Sebi proposes circuit filters for F&O segment to curb price volatility

To address concerns about significant price movements in scrips having a presence in the derivatives segment, Sebi has come out with a consultation paper and sought comments from the public till Feb 2

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To check excessive price movements, capital markets regulator Sebi on Monday proposed a slew of measures including capping the maximum daily movement of up to 20 per cent for all stocks including that are part of the future and options (F&O) segment. 

There have been concerns that investors' wealth is getting wiped out in a single day by recent falls in stocks on which derivative products are available, as no price band are applicable to them.

Besides, a sharp plunge in the shares of several companies, including Dewan Housing Finance and e-commerce player Infibeam, has been noticed in recent times. 

According to Sebi, the examination of price movement of scrips, on which derivatives are available, during the last six months, revealed 40 scrips witnessed intra-day movement of over 20 per cent. Out of this, 29 stocks have seen intra-day movement between 20 per cent and 30 per cent.

Derivatives markets or F&O segment reflect the expectation of spot prices in the future and currently, price bands or circuit filters are generally not applied to them. At present, there are over 200 stocks in the F&O segment.

To address the concerns arising out of significant price movements in scrips having a presence in the derivatives segment, Sebi came out with a consultation paper and sought comments from the public till February 20 in this regard. 

The final regulation will be out in place after taking into account the suggestions of all stakeholders.

The regulator has asked whether individual scrip wise price bands of 20 per cent either way be adopted for all scrips, including scrips on which derivatives are available, in the compulsory rolling settlement.

Further, it suggested a combination of dynamic and fixed price band or call auction mechanism.

According to Sebi, the regulator asked whether the current framework for dynamic price band may be allowed to continue with the initial threshold set by the stock exchanges for flexing. This framework would be available up to a threshold (say 30 per cent intra-day movement in either direction).

Upon reaching such threshold, it has been proposed to either fixed price band on the stock may be imposed or a call auction should be conducted for a fixed duration as per criteria to be prescribed relating to minimum trades, volume, etc. The price discovered in such call auction may be considered for continuous market.

Also, it sought public view whether any measure may be required at this stage as the same may hamper free market and fair price discovery.

Moreover, the regulator has also given benefits as well as challenges of all the three options suggested by it.

Explaining the benefits of proposed daily price limits for stocks in derivative segment, Sebi said imposing such circuit filters may arrest abnormal movement of the price of the scrip beyond a certain limit.

Besides, it may give some opportunity to listed firms and its promoters to assess the movement of the stock price and enable them to make market announcement, if any, to address market sentiments, which may restore the price to its normalcy.

The regulator, however, said that the imposition of price bands on such stocks may hamper fair price discovery and liquidity. Besides, it may lead to mis-alignment between the price of underlying in cash segment and price of the derivative products.

Spelling out benefits of opting for a combination of dynamic and fixed price or call auction mechanism, Sebi said that introducing call auction may ensure wider participation of investors thereby leading to better price discovery as compared to the current system of flexing of dynamic price bands which is based on limited number of trades.

"For a scrip which is also a constituent of an index, computation of the index may become a challenge during the period of the call auction on account of lack of availability of current market price of the scrip during the period," Sebi said about the challenges of such move.