Our Summer 7s have included the modified rule that they may sub at any stoppage. Referees should be consistent in how this is applied.
Subbing at any stoppage is not a modified rule because that is the rule for all FIFA matches unless otherwise modified. Especially in tournament situations where the rules call for a running clock, teams will sometimes use this as a time wasting ploy. Referees must ensure that this does not occur.
First, do NOT recognize any sub opportunity other than when the substitute is standing and waiting to enter at the halfway line. Do NOT permit teams to simply call out "SUB" and sent people onto the field from anywhere.
Second, recognize sub opportunities only where they will not detract from the natural flow of the game. Especially be aware of those situations where a team will be disadvantaged by permitting a request for substitution. Treat this like a quick free kick situation. If a team in possession of the ball in anxious to put the ball into play quickly, let them. This is especially important if it is a quick free kick including a corner kick. They are entitled to the ball -- do not keep them from restarting to allow their opponents to sub.
However, if they are not in a hurry to keep the play moving, use your discretion as to whether it would be an appropriate time to sub.
Referees must be aware of legitimate subbijng opportunities and those which are merely time-wasting. While we cannot deny a proper request for a substitution, there is nothing in the Laws that state that we must recognize every request every time, especially where it is apparent that the team winning is merely subbing players at every opportunity. We can use our discretion in Law 7 to add time to make up for excessive time lost due to subbing and use our personalities to manage the players.
Finally, referees must be diligent in watching for every opportunity. If we explain to the teams that they must be standing and waiting and we will look to see if they are standing and waiting, then we really must look to see at every opportunity.