The Securities and Exchange Board of India (SEBI) recently issued a circular on August 30, 2024, that brings significant changes to the eligibility criteria for the entry and exit of stocks in the derivatives segment. This revision aims to enhance market depth, reduce risks of manipulation, and ensure that only high-quality stocks are traded in the derivatives segment. Let’s try to understand the key aspects of this circular and its implications for market participants.
Background and Rationale
SEBI’s primary goal is to foster a well-regulated securities market. Derivative markets are crucial for price discovery and liquidity, but without sufficient underlying market depth and proper position limits, these markets can become susceptible to manipulation, increased volatility, and compromised investor protection. The last review of the eligibility criteria was conducted in 2018, and since then, the market has seen significant growth. Therefore, SEBI has deemed it necessary to revise these criteria to align with the current market conditions.
Revised Entry Norms for Derivatives
The circular outlines revised criteria that stocks must meet to be eligible for trading in the derivatives segment. The key changes include:
1. Median Quarter Sigma Order Size (MQSOS): The Median Quarter Sigma Order Size threshold has been raised from INR 25 lakhs to INR 75 lakhs. This change reflects the increased market turnover, which has grown over 3.5 times since the last review.
2. Market Wide Position Limit (MWPL): The MWPL criterion has been increased from INR 500 crores to INR 1,500 crores, in response to the market capitalization nearly tripling since the last review.
3. Average Daily Delivery Value (ADDV): The ADDV requirement has been raised from INR 10 crores to INR 35 crores. This adjustment ensures that only stocks with substantial trading activity are included in the derivatives segment.
Additionally, stocks meeting these criteria in the underlying cash market on any stock exchange will be permitted to trade in the derivatives segment across all exchanges. The derivative contracts will be settled based on the volume-weighted average price (VWAP) from the cash segment.
Exit Norms for Derivatives
SEBI has also established exit criteria to ensure that stocks failing to maintain the required standards are removed from the derivatives segment. If a stock does not meet the criteria continuously for three months, it will be excluded from the derivatives segment. However, existing contracts may continue to trade until expiry, and new strikes can be introduced for these contracts.
Moreover, a stock that exits the derivatives segment cannot be reconsidered for re-entry for a period of one year. This stringent measure ensures that only consistently performing stocks remain in the derivatives market.
Introduction of Product Success Framework (PSF)
In a bid to further safeguard market integrity, SEBI has introduced a Product Success Framework (PSF) for single stock derivatives, similar to the framework already in place for index derivatives. The PSF criteria include:
1. Active participation by at least 15% of trading members or 200 trading members, whichever is lower.
2. Trading on a minimum of 75% of the trading days during the review period.
3. An average daily turnover of at least INR 75 crores.
4. An average daily notional open interest of at least INR 500 crores.
Stocks failing to meet these PSF criteria for three continuous months will be excluded from the derivatives segment.
Implementation and Impact
The circular is effective immediately, and stock exchanges are required to make the necessary amendments to their bye-laws, rules, and regulations. They must also carry out system changes and disseminate the circular’s provisions on their websites.
The revised criteria are expected to significantly impact the derivatives market by ensuring that only stocks with substantial market depth and liquidity are traded. This move will likely reduce market manipulation and enhance investor protection, contributing to a more stable and transparent market environment.
In conclusion, SEBI’s revised eligibility criteria mark a significant step towards strengthening the derivatives market in India. By aligning the criteria with the current market realities, SEBI aims to foster a more resilient and investor-friendly market, ensuring that the derivatives segment remains a robust tool for price discovery and risk management.
