Sebi’s new approach to keeping markets under watch should help reduce distortions

Subscribe to enjoy similar stories. The Securities and Exchange Board of India’s (Sebi) consultation paper, ‘Enhancing Trading Convenience and Strengthening Risk Monitoring in Equity Derivatives,’ issued last month, fulfils a long-standing market demand to increase the economic representativeness of its Open Interest (OI) measurement approach. The proposal will not only help retail investors, but also institutions such as mutual funds that manage retail money.

The existing method of measuring OI by adding the notional value of futures and options makes limited sense. It inadvertently leaves the door open for market risk guard-rails to be bypassed. Regulatory independence: Indian regulators have at times adopted global best practices and at others charted their own path.

For example, Reserve Bank of India (RBI) guidelines that predate the West’s 2008 subprime-loan crisis had restrained securitization structures which had a weak economic rationale. But in hindsight, these worked out well. Take another example.

The London Interbank Offered Rate (Libor), once a global lending benchmark, was determined by a process called ‘fixing,’ and had the same executional shortcomings that its name cued. But India’s benchmark, the Mumbai Interbank Offered Rate (Mibor), did not follow what was seen as a ‘best practice’ before it was phased out in 2023. While the future-equivalent (or Delta) way of calculating OI proposed by Sebi may not be present in major markets, the concept is sound.

So, there is no reason why India should not implement it. South Korea and America’s Commodity Futures Trading Commission have already adopted the Delta approach. Sebi’s proposal hits a sweet spot that balances economic correctness with ease of