Criteria for entry, exit of stocks in F&O segment revised by SEBI

The requirements for equities to be included in the futures and options (F&O) segment have become more stringent, according to the Securities and Exchange Board of India (SEBI).

To avoid manipulation and reduce systemic risks, the market regulator wants stocks that are traded by a wide range of market participants and are more liquid. 

On 30th August, SEBI said in a circular, “Given the need to ensure that only high quality stocks with sufficient market depth are allowed to trade in derivatives segment and considering the growth witnessed in market parameters since the last review conducted in 2018, the eligibility criteria for entry and exit of stocks in derivatives segment has been revised.”

Citing that the average market turnover is now more than 3.5 times the figure during the last review, the regulator has increased the median quarter sigma order size, a crucial criterion for including stocks into F&O, by three times to Rs. 75 lakh from the current Rs. 25 lakh over the previous six months on a rolling basis. According to SEBI, the MQSOS criteria would need to be raised three or four times.

Additionally, it increased a stock’s market-wide position limit from Rs. 500 crore to Rs. 1,500 crore during the preceding half-year. The market capitalization has increased to 2.8 times since the last review, which is the reason for the change. 

A stock’s average daily delivery value (ADDV) in the cash market for the preceding six months on a rolling basis, according to the regulator, should not be less than Rs. 35 crore. The current threshold is Rs. 10 crore.

All stock exchanges would allow stocks that meet the eligibility requirements in the underlying cash market to trade in the equity derivatives sector. According to the market regulator, the clearing organizations should determine the volume weighted average price from the cash segment across all exchanges for the stock exchanges to use in settling derivative contracts.

Further, the regulator stated that when evaluating a stock for inclusion in the futures market, SEBI will take into account any current investigations, surveillance issues, or other administrative factors.

A stock in the derivatives section will be removed from the segment if it consistently fails to achieve any of these requirements for a rolling three-month period based on data from the preceding six months. No new contracts on equities that might leave the derivatives section should be granted, as per SEBI. 

Also Read: SEBI Suggests Rules Relaxation for Investment Advisors