On 30th August 2024, the Securities Exchange Board of India (SEBI) revised the criteria for entry and exit of stocks in the Futures and Options (F&O) or derivatives segment to enhance market stability by ensuring only actively traded and financially robust stocks participate in the derivatives segment.
- These new guidelines were issued by SEBI through a circular in exercise of powers given under Section 11(1) and Section 11(2)(a) of the Securities and Exchange Board of India Act, 1992.
- The circular is effective immediately, and 6 month gestation period has been granted to existing stocks to meet the requirements of new norms.
Note: According to the new guidelines, nearly 80 stocks qualify for inclusion in F&O segment and around 18 stocks are expected to be excluded, as per calculations of Nuvama Alternative & Quantitative Research. However, the final decision for inclusion and exclusion of stocks in F&O segment remains with SEBI.
Key Changes in Entry Norms for Stocks in F&O segment:
i.As per the revised guidelines, Median Quarter Sigma Order Size (MQSOS), MQSOS over the previous 6 months, on a rolling basis has been increased from Rs 25 lakhs to Rs 75 lakhs. SEBI has cited that the average market turnover is now over 3.5 times the figure since the last review conducted in 2018.
- Also, it is mandatory to increase the MQSOS criteria between 3 to 4 times.
ii.SEBI has increased Market Wide Position Limit (MWPL) of stocks over the previous 6 months, from the existing limit of Rs 500 crore to Rs 1500 crore. This increase in MWPL limit is introduced due to the market capitalization now standing at 2.8 times since the last review.
iii.As per SEBI’s guidelines, Average Daily Delivery Value (ADDV) of stocks in the cash market in the previous 6 months must be minimum Rs 35 crore (from the existing Rs 10 crore). This is due to significant increase in the ADDV which has increased by over 3 times since the last review.
iv.According to new guidelines, stocks which meet the eligibility criteria in the underlying cash market of any stock exchange will be allowed to trade in equity derivatives segment of all stock exchanges.
v.The stock exchanges are required to settle the derivative contracts at a price calculated by the clearing corporations based on Volume Weighted Average Price (VWAP) from the cash segment across all exchanges.
Key Changes in Exit Norms based on performance in underlying cash market:
i.As per new guidelines, if a stock in F&O segment fails to meet the any of these criteria for a continuous period of 3 months, on a rolling basis based on the data for 6 months, then it will exit from F&O segment.
- This criterion for exit will be applicable to only those stocks which have completed minimum 6 months from the date of introduction.
ii.Also, if a stock fails to meet the eligibility criteria across all exchanges based on performance in the underlying cash market will exit from derivatives segment.
iii.SEBI has mentioned that once a stock is excluded from the derivative segment, it will not be considered for re-inclusion for a period of 1 year from its last trading day in the derivatives segment.
SEBI Introduced Product Success Framework for Single-Stock Derivatives
SEBI has introduced a Product Success Framework (PSF) for single-stock derivatives. The framework specifies a minimum level of trading activity, turnover, and open interest for stocks to remain in derivatives market.
Exit Norms based on PSF for stock derivatives:
i.The framework has specified that minimum 15% of trading members which are active in all stock derivatives or 200 trading members (whichever is lower), must have traded in any derivative contract on the stock being reviewed, on average, each month during the review period.
ii.Trading on a minimum of 75% of the trading days during the review period.
iii.The framework has mandated that stocks should have an average daily turnover including both F&O premium, of minimum Rs 75 crore during the review period.
- Also, an average daily notional open interest (including both F&O premium) of at least Rs 500 crore during the review period.
Click Here to view Official Circular
About Securities and Exchange Board of India (SEBI):
Chairman- Madhabi Puri Buch
Headquarter- Mumbai, Maharashtra
Established- 1992
