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Business News/ Markets / Stock Markets/  SEBI suggests tighter regulations for inclusion of derivative trading on individual stocks

SEBI suggests tighter regulations for inclusion of derivative trading on individual stocks

The new proposal aims to exclude stocks with consistently low turnover from the Futures & Options (F&O) segment of the exchanges.

SEBI (Reuters)Premium
SEBI (Reuters)

Markets regulator SEBI, on Monday, proposed stricter criteria for the inclusion of individual stocks in the derivatives segment. The new proposal aims to exclude stocks with consistently low turnover from the Futures & Options (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.

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The markets regulator also said that it will not freeze mutual fund portfolios and demat accounts of investors who haven't submitted nominations.

This decision, applicable to existing investors and unitholders, stems from feedback from market participants, emphasizing the importance of compliance ease and investor convenience. According to Sebi's circular, investors possessing securities in physical form will still be entitled to receive dividends, interest payments, or redemption payments, as well as to lodge grievances.

The decision - for existing investors and unitholders - has been taken based on representations from the market participants, citing need for ease of compliance and investor convenience. Investors holding securities in physical form shall be eligible for receipt of dividend, interest payment or redemption payment, as well as to lodge grievance, Sebi's circular said.

Given this context, SEBI needs to ensure that only high-quality stocks, characterized by size, liquidity, and market depth, are available in the derivatives segment.

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In line with this objective, SEBI has proposed adjustments to the existing market parameters for eligibility in the derivatives segment to align with evolving market conditions.

The proposed review is based on significant growth in market indicators reflecting the size and liquidity of the cash market, such as market capitalization and turnover. The last review of eligibility criteria for stocks in the derivatives segment was conducted in 2018.

Under the new proposal, for an individual stock to be included for derivative trading, it must have been traded on 75 per cent of trading days. Additionally, at least 15 per cent of active traders or 200 members, whichever is lower, should have traded the stock. The average daily turnover should be between 500 crore and 1,500 crore, and the average premium daily turnover should be at least 150 crore.

Furthermore, SEBI has proposed that the maximum number of open contracts allowed for the underlying stock should be increased to between 1,250 crore and 1,750 crore, up from the current 500 crore.

These proposals aim to ensure that stocks have sufficient turnover, open interest, and widespread participation. SEBI also stated that stocks should be selected from the top 500 stocks based on average daily market capitalization and average daily traded value on a rolling basis.

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The stock's Median Quarter-Sigma Order Size over the last six months should be between 75 and 100 lakh, increased from a minimum of 25 lakh. The stock’s minimum rolling average daily delivery value in the cash market over the previous six months should be 30-40 crore, up from the current 10 crore.

If a stock fails to meet these criteria for three consecutive months, it should be removed from the derivatives segment, meaning no new contracts would be issued for that stock.

SEBI has invited public comments on the proposal until June 19.

(With inputs from PTI)

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Published: 10 Jun 2024, 06:36 PM IST
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