SEBI Proposes Updates to Stock Derivatives Trading Rules

In an effort to enhance market integrity and investor protection, the Securities and Exchange Board of India (SEBI) has proposed revisions to the criteria for stock inclusion and exclusion in the derivatives market. A consultation paper detailing these proposed changes has been released, inviting feedback from various market participants to refine the process of stock selection for futures and options (F&O) trading.

Revisiting Derivative Market Standards

SEBI's move aims to address potential risks associated with market manipulation and excessive volatility. By ensuring that only stocks of the highest quality in terms of liquidity and market popularity are present in the derivatives market, SEBI aims to safeguard the interests of investors. Derivatives trading, while profitable, can carry significant risks, which have become a cause for concern as more small retail investors participate in the F&O segment.

Enhancing Market Protections

According to the proposed criteria by SEBI, a stock must demonstrate adequate trading frequency, liquidity, and widespread interest from traders to be considered for inclusion in the derivatives market. The regulator has emphasised the importance of depth in the underlying cash market and precise limit settings around leveraged derivatives to minimize the risks of market abuse and to curtail unreasonable market fluctuations.

New Eligibility Benchmarks for F&O Trading

The consultation paper proposes new benchmarks for a stock's eligibility for derivatives trading. These include a minimum of 75% trading days presence, participation by 15% of trading members or 200 members in any derivative of the stock, a requisite average daily turnover, and a significant daily traded turnover in options and futures. SEBI hopes these measures will ensure comprehensive participation and reduce vulnerabilities in the marketplace.

Feedback on SEBI's proposed updates is being solicited from the public until June 19, 2024.

SEBI, derivatives, regulation