SEBI’s New Eligibility Rules for F&O Entry and Exit: What Investors Need to Know

In the fast-changing world of financial markets, SEBI (Securities and Exchange Board of India) works tirelessly to keep the rules strong and relevant. Recently, SEBI revised the eligibility criteria for the entry and exit of stocks in the derivatives segment, reflecting the changing market context and ensuring investor protection and market vibrancy. This blog aims to break down these revisions in an easy-to-understand manner.

Introduction to the Revised Criteria

The SEBI Board, in its 206th meeting, approved significant changes to the eligibility criteria for stocks entering and exiting the derivatives segment. These changes aim to maintain a healthy and dynamic securities market ecosystem, balancing regulation and investor protection.

Key Revisions in Eligibility Criteria

1. Average Daily Market Capitalization and Traded Value

• New Criteria: Stocks must be among the top 500 in terms of average daily market capitalization and traded value over the previous six months on a rolling basis.
• Rationale: This ensures that only the most actively traded and financially significant stocks enter the derivatives market.

2. Median Quarter Sigma Order Size (MQSOS)

• New Criteria: The stock’s MQSOS over the last six months on a rolling basis should not be less than Rs 75 lakh.
• Rationale: This criterion ensures that the stocks have sufficient liquidity, making them suitable for derivatives trading.

3. Market Wide Position Limit (MWPL)

• New Criteria: The stock’s MWPL on a rolling basis should not be less than Rs 1,500 crore.
• Rationale: A higher MWPL ensures that there is adequate interest and participation in the stock, which is crucial for the derivatives segment.

4. Average Daily Delivery Value (ADDV)

• New Criteria: The stock’s ADDV in the cash market over the previous six months on a rolling basis should not be less than INR 35 crore.
• Rationale: This metric ensures that the stock has a substantial and consistent trading volume, which is necessary for derivatives trading.

Exit Criteria for Stocks in Derivatives Segment

The revised criteria also include provisions for the exit of stocks from the derivatives segment, ensuring that only those meeting performance standards continue to trade.

1. Performance-Based Exit

• Criteria: Stocks must have completed at least six months in the derivatives segment before the exit criteria apply.
• Implementation Timeline: The exit criteria will be applicable three months after the issuance of the circular for existing stocks in the derivatives segment.

2. Product Success Framework (PSF)

• Implementation: The PSF will start to apply six months from the date of issuance of the circular.

Conditions:

1. At least 15% of trading members active in all stock derivatives or 200 trading members, whichever is lower, must trade in any derivative contract on the stock under review.
2. Trading must occur on a minimum of 75% of the trading days during the review period.
3. The average daily turnover (futures and options premium) must be at least Rs 75 crore.
4. The average daily notional open interest (futures and options) must be at least Rs 500 crore.

Conclusion

The revised eligibility criteria for the entry and exit of stocks in the derivatives segment by SEBI are a step towards ensuring a vibrant, well-regulated, and investor-friendly market ecosystem. These changes reflect the dynamic nature of the financial markets and the need for continuous evaluation to maintain market integrity and investor confidence.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.