Pre-Trade Risk Control – Limit Price Protection in Equity Derivatives Segment

Description

BSE revises Limit Price Protection (LPP) parameters for equity derivatives, modifying ranges for index options and index futures effective December 01, 2025.

Summary

BSE has revised the Limit Price Protection (LPP) parameters for the Equity Derivatives segment, modifying the percentage ranges and minimum absolute values for index options and index futures. This partial modification to earlier circulars (dated April 05, 2024 and April 20, 2024) aims to enhance pre-trade risk controls. The revised parameters increase LPP for index options to 40% (minimum Rs. 20) and set index futures at 2% (minimum Rs. 200). The exchange emphasizes the need for robust risk management practices and proper order placement to maintain market integrity.

Key Points

• LPP range for Index Options revised to 40% on reference price with minimum absolute value of Rs. 20
• LPP range for Index Futures set at 2% on reference price with minimum absolute value of Rs. 200
• Changes represent a modification to the existing LPP framework based on periodic review
• All trading members must implement robust risk management measures
• Members advised to review and strengthen pre-trade risk controls
• Participants warned against placing orders at unrealistic prices that may cause order book imbalances
• Stop Loss order limits and Market Price Protection (MPP) settings should be reviewed at both TM and user levels

Regulatory Changes

The circular modifies the Limit Price Protection framework previously established through Exchange circulars 20240405-40 (April 05, 2024) and 20240420-1 (April 20, 2024). The key parameter changes are:

These revised parameters supersede the previous LPP settings for these instrument types.

Compliance Requirements

• Trading Members: Must update systems to accommodate revised LPP parameters
• Risk Management: Implement and maintain robust risk management measures and practices
• Pre-Trade Controls: Review and strengthen pre-trade risk control mechanisms
• Order Discipline: Avoid placing orders at unrealistic prices to prevent market disruption
• System Reviews: Conduct thorough review of Stop Loss order limits and MPP limit settings
• Multi-Level Controls: Ensure proper risk controls are configured at both Trading Member (TM) level and individual user level
• Compliance Monitoring: Take note of all exchange circulars and advisories regarding pre-trade risk controls
• Due Diligence: Exercise due care and diligence while placing orders, particularly during volatile market sessions

Important Dates

• November 28, 2025: Circular issued (Notice No. 20251128-56)
• November 29, 2025 (Saturday): Mock Trading Session for testing revised parameters
• December 01, 2025 (Monday): Revised LPP parameters become effective

Impact Assessment

Market Operations: The revised LPP parameters will directly affect order placement and execution in the equity derivatives segment. The 40% LPP for index options provides wider price bands compared to typical settings, while the 2% limit for index futures maintains tighter control over futures pricing.

Trading Members: Must update their risk management systems and trading infrastructure to comply with the new parameters. This includes reconfiguring order management systems, risk engines, and surveillance tools.

Market Participants: Traders and institutional participants will need to adjust their order placement strategies, particularly for index options where the wider LPP range allows for greater price flexibility. However, the minimum absolute value thresholds (Rs. 20 for options, Rs. 200 for futures) provide a floor protection mechanism.

Risk Management: The changes aim to balance market efficiency with risk containment. The wider bands for index options may accommodate greater volatility while still preventing extreme price dislocations. The stricter futures limits help maintain orderly price discovery in the futures market.

Operational Risk: The exchange’s emphasis on reviewing Stop Loss and MPP settings highlights the importance of preventing erronaneous orders that could trigger unintended trades, especially during volatile market conditions. Market participants must ensure their risk controls are properly calibrated to the new parameters to avoid order rejections or unintended exposures.

Impact Justification

Modifies LPP parameters for derivatives trading which affects order placement and risk controls for all derivatives market participants, with specific impact on index options and futures trading