SEBI proposes to overhaul eligibility criteria for inclusion in F&O segment

Derivatives contracts on stocks can be traded on recognized stock exchanges only if the underlying stocks satisfy certain objective criteria

Securities and Exchange Board of India (SEBI) said it has proposed to review the criteria for inclusion of stocks into futures and options (F&O) segment, also called equity derivatives market.

“The last review of the eligibility criteria for introduction of stocks in derivatives was done in 2018. Since then, broad market parameters reflecting the size and liquidity of the cash market, viz., market capitalization and turnover have moved up considerably,” SEBI said in its annual report. “Accordingly, it is proposed to review the eligibility criteria for introduction and continuation of stocks in the derivatives segment."

Derivatives contracts on stocks can be traded on recognized stock exchanges only if the underlying stocks satisfy certain objective criteria. They take into consideration average daily market capitalisation, average daily traded value, the market wide position limit in the security, the quarter sigma values, and the average daily deliverable value.

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The market regulator said it is also planning to make changes in price band formulation for scrips in equity derivatives segment.

Currently, stocks that are part of F&O segment do not have fixed circuit limits. For instance if a stock is part of the F&O segment and has a circuit limit of 10 percent on either side. once the price reaches that level, the limits are relaxed further. However, there is a cooling period of 15 minutes before new limits are added for F&O stocks.

“In order to strengthen volatility management and minimize information asymmetry for such scrips and contracts in equity derivatives segment, SEBI is in the process of strengthening the existing framework of price band for these scrips and their derivatives contracts for more effective risk management and orderly Trading,” Sebi said in its annual report. “The proposed framework would limit the impact of possible price risk arising out of sudden extreme market volatility, fat finger error or issues with systems of a trading member.”