In its June 8 consultation paper, Sebi had sought feedback from market participants for its plan to revise the eligibility criteria for stocks to be a part of the futures and options (F&O) segment. The regulator wants stocks that are part of the derivatives market to be more liquid and traded by a wide set of market participants to prevent manipulation and lower risks to the system.
“Sebi’s intention is to have a stricter eligibility criteria for stocks to be included in the F&O segment,” said Vijay Kanchan, a finance professor and derivatives specialist. “The whole objective is to have a derivative market of extremely liquid stocks.”
The regulator had changed the eligibility criteria for the introduction of stocks in the derivatives segment in 2018.
Agencies Will Result in ‘Better Filters’
Since then, the Sensex and Nifty have more than doubled and India’s market capitalisation has surged nearly threefold. The average daily notional turnover in equity derivatives has shot up – to Rs 381 lakh crore in June from Rs 8.79 lakh crore in May 2018.
The stock market rally, particularly since April 2020, has encouraged hordes of newbie retail traders to test their fortunes in derivatives, especially in options, raising concerns over excessive speculation and risk-taking by individuals. Sebi’s proposals in its discussion paper include raising the threshold for entry of stocks into F&O and introducing exit criteria for them, like the current framework in index derivatives.
Currently, the product success framework is only applicable to index derivatives. Such derivatives should have sufficient turnover, outstanding positions and widespread participation, failing which exchanges will not be able to issue fresh contracts on them.
The F&O segment currently has 181 stocks, against 207 in May 2018. Market players said that except some stocks that are part of the Nifty, most see erratic spurts in volumes, raising manipulation risks. “If Sebi goes ahead with its proposals, it will create better filters for F&O stock selection,” said IIFL Securities senior vice president Sriram Velayudhan.
As per IIFL’s initial analysis based on the Sebi recommendations in its paper, 18-22 stocks could move out and 70-75 stocks will become eligible for the derivatives segment. Sebi is proposing to tighten F&O entry conditions such as Median Quarter Sigma Order Size, Market Wide Position Limit and Average Daily Delivery Value by raising threshold levels. Kanchan said, “The Mean Order Quarter Sigma will be revised to Rs 75 lakh from the current Rs 25 lakh, ensuring that only the most liquid stocks will be made part of F&O.”
