Sebi to review eligibility criteria for derivatives trading
The Securities and Exchange Board of India (Sebi) is considering changing the criteria for selecting stocks eligible for derivatives trading. Following a phenomenal growth in the markets over the last six years, Sebi is proposing these changes to protect investors from increased volatility and market manipulation. The new criteria will also encourage broader representation of constituents in the derivatives segment.
Existing criteria for derivatives trading
Currently, to be eligible for derivatives trading, both futures and options contracts on stocks must satisfy certain criteria that were last reviewed in 2018. These criteria relate to average daily market capitalisation, average daily traded value, average daily delivery value, and market-wide position limit (MWPL) on a rolling basis for a continuous period of six months. Only stocks from among the top 500 in terms of average daily market cap and average daily traded value on a rolling basis qualify. The average daily delivery volume on the cash market should not be less than INR 10 crore.
Why review the criteria now?
Since the last review, the capital markets have grown significantly, with the number of demat accounts rising from 40.8 million to 158.05 million. As a result, Sebi requires a review of the eligibility criteria for stock derivatives in light of the increased interest in trading, which has impacted delivery volumes and market values.
What is the rationale for the review?
Stock exchanges have two segments – a capital market segment and a derivatives segment. A derivative gets its value from the stock traded in the capital market segment. However, the combination of the burgeoning volume of shares, trade and delivery values, etc., has created a demand for a new set of criteria for derivatives trading. To keep the stock derivatives segment aligned with the cash segment, Sebi believes changing the eligibility criteria will benefit investors, by reducing the risk of market manipulation.
What are the potential changes?
Sebi has proposed an increased criterion for the median quarter sigma order size from INR 25 lakhs presently to INR 75 lakhs to INR 1 crore. The proposed changes to the market-wide position limit and average daily delivery value are from INR 500 crore to INR 1,250-1,750 crores and from INR 10 crore to INR 30-40 crore respectively. These changes in the eligibility criteria will mean only those stocks that meet the criteria of market cap, trade value, and other relevant parameters will be listed for derivatives trading.
Impact on Stocks
If Sebi’s proposals are implemented, it will lead to new stocks being included in the derivatives segment, while others could be excluded. According to brokerage Nuvama, some stocks that could be removed include Abbott India, Atul, Bata India, Berger Paints, CanFin Homes, Mahanagar Gas, Gujarat Gas, and Dr Lal Path Labs. Meanwhile, those that could make their entry into the derivatives segment include Zomato, Yes Bank, Jio Financial, Adani Green, and IRFC.
By reviewing the eligibility criteria for derivatives trading, Sebi aims to reduce the risk of market manipulation and increased volatility, which will benefit investors. The proposed changes in eligibility criteria have been designed to include more constituents in the derivatives segment and ensure that only those stocks that meet the specified parameters are listed.
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