Key Points of SEBI’s Proposal for Stricter Derivative Trading Norms
- Stricter Inclusion Norms: SEBI proposes more stringent criteria for individual stocks to enter the derivatives segment.
- Exclusion of Low Turnover Stocks: Stocks with consistently low turnover will be weeded out from the Futures & Options (F&O) segment.
- Market Depth and Position Limits: SEBI highlights the importance of sufficient market depth and appropriate position limits to mitigate risks of market manipulation, increased volatility, and compromised investor protection.
- High-Quality Stocks: The proposal ensures that only high-quality stocks, characterized by significant size, liquidity, and market depth, are available in the derivatives segment.
- Readjustment of Market Parameters: Current market parameters for eligibility will be readjusted to keep pace with evolving market conditions, reflecting growth in market capitalization and turnover.
- Past Review: The last review of the eligibility criteria for stocks in the derivatives segment was in 2018.
- Trading Days Requirement: Under the new proposal, individual stocks must have traded on at least 75% of trading days to qualify for derivative trading.
SEBI Proposes Tighter Criteria for Derivative Trading on Individual Stocks
On Monday, the Securities and Exchange Board of India (SEBI), the capital markets regulator, introduced a proposal for stricter norms governing the inclusion of individual stocks in the derivatives segment. This new initiative aims to exclude stocks with persistently low turnover from the Futures & Options (F&O) segment of the exchanges.
In its consultation paper, SEBI emphasized that insufficient depth in the underlying cash market and inadequate position limits around leveraged derivatives can lead to increased risks of market manipulation, heightened volatility, and diminished investor protection. Therefore, SEBI underscores the necessity to ensure that only high-quality stocks, characterized by their size, liquidity, and market depth, qualify for the derivatives segment.
To align with evolving market conditions, SEBI proposes readjusting the current market parameters for eligibility in the derivatives segment. This reassessment considers significant growth in market parameters, such as market capitalization and turnover, which reflect the size and liquidity of the cash market.
The last review of the eligibility criteria for introducing stocks into the derivatives segment was conducted in 2018. Under the new proposal, for an individual stock to be eligible for derivative trading, it must have been traded on at least 75% of trading days.