Background:
Derivative markets without sufficient depth in the underlying cash market could result in higher risks of market manipulation, increased volatility, and compromised investor Protection.
To ensure that only high-quality stocks with sufficient market depth are allowed to trade in the derivatives segment and considering the growth witnessed in market parameters since the last review conducted in 2018, SEBI has revised the eligibility criteria for entry/exit of stocks in the derivatives segment after issuing a consultation paper and after taking feedback and issued the following circular which is effective from today.
Entry Norms for stocks in the derivatives segment
| Criteria | Existing criteria | Revised criteria | Rationale for change |
|---|---|---|---|
| Average Daily Market Capitalization and Average Daily Traded value (ADTV) in the previous six months on a rolling basis | Amongst top 500 stocks | Amongst top 500 stocks | No change |
| The stock’s Median Quarter Sigma Order Size (MQSOS) over the last six months, on a rolling basis, shall not be less than: | INR 25 Lakh | INR 75 Lakh | Since average market turnover is now over 3.5 times the figure during the last review, MQSOS criteria would need to increase between 3-4 times. |
| The stock’s market-wide position limit (MWPL) on a rolling basis shall not be less than | INR 500 crores | INR 1,500 crores | Market capitalization is now 2.8 times the last review |
| The stock’s Average daily delivery value (ADDV) in the cash market, in the previous six months on a rolling basis, shall not be less than | INR 10 crores | INR 35 crores | Average Daily Delivery Value has increased by over 3 times since the last review. Note that upon expiry, single stock derivatives are physically settled, unlike index derivatives that are cash settled. |
Additional points regarding entry norms:
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Stocks that meet the eligibility criteria in the underlying cash market of any stock exchange would be permitted to trade in the equity derivatives segment of all stock exchanges.
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The stock exchanges will 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.
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In addition, other aspects like surveillance concerns, ongoing investigations, or other administrative considerations shall be considered by SEBI, while considering a stock for introduction into the derivatives segment.
Exit norms
1. Exit norms based on performance in the underlying cash market:
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If the entry criteria(s) are not met for three continuous months, on a rolling basis, based on the data for the previous six months, then those stocks will be excluded from derivatives.
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For existing stocks: Review will happen based on a 3-month gestation period (which includes the past 3 months, therefore deciding based on the previous 6 months’ data)
For new stocks: Review will happen based on a 6-month gestation period
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A stock will exit from the derivatives segment if it fails to meet eligibility criteria across all exchanges based on performance in the underlying cash market. If a stock meets the eligibility criteria on any exchange, it will continue to be eligible for the derivatives segment on all exchanges.
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Once a stock is excluded from the derivatives segment, It will not be considered for re-inclusion for 1 year from its last trading day in derivatives.
2. Exit norms based on the introduction of a Product Success Framework (PSF) for stock derivatives
- This is an additional exit criterion for stocks along with the exit norms based on performance in the underlying cash market.
At least 15% of active trading members in all stock derivatives or 200 trading members (whichever is lower) must have traded in the stock’s derivative contract on average each month during the review period. AND
Trading must occur on a minimum of 75% of trading days during the review period in the derivatives segment. AND
The average daily turnover (futures + options premium) should be at least INR 75 crore during the review period. AND
The average daily notional open interest (futures + options notional) of the specific stock should be at least INR 500 crore during the review period.
Additional points regarding exit norms based on PSF
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All the above criteria have to be fulfilled for at least 3 consecutive months on a rolling basis, based on the data from the previous six months. Otherwise, the stocks will exit derivatives.
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The PSF review cycle will be aligned with the review of entry and exit norms based on performance in the underlying cash market i.e. all the above criteria for PSF will be calculated on the 15th of each month, on a rolling basis, considering the data for
previous six months. -
The gestation period will be 6 months for both new and existing stocks in PSF-based exit norms.
You can read the full circular here:
