Sebi's measures to offset coronavirus impact on stock market: All you need to know

HIGHLIGHTS

• Market Wide Position Limit revised for certain stocks to limit short-selling.
• The cash market margin will be increased to 40 percent in a phased manner.
• Mutual funds and FPIs can have exposure in equity index derivatives based on certain conditions.
• The measures would be effective from March 23 and would be in place for one month.

Sebi on Friday announced revision market-wide position limit for stocks in the derivatives segment, flexing dynamic price bands and other measures for one month starting from March 23. The slew of measures is meant to curb high market volatility amidst sharp movement in stocks and continuing volatility in the wake of the coronavirus pandemic that has also adversely impacted economic activities.

In the four-page statement, Sebi said it would revise Market Wide Position Limit (MWPL) for stocks in the F&O segment to 50 percent of existing levels, subject to certain conditions. It would be in place in case the average daily price high-low variation percentage is more than or equal to 15 percent, or if the average MWPL utilization percentage is at least 40 percent or more. This would be calculated on the basis of the last five trading days. This is done to limit short-selling by traders which can aggravate the slide in stock prices.

The measures would be effective from March 23 and would be in place for one month. Among other steps, revised positions limits would be applicable in equity index derivatives (F&O) and there would be flexing in dynamic price bands in the F&O (Futures & Options) segment only after a cooling period of 15 minutes after fulfilling certain criteria, Sebi said in a statement.

Taking note of the continued abnormally high volatility in the market, Sebi said it discussed with stock exchanges, clearing corporations, and depositories appropriate measures that may be taken in the existing circumstances. "Sebi and stock exchanges will continuously monitor the market developments and review the position and take any further suitable actions as may be required," the watchdog said.

The revised MWPL would be only for introducing ban period on fresh positions and not for determining the enhanced eligibility criteria for derivatives stocks, Sebi said. End-of-day positions, as on the date of issuance of the circulars by the stock exchanges/clearing corporations in this regard, would not be impacted.

In the event MWPL utilization in security crosses 95 percent, then derivative contracts enter into a ban period. This means that trading members can trade in derivative contracts only to decrease their positions.

Further, Sebi said stock exchanges and clearing corporations have to put in place an effective mechanism to monitor whether the market wide open interest for scrips meeting the criteria exceeds 95 percent of the reduced MWPL.

Stock exchanges and clearing corporations have been asked to check on the intra-day basis whether any member or client has exceeded their existing positions or have created a new position in the scrips in the new ban period. The watchdog also said that the current penalty structure might be enhanced to 10 times the minimum and 5 times the maximum penalties to ensure new measures are properly implemented.

An increase in margin would be allowed for stocks meeting certain criteria. The margin rate in the cash market would be raised to a minimum of 40 percent in a phased manner. The minimum 20 percent level would be from March 23, 30 percent from March 26 and 40 percent from March 30. The proposed margins would be applicable only in the cash market and derivatives contracts on the stocks concerned would continue to be charged margins as per the extant framework.

Further, there would be an increase in margin for non-F&O stocks in the cash market.

Mutual funds, FPIs, trading members (proprietary) and clients can have exposure in equity index derivatives on the basis of certain conditions. Short positions in index derivatives should not exceed, in terms of notional value, these entities' holding of stocks. When it comes to long positions in index derivatives, the same should not exceed their holding of cash, government securities, T-Bills, and similar instruments, as per the statement.

Also, there would be additional position limits for these entities. This would be Rs 500 crore each for equity index futures contracts and equity index options contracts. In case the limits are exceeded, then an additional deposit has to be paid by the entity concerned.

This framework would be in place for one-month starting from March 23 for institutions and trading members (proprietary). For others, it would be applicable from March 27.

Currently, stocks in the F&O segment are subject to dynamic price bands. As per the latest directive, those bands would be flexed only after a cooling-off period of 15 minutes from the time of meeting the existing criteria specified by stock exchanges for flexing, the statement said.