Market regulator Securities and Exchange Board of India (SEBI) has issued a consultation paper to review the eligibility criteria of stocks that can be included in the futures and options (F&O) segment in-line with the growth seen by the market over the last six years.
SEBI had last established a framework in 2018 to select stocks that are eligible for trading in the F&O segment. Currently, there are 182 stocks whose futures and options can be traded in the Indian markets, down from 209 as of March 31, 2018.
The market regulator said that 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.
Here are the changes to the current criteria proposed by SEBI:
Current Criteria #1
Average daily market capitalisation and average daily traded value in the previous six months on a rolling basis should be among the top 500 stocks.
SEBI has proposed no change to this criteria, and it remains as is.
Current Criteria #2
The stock’s Median Quarter Sigma Order Size (MQSOS) over the last six months on a rolling basis shall not be less than ₹25 lakh.
SEBI’s Proposal: The market regulator has proposed the MQSOS to now be in the range of ₹75 lakh to ₹1 crore, since the average market turnover is 3.5x higher than 2018 and therefore, the proposed change should be in-line with the growth.
A Median Quarter Sigma Order Size refers to the order size in value terms required to cause a change in the stock price equal to one-quarter of a standard deviation. The higher the size, means higher the liquidity and tougher for the stock price movement to be manipulated.
Current Criteria #3
The stock’s Market Wide Position Limit (MWPL) on a rolling basis shall not be less than ₹500 crore.
SEBI’s Proposal: The regulator has proposed this limit to be enhanced to between ₹1,250 crore to ₹1,750 crore as the overall market capitalisation is now 2.8x compared to 2018, while the turnover is grown by more than 3.5x.
Market Wide Position Limit (MWPL) is the maximum number of open F&O contracts permitted for a particular stock. This limit is determined by the exchanges.
Current Criteria #4
The stock’s Average Daily Delivery Value (ADDV) in the cash market, in the previous six months on a rolling basis shall not be less than ₹10 crore.
SEBI’s Proposal: It is proposed to enhance this figure to between ₹30 crore to ₹40 crore as the ADDV has increased by 3x since 2018.
Current Criteria #5
The stocks to meet the criteria laid down for the Product Success Framework for index derivatives which includes
- 15% trading members active in all index derivatives or 20 trading members, whichever is lower, should have traded in any derivative contract on the index being reviewed in each month during the review period.
- Trading on a minimum of 75% of the trading days during the review period.
- Average daily turnover of at least ₹10 crore during the review period and
- Average daily open interest of ₹4 crore during the review period.
SEBI’s Proposal:
The regulator has proposed changes to this rule as under:
- At least 15% of the trading members active in all stock derivatives or 200 members, whichever is lower, shall have traded in any derivative contract on the stock.
- Trading on minimum 75% of the trading days.
- Average daily turnover would be minimum of ₹150 crore and
- Average daily Open Interest would be a minimum of ₹500 crore to ₹1,500 crore.
SEBI has sought comments on whether changes to all of these above mentioned criteria are appropriate. Market participants and public comments are invited, along with the rationale by June 19, 2024 via the online web based platform.
