India’s market regulator, SEBI, has proposed stricter rules for equity and index derivatives to mitigate risks. The new framework includes lowering position limits for stock derivatives and setting criteria for index derivatives, aiming to curb volatility and prevent excessive speculation.
In a consultation paper released on Monday, SEBI suggested linking market-wide position limits for single-stock derivatives to cash markets. It also proposed that index derivatives, excluding Nifty 50 and Sensex, should meet specific criteria to prevent market manipulation. These changes come after SEBI raised the entry barrier for derivatives trading in October 2024.
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SEBI Proposes Tighter Rules for Derivatives Trading
The Securities and Exchange Board of India (SEBI) has introduced new proposals to regulate equity derivatives and index-based futures and options (F&O). These measures aim to limit risk accumulation and reduce excessive volatility in India’s stock market.
SEBI’s proposal includes setting market-wide position limits for single-stock derivatives at the lower of 15% of the free-float market capitalization or 60 times the average daily delivery value. This move aligns derivatives risk with underlying cash market liquidity, preventing potential manipulation.
Stricter Criteria for Index Derivatives
Additionally, SEBI recommended that index derivatives be offered only if the underlying index has at least 14 constituent stocks. This rule aims to prevent excessive reliance on a few heavyweight stocks, reducing market manipulation risks.
To further ensure market stability, SEBI proposed that the top three constituents of an index should not exceed 45% of its weight, and no single stock should have more than a 20% weight in the index. These conditions will help maintain a balanced market.
Introduction of Pre-Open Session in the Futures Market
SEBI also proposed extending the pre-open session mechanism, currently used in the cash market, to the futures market. This change, starting with current-month futures on both single stocks and indices, will smoothen price discovery and curb excessive volatility.
Tighter Regulations Follow October 2024 Measures
These proposals follow SEBI’s October 2024 decision to increase margin requirements and entry barriers for derivatives traders. The regulator is tightening norms further to protect retail investors and reduce the impact of speculation on broader market movements.
Concerns have grown about the F&O market’s influence on the cash market, especially after recent sharp corrections in Indian equities following record highs in September 2024. The regulator believes these measures will help curb speculation-driven market fluctuations.
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SEBI Seeks Market Feedback Before Implementation
By making F&O trading stricter, SEBI aims to align derivatives activity with the actual liquidity of stocks and indexes, ensuring market integrity. These proposals are open for stakeholder feedback before final implementation.
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