Sebi moots stricter norms for F&O stocks
The new proposal would weed out stocks with consistently low turnover from derivatives segment; It ensures that only high-quality stocks are available in the derivatives segment
image for illustrative purpose
Without sufficient depth in the underlying cash market and appropriate position limits around leveraged derivatives, there can be higher risks of market manipulation, increased volatility, and compromised investor protection, says Sebi
Investor Protection
- Compulsorily traded in 75% of sessions
- Stock should have 15% of active traders or 200 members
- Avg daily turnover should be Rs500-1,500 cr
- Avg premium daily turnover should be Rs150 cr
- Maximum open contracts allowed should be Rs1,250 cr and Rs1,750 cr as against current Rs500 cr
New Delhi: Capital markets regulator Sebi on Monday proposed stricter norms for the entry of individual stocks in the derivatives segment. The new proposal would weed out stocks with consistently low turnover from the Futures & Option (F&O) segment of the bourses. The Securities and Exchange Board of India (Sebi) has sought public comments till June 19 on the proposal.
“Without sufficient depth in the underlying cash market and appropriate position limits around leveraged derivatives, there can be higher risks of market manipulation, increased volatility, and compromised investor protection,” Sebi said in its consultation paper.
Given all this, there is a need for Sebi to ensure that only high-quality stocks in terms of size, liquidity, and market depth are available in the derivatives segment. In line with this, the extant market parameters for eligibility in the derivatives segment need to be readjusted to keep pace with the evolving market conditions, it added. The review has been proposed considering remarkable growth in market parameters reflecting the size and liquidity of the cash market such as market capitalization and turnover.
The last review of the eligibility criteria for the introduction of stocks in the derivatives segment was conducted in 2018. Under the proposal, for an individual stock to be included for derivatives trading, it should have traded for 75 per cent of trading days. Further, at least 15 per cent of active traders or 200 members, whichever is low, should have traded in the stock, average daily turnover should be between Rs500 crore and Rs1,500 crore and average premium daily turnover should be at least Rs150 crore for the inclusion.
In addition, Sebi proposed that the maximum number of open contracts allowed for the underlying stock should be Rs1,250 crore and Rs1,750 crore. At present, the figure is pegged at Rs500 crore. These proposals are aimed at ensuring that stocks have sufficient turnover, open interest and widespread participation. Sebi said that stock should continue to be chosen from amongst the top 500 stocks in terms of average daily market capitalisation and average daily traded value on a rolling basis.
The stock’s Median Quarter-Sigma Order Size over the last six months should be between Rs75 and Rs100 lakh. This figure has been hiked 3-4 times from a minimum of Rs25 lakh at present. The stock’s minimum rolling average daily delivery value in the cash market in the previous six months should be Rs30-40 crore. Currently, this is Rs10 crore. If a stock fails to meet the criteria for three months consecutively, then such stock should exit from the derivatives segment. It means no new contract would be issued on that stock.
