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SEBI proposes tighter derivative market rules to curb risk

25-Feb-2025, 02:07
In a move aimed at further mitigating risk and volatility in India's equity derivative markets, the Securities and Exchange Board of India (SEBI) has unveiled a series of new proposals. These measures include lowering position limits for single-stock derivatives and tightening regulations for index derivatives, building upon previously announced changes designed to protect retail investors.

The regulator's latest consultation paper, released late Monday (24 February), addresses concerns that volatility stemming from the futures and options (F&O) market is impacting the broader stock market, which has experienced a recent downturn after reaching record highs in September 2024.

Key Proposals include:

* Linking Single-Stock Derivative Limits to Cash Markets: SEBI proposes that the market-wide position limit (MWPL) for single-stock derivatives be tied to cash market activity. Specifically, the MWPL would be set at the lower of 15% of the stock's free-float market capitalization or 60 times its average daily delivery value. This move aims to reduce manipulation and better align derivatives risk with underlying cash market liquidity.

* Stricter Rules for Non-Benchmark Index Derivatives: SEBI intends to impose stricter eligibility criteria for derivative contracts on indices other than the benchmark BSE Sensex and NSE Nifty 50. This is to address concerns about potential manipulation and excessive volatility when a small number of stocks dominate an index. The regulator proposes that such indices have a minimum of 14 constituents, with the top three constituents' combined weight not exceeding 45% and the top constituent's weight capped at 20%.

* Introduction of Pre-Open Session for Futures: SEBI also proposes introducing a pre-open session for futures trading, mirroring the practice in the cash market. This would initially apply to current-month futures on both single stocks and indices.

Index derivatives are cash-settled, but the nexus between cash and derivative markets nevertheless exists, SEBI stated in its consultation paper, highlighting the need for these measures.

SEBI has invited feedback from market participants on these proposals until March 17th. The regulator's actions reflect its commitment to maintaining market stability and protecting investor interests amidst growing concerns about derivative market volatility.