Sebi signals change with tougher futures and options stock rules

New framework may displace low-turnover stocks, introduce market heavyweights

The Securities and Exchange Board of India (Sebi) has proposed stricter eligibility criteria for adding and retaining stocks in the futures and options (F&O) segment, which accounts for the bulk of the trading volumes. The proposal—which comes six years after the securities regulator last revised the stock selection framework---is much awaited by the market players as the derivatives stock list has largely remained stagnant for the last two years. Currently, about 182 stocks are eligible to trade in the derivatives segment down from a peak of 209 in 2018.

The proposed framework, if implemented, could lead to the removal of several stocks that have consistently low derivative turnover and open interest but could also allow the entry of some of the recently listed larger companies.

Sebi has suggested an upward revision to the stock selection criteria is required given the growth in volumes and India’s market capitalisation (mcap).

Last month, India’s mcap crossed $5 trillion, growing almost three fold since 2018 when the framework for selection was last revised.

The F&O selection criteria is critical as the stocks that make up to the popular Nifty, Sensex and other indices have to be part of the derivatives segment.

The market regulator has proposed higher limits for so-called market wide position limit (MWPL), median quarter sigma order size (MQSOS), and average daily delivery value (ADDV) in the cash market. Further, it also plans to introduce a ‘product success framework’ (PSF) for stock derivatives, similar to that for index derivatives.

“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,” said Sebi in a consultation paper floated on Saturday.

“The broad market parameters have shown significant growth. In turn, the criteria for entry and exit of stocks in the derivatives market should keep pace with the evolving market,” it added.

After the proposal is approved, stocks would be required to have ADTV for the previous six months between Rs 30 and Rs 40 crore against the current requirement of Rs 10 crore. The stock’s MWPL on a rolling basis would have to be in the range of Rs 1,250 crore and Rs 1,750 crore –significantly higher than the current requirement of Rs 500 crore.

Further, the stock to be included in the F&O segment must have MQSOS over the previous six months, on a rolling basis, between Rs 75 lakh to Rs 1 crore.

Further, the PSF for stock derivatives will ensure that there is sufficient turnover, open interest, and widespread participation from more brokers and higher number of days.

Only the top 500 stocks will be eligible to be part of the F&O segment, which generated ADTV of Rs 432 trillion in May on a notional basis. The options segment accounts for a major portion of these volumes. Recently, the Nifty options volumes surpassed that of S&P 500, a popular gauge that tracks the performance of top US-listed stocks.