Sebi Proposes Strict Norms for Stock Entry in Derivatives

Sebi proposed new regulations to tighten the entry norms for individual stocks in the derivatives segment, aiming to eliminate low-turnover stocks and enhance market depth and liquidity. The proposal includes revised market parameters and seeks to address risks of market manipulation and increased volatility.


PTI | New Delhi | Updated: 10-06-2024 14:05 IST | Created: 10-06-2024 14:05 IST
Sebi Proposes Strict Norms for Stock Entry in Derivatives
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Capital markets regulator Sebi has put forth a proposal on Monday to tighten norms for the inclusion of individual stocks in the derivatives segment.

The new regulations aim to exclude stocks with consistently low turnover from the Futures & Option (F&O) segment of the exchanges.

'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.

As a result, Sebi aims to ensure that only high-quality stocks in terms of size, liquidity, and market depth are available in the derivatives segment.

The existing market parameters for eligibility in the derivatives segment need to be readjusted to keep pace with evolving market conditions, it added.

The review is proposed in light of significant growth in market parameters reflecting the size and liquidity of the cash market such as market capitalization and turnover, with the last review conducted in 2018.

Under the proposal, for an individual stock to be included for derivative trading, it must have traded for at least 75% of trading days. Moreover, 15% of active traders or 200 members, whichever is lower, should have traded in the stock. The average daily turnover should range between Rs 500 crore and Rs 1,500 crore, and the average premium daily turnover should be at least Rs 150 crore for inclusion.

Sebi also proposed that the maximum number of open contracts allowed for the underlying stock should be set between Rs 1,250 crore and Rs 1,750 crore, raising the current figure from Rs 500 crore.

These changes are aimed at guaranteeing sufficient turnover, open interest, and widespread participation in the derivatives market.

Stocks should continue to be selected from among the top 500 in terms of average daily market capitalization and average daily traded value on a rolling basis.

The stock's Median Quarter-Sigma Order Size over the last six months should be set between Rs 75 and Rs 100 lakh, significantly raised from the current minimum of Rs 25 lakh.

Moreover, the stock's minimum rolling average daily delivery value in the cash market in the previous six months should be Rs 30-40 crore, up from the current Rs 10 crore.

Stocks that fail to meet the specified criteria for three consecutive months will exit the derivatives segment, meaning no new contract would be issued for such stocks.

The Securities and Exchange Board of India (Sebi) has sought public comments on the proposal until June 19.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)

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