SEBI Proposes Tighter Norms To Curb Market Manipulation In Derivatives Segment

The Securities and Exchange Board of India has announced tighter norms for the entry of individual stocks in the derivatives segment. The norms will help lower the risk of market manipulation, increased volatility and compromised investor protection, it said.

If a stock fails to meet the new criteria for three months consecutively, then it should exit the derivatives segment and cannot claim new contracts, the proposal said.

The new rules have been proposed considering remarkable growth in market parameters, reflecting the size and liquidity of the cash market, such as market capitalisation and turnover, it said.

Under the new proposal, for a stock to be included in derivative trading, it should have traded for 75% of trading days and at least 15% of active traders, or 200 members (whichever is lower), should have traded in the stock. The average daily turnover of the stock should be a minimum Rs 150 crore, while the average daily open interest should be a minimum of between Rs 500 crore and Rs 1,500 crore.

SEBI also proposed that the maximum number of open contracts allowed for the underlying stock should be between Rs 1,250 crore and Rs 1,750 crore. At present, the figure is pegged at Rs 500 crore.

Stocks should continue to be chosen from among the top 500 stocks in terms of average daily market capitalisation and average daily traded value on a rolling basis, the market regulator said.

The stock's median quarter-sigma order size over the last six months should be between Rs 75 lakh and Rs 100 lakh. This figure has been hiked three to four times from a minimum of Rs 25 lakh at present. A higher Quarter Sigma order size will increase the liquidity of the stock and, therefore, reduce the risk of market manipulation.

The stock’s minimum rolling average daily delivery value in the cash market in the previous six months should be Rs 30 crore to Rs 40 crore. Currently, it is Rs 10 crore.

SEBI last established a framework in 2018 for the selection of stocks eligible for derivatives trading. The new proposal will make the entry of individual stocks a harder task and will also weed out stocks with consistently low turnover from the futures and options segments of the bourses. It is also aimed at ensuring that stocks have sufficient turnover, open interest and widespread participation.

Eligibility needed to be readjusted to keep pace with evolving market conditions for the market regulator to ensure that only high-quality stocks are available in the derivatives segment, it said.

(With inputs from PTI)