Sebi revises eligibility criteria for entry, exit of stocks in F&O segment

The capital markets regulator, Sebi, revised the entry and exit criteria for stocks in the derivatives segment to ensure that only high-quality stocks with sufficient market depth are allowed to trade.

To qualify for entry into the derivatives segment, stocks must meet specific criteria based on their performance in the cash market over the previous six months on a rolling basis.

The stock's Median Quarter Sigma Order Size (MQSOS) must now be at least ₹75 lakh, increased from the previous ₹25 lakh. Additionally, the Market Wide Position Limit (MWPL) has been raised to ₹1,500 crore, up from ₹500 crore, due to an increase in market capitalization. Sebi also stated that the Average Daily Delivery Value in the cash market must be at least ₹35 crore, a rise from the previous requirement of ₹10 crore, reflecting a significant increase in average daily delivery value.

Stocks that meet these eligibility criteria in the underlying cash market of any stock exchange will be allowed to trade in the equity derivatives segment across all exchanges.

The stock exchanges will settle derivative contracts at a price determined by the clearing corporations based on the volume-weighted average price (VWAP) from the cash segment across all exchanges. Additionally, Sebi will consider other factors such as surveillance concerns, ongoing investigations, or other administrative considerations when deciding on a stock's eligibility for inclusion in the derivatives segment. If a stock fails to meet these criteria for three months, it will exit the derivatives segment, and no new contracts will be issued for these stocks.

However, existing unexpired contracts can continue to trade until expiration. Once a stock is excluded from the derivatives segment, it will not be considered for re-inclusion for one year.

Sebi stated, "Considering the need to ensure that only high-quality stocks with sufficient market depth are allowed to trade in the derivatives segment and the growth witnessed in market parameters since the last review in 2018, the eligibility criteria for the entry and exit of stocks in the derivatives segment have been revised." The regulator has also introduced a Product Success Framework (PSF) for single-stock derivatives.

Under this framework, at least 15% of trading members active in all stock derivatives, or a minimum of 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. Furthermore, trading must occur on at least 75% of the trading days during the review period. The stock should also have an average daily turnover (futures and options premium combined) of at least ₹75 crore and an average daily notional open interest (futures and options combined) of at least ₹500 crore during the review period.

Sebi noted that derivative markets enhance price discovery and market liquidity. However, without sufficient depth in the underlying cash market, adequate volumes in the derivatives markets, and appropriate position limits for leveraged derivatives, there are higher risks of market manipulation, increased volatility, and compromised investor protection.