SEBI proposes stricter norms for derivative trading on individual stocks

SEBI/ File Photo

The Securities and Exchange Board of India (SEBI) has recommended stiffer guidelines for including individual equities in the derivatives segment. This programme seeks to eliminate equities with continuously low turnover from the Futures & Options (F&O) division of stock exchanges.

SEBI underlined the hazards associated with low-turnover derivatives equities in a consultation paper released earlier this month, including potential market manipulation, higher volatility, and weakened investor protection. "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 per the PTI report.

According to the report. SEBI stressed the need to ensure that the derivatives section only includes high-quality stocks that are large, liquid, and have market depth. To that aim, SEBI suggests revising the existing market eligibility criteria to reflect changing market conditions. The last review of these criteria was done in 2018.

According to the proposed plan, a stock must meet numerous requirements in order to be qualified for derivative trading:
1. It must have traded on at least 75 per cent of trading days.
2. At least 15 per cent of active traders, or 200 members (whichever is lower), should have traded the stock.
3. The average daily turnover should be between Rs 500 and Rs 1,500 crore.
4. The average premium daily turnover must be at least Rs 150 crore.

Furthermore, the plan calls for increasing the maximum number of open contracts for the underlying stock from Rs 500 crore to Rs 1,250 crore to Rs 1,750 crore. These strategies seek to ensure that derivatives stocks have adequate turnover, open interest, and widespread involvement, the report added.

SEBI further directed that equities should continue to be chosen from the top 500 based on their average daily market capitalization and average daily traded value. The stock's Median Quarter-Sigma Order Size in the last six months should be between Rs 75 and Rs 100 lakh, up from the present minimum of Rs 25 lakh.

The minimum rolling average daily delivery value in the cash market for the past six months should be Rs 30-40 crore, an increase from the present Rs 10 crore.

If a stock fails to achieve these conditions for three months in a row, it will be withdrawn from the derivatives segment, and no new contracts will be issued for that stock. SEBI is accepting public feedback on the proposal until June 19, the report added.