SEBI Clarifies No Plans to Link Options Leverage Limits to Cash Positions

Mumbai, July 9, 2025 – The Securities and Exchange Board of India (SEBI) has addressed market concerns by confirming that no proposal is currently under consideration to link options leverage limits to cash positions. This clarification comes a day after the SEBI Chairperson highlighted the regulator’s intensified surveillance efforts aimed at curbing potential manipulation in the derivatives market, which had fuelled speculation about stricter trading norms.

A Quick Look: Options, Leverage, and Cash

Options are like bets on whether a stock’s price will go up or down. You pay a small amount to control a much larger value of shares. This “controlling a lot with a little” is called leverage. It can make your profits bigger, but also your losses.

The idea that was floating around was for SEBI to set a rule: “For every ₹100 cash you have, you can only make options bets worth ₹X.” This would directly limit how much leverage people could use.

Why might this idea have come up?

• To protect small investors: Many everyday investors lose a lot of money in options trading. Limiting leverage could make them take fewer big risks.
• To stop big risks: If people can’t use too much borrowed money, they might be less likely to make huge, risky bets.
• To prevent market rigging: Sometimes, very large bets in options, combined with trading actual shares, can be used to unfairly push prices around. Limiting leverage could make this harder. (For example, SEBI recently banned a US company, Jane Street, for supposedly doing this and seized a huge amount of their money.)

Background: Jane Street Ban and Market Manipulation Probe

SEBI’s statement follows its recent interim order banning US-based trading firm Jane Street Group from participating in Indian markets. The regulator accused Jane Street of engaging in manipulative trading strategies, specifically “marking-the-close” and “intra-day index manipulation,” that allegedly distorted stock indices on expiry days to profit from large options positions. These activities reportedly resulted in substantial profits for Jane Street, with SEBI ordering the impounding of ₹4,843.57 crore (approximately $567 million) in alleged unlawful gains. The regulator’s ongoing investigation is reportedly expanding to scrutinise other expiry days and indices beyond just Bank Nifty and Nifty 50.

It is implied that SEBI’s current focus is primarily on surveillance and enforcement against violators, rather than implementing broad market curbs like linking leverage limits to cash holdings. This approach aims to avoid penalising the entire market for the actions of a few.

Retail Derivatives Losses Soar 41% in FY25

A study released by SEBI on Monday revealed a concerning trend: retail investors suffered ₹1.06 trillion in losses from derivatives trading in FY2024–25. This marks a significant 41% increase from the previous fiscal year’s losses of ₹75,000 crore (FY24). The average loss per individual trader also jumped by 27%, from ₹86,728 in FY24 to ₹1,10,069 in FY25, with approximately 91% of individual traders incurring losses.

India maintains its position as the largest equity derivatives market globally, accounting for roughly 60% of the 7.3 billion equity derivative contracts traded worldwide in April, according to data from the Futures Industry Association.

This explosive growth, predominantly driven by retail participation, has prompted SEBI to implement various measures to make derivatives trading “costlier and more prudent” for smaller investors. These measures, rolled out in phases since November 2024, include:

• Limiting the number of weekly contract expiries to only benchmark indices like Nifty and Sensex. For instance, Bank Nifty and Fin Nifty weekly expiries were discontinued.
• Increasing lot sizes for index derivatives, with the minimum contract size raised from ₹5-10 lakh to ₹15-20 lakh.
• Implementing higher margins for expiry day trading.
• Changes to how Open Interest (OI) is measured, shifting from notional value to a delta-based or FutEq OI method.
• Revising Market Wide Position Limits (MWPL) for stocks, now based on a lower of 15% of free float or 65 times average daily cash volume, with a minimum floor of 10% of free float.

While these measures have led to a noticeable decline in notional turnover and the number of contracts traded in some segments, the overall growth in derivatives trading continues, alongside the significant losses incurred by retail participants.

Why SEBI’s Clarity Matters?

SEBI saying “we’re not doing this” is a big deal for a few reasons:

1. Calms the market: Traders and brokers were getting nervous, as such a rule would change how they do business. This news helps them breathe easier.
2. Keeps trading flexible: Options trading relies on leverage. If it were too restricted, it might make it harder for people to use options for their proper purpose, like managing risks for their other investments.
3. Focuses on bad actors: Instead of punishing everyone, SEBI seems to be saying, “We’ll go after the cheaters directly with strict policing and enforcement.” The person close to the matter even said that linking limits to cash would “penalise the whole market.”
4. Balances safety with growth: India has the world’s biggest market for stock-related options. SEBI wants to protect investors, but also wants the market to keep growing. They’ve already introduced other rules to make trading safer, like increasing the minimum size of options contracts, but they’re stopping short of tying options limits to cash.

Future Outlook

SEBI’s clarification provides immediate relief to market participants, but regulatory scrutiny will remain intense. Rather than blanket rules like tying leverage to cash, SEBI is expected to continue refining targeted interventions, focusing on transparency, surveillance, and punishing manipulation. More data-driven reforms may emerge, especially as retail losses remain high. Traders can expect stricter risk-based norms but not overly restrictive policies that hinder hedging or market depth. In short, SEBI seems set to balance market integrity with investor protection while supporting India’s position as a global derivatives leader.

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