruption and Economic Implications
With the proposed intraday gross limit for index options standing at ₹2,500 crore on a delta-adjusted basis, market participants are bracing for a substantial impact on their daily trading operations. This move could restrict the capital utilization of FPIs, HNIs, and prop desks to a mere fraction of their current levels, prompting concerns about a potential exodus to more favorable markets or a complete withdrawal from the trading landscape.
According to industry insiders, FPIs and large prop desks typically deploy capital ranging from ₹3,000 to ₹3,500 crore in derivatives trading on a daily basis, with a significant portion allocated to index options. The proposed changes could shrink this capital allocation by as much as ten percent, leading to a significant contraction in derivatives trading volumes. A senior broking official warned that these alterations could precipitate a 60-70 percent decrease in trading activity from previous highs, signaling a major disruption in the derivatives market.
Expert Insights and Market Outlook
Tejas Khoday, CEO of FYERS, emphasized that the proposed regulations would limit traders’ ability to offset positions and mask their true exposure through hedging strategies. This, in turn, could lead to a substantial reduction in effective capital usage and deployed capital. Khoday pointed out that the open interest in index F&O contracts would also be severely impacted, further exacerbating the challenges faced by market participants.
SEBI’s decision to monitor the short position limit of ₹500 crore intraday, effective April 1, 2025, adds another layer of complexity to the regulatory landscape. These measures, introduced by SEBI in 2020 to mitigate speculation in index derivatives, are poised to reshape trading dynamics and market behavior in the coming months.
Market analysts, including Goldman Sachs, have already begun to adjust their forecasts in response to these regulatory changes. The forthcoming restrictions on proprietary traders, who account for a significant portion of daily turnover on the BSE, have prompted a reevaluation of market sentiment and future prospects.
As the derivatives trading landscape in India undergoes a significant transformation, market participants are bracing for a new era of regulatory oversight and operational challenges. The proposed revisions to position limits and intraday monitoring are expected to reshape trading strategies, capital allocation, and risk management practices, setting the stage for a period of adjustment and adaptation in the financial markets. With the deadline for compliance fast approaching, stakeholders across the industry are closely monitoring developments and preparing for a new chapter in India’s derivatives market.
