F&O Segment: SEBI Mulls to Review Eligibility Criteria for Inclusion of Stocks

Markets regulator the Securities and Exchange Board of India (SEBI) is contemplating assessing the criteria governing the inclusion of equities or stocks into the futures and options (F&O) segment, as per its latest annual report.

Also referred to as the equity derivatives market, it was in 2018 that the last review of the eligibility criteria for the introduction of stocks in derivatives was undertaken. From that time onwards, broad market parameters highlighting the size and liquidity of the cash market, namely market capitalisation and turnover have surged significantly, stated SEBI.

Typically, derivatives contracts on stocks can be suitably traded on stock exchanges provided the underlying stocks adhere to a particular objective criteria. 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 are suitably taken into consideration for the introduction of stocks in the F&O segment.

Furthermore, SEBI maintained that it is also looking forward to introducing changes in price band formulation for scrips in the equity derivatives segment.

At present, stocks that are part of the F&O segment tend to have no fixed circuit limits. For example, let’s say a stock is part of the F&O segment with a circuit limit of 10% on either side, after the price touches that level, the limits tend to be relaxed further. A cooling period of 15 minutes exists prior to new limits being added in the case of F&O stocks.

SEBI in its annual report maintained that it aims to ensure better volatility management while minimising information asymmetry for such scrips and contracts that are part of the equity derivatives segment. The markets regulator is in the process of strengthening the current framework of price bands for these scrips and their derivatives contracts to ensure further effective risk management and orderly trading.

The framework that is proposed would limit the impact of possible price risk posed due to unexpected extreme market volatility, fat finger error or issues arising from the systems of a trading member.