SEBI Proposes Stricter Criteria for Derivatives Trading to Enhance Market Integrity

This move is aimed at excluding stocks with consistently low turnover from the Futures & Options (F&O) trading segment to reduce market manipulation risks, volatility, and ensure better investor protection.

Reducing Market Manipulation Risks

In its consultation paper, SEBI emphasized the necessity of adequate market depth and appropriate position limits around leveraged derivatives to maintain market integrity. Stocks lacking these attributes pose higher risks, which the new criteria aim to mitigate.

Flexibility for Mutual Fund Portfolios and Demat Accounts

Moreover, SEBI announced it would not freeze mutual fund portfolios and demat accounts of investors who haven’t submitted nominations. This decision, based on feedback from market participants, aims to enhance compliance ease and investor convenience. According to SEBI’s circular, investors with physical securities can still receive dividends, interest payments, and redemption payments, and lodge grievances.

Revised Eligibility Criteria for Derivatives Segment

To ensure only high-quality stocks with adequate size, liquidity, and market depth are available in the derivatives segment, SEBI proposed revising the eligibility criteria to align with the evolving market conditions. The last review of these criteria was in 2018.

Under the new proposal, an individual stock must have been traded on at least 75% of trading days and engaged by at least 15% of active traders or 200 members, whichever is lower. The average daily turnover should be between INR 500 crore and INR 1,500 crore, with an average premium daily turnover of at least INR 150 crore. The maximum number of open contracts allowed for the underlying stock would increase to between INR 1,250 crore and INR 1,750 crore from the current INR 500 crore.

Stock Selection Criteria

SEBI also proposed that eligible stocks should be among the top 500 based on average daily market capitalization and traded value. The Median Quarter-Sigma Order Size over the last six months should be between INR 75 and INR 100 lakh, up from a minimum of INR 25 lakh, and the minimum rolling average daily delivery value in the cash market over the previous six months should be INR 30-40 crore, up from the current INR 10 crore.

If a stock fails to meet these criteria for three consecutive months, it would be removed from the derivatives segment, ceasing new contract issuances.

Public comments on SEBI’s proposal are invited until June 19.