FIA warns SEBI proposals may harm market liquidity

The Futures Industry Association (FIA) has raised concerns about two proposals from India's market regulator, SEBI, regarding the futures and options (F&O) market. The FIA worries that these proposals could increase trading costs, reduce market liquidity, and lead to price manipulation, which could threaten market stability. The proposals aim to establish open interest (OI) and position limits for index futures and options. FIA suggests that these measures could have unintended consequences, making the market less efficient. They indicate that if implemented as planned, the proposals might widen bid-ask spreads and increase market volatility, which could discourage institutional investors from participating. FIA emphasizes that while the intention behind the proposals is to improve risk management, they could actually create problems. Currently, they recommend keeping the established end-of-day Gross Notional Open Interest limit, rather than introducing complex delta-based limits. The organization argues that delta calculations could result in errors and operational burdens, further complicating the trading environment. Furthermore, FIA argues that the proposed delta limits could strain liquidity providers and impact retail traders negatively. They suggest that small investors might face larger losses and market integrity could decline as mismatches between instruments become more frequent. In its response, FIA points out that other global markets, like those in Hong Kong and the US, successfully operate under higher position limits while maintaining strong risk management practices. They believe adopting a similar structure could help maintain market liquidity and efficiency. Lastly, FIA warns that imposing new limits could lead to significant price movements when there is high demand from smaller investors. This would put unnecessary pressure on liquidity providers while harming retail traders by lowering overall market liquidity.