Securities and Exchange Board of India (SEBI) has released a consultation paper inviting public feedback on proposed revisions to the eligibility criteria for stock derivatives. According to SEBI, this move is designed to bolster market integrity and investor protection in response to significant market growth since the criteria were last updated in 2018.
"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 says in the consultation paper.
According to the market regulator, the primary goal of this review is to ensure that the derivatives market accurately reflects the current size and liquidity of the underlying cash market. "Derivative markets are vital for price discovery and market liquidity, but insufficient depth and lax position limits can lead to market manipulation, heightened volatility, and diminished investor protection."
The existing framework for selecting stocks eligible for derivatives trading was established in 2018. Since then, substantial changes in market parameters, such as market-capitalisation and turnover, necessitate an update to the eligibility criteria. SEBI is seeking comments and inputs from all stakeholders on these proposed changes.
Currently, stocks must meet several criteria to be eligible for derivatives trading. These include being among the top-500 stocks by average daily market-capitalisation and average daily traded value over the last six months. Additionally, the median quarter sigma order size (MQSOS) must be at least Rs25 lakh, the market-wide position limit (MWPL) must be at least Rs500 crore, and the average daily delivery value (ADDV) in the cash market must be at least Rs10 crore.
These criteria must be met continuously for six months, SEBI says. "If a stock fails to meet these standards for three consecutive months, it exits the derivatives segment."
This means no new contract will be issued on that stock.
The stock market has experienced significant growth since the last review in 2018. For instance, market-capitalisation has surged by 178% to Rs4.08 lakh crore in May 2024 from Rs1.46 lakh crore in May 2018. Similarly, the daily average turnover in the cash market has increased by 253% to Rs1,12,179 crore from Rs31,819 crore, and the average daily delivery value has risen by 208% to Rs29,677 crore from Rs9,635 crore.
Given these substantial changes, SEBI proposes revising the criteria for the entry and exit of stocks in the derivatives segment to align with the current market dynamics. The revisions include increasing the MQSOS from Rs25 lakh to a range of Rs75 lakh to Rs100 lakh, raising the MWPL from Rs500 crore to a range of Rs1,250 crore to Rs1,750 crore, and enhancing the ADDV from Rs10 crore to a range of Rs30 crore to Rs40 crore.
SEBI also proposes introducing a product success framework (PSF) for stock derivatives, similar to the existing framework for index derivatives. It includes criteria such as at least 15% of trading members or 200 members, whichever is lower, must trade in the derivative contract, trading must occur on at least 75% of trading days, a minimum average daily turnover (premium basis) of Rs150 crore, and a minimum average daily open interest between Rs500 crore and Rs1,500 crore.
SEBI has sought public comments till 19 June 2024 on the proposal.
