The communication to the members of the working group was sent on Monday, even though the decision to form one was made some weeks before.
Tighter Eligibility Criteria for Stocks in F and O Segment
The Securities and Exchange Board of India (SEBI), the market regulator, has formed a 15-member working group amid much talk about the increasing turnover of equity derivatives on Dalal Street, three sources revealed to stock 24 news. One of the people with knowledge of the development claims that the working group’s mandate will include proposing short- and long-term actions to 1) strengthen investor protection in exchange-traded derivatives (ETDs) and 2) enhance risk metrics and risk architecture of ETDs, with a view to improve market regulation and development.
G Padmanabhan, a well-known specialist and former executive director of the Reserve Bank of India, will lead the working group. In a phone conversation, Padmanabhan informed stock 24 news of the development, but he withheld further information on the terms of reference and other specifics.
The working group, according to an industry insider who is aware of the problem, is made up of people from the broking sector, exchanges and clearing corporations officials, one independent personal finance expert, a mutual fund representative, a large corporate house representative, and two IIM professors who specialize in finance and risk management.
Even if it was decided a few weeks ago to create a working group, The members received the communication on Monday.
In three months, the working group is supposed to turn in its report.
SEBI Advise, Tighter Eligibility Criteria for Stocks in F and O Segment
SEBI will return to the committee that advises on the secondary market with the working group’s report in hand, and before bringing the matter before the board for approval, it will prepare a public consultation document.
Regarding retail involvement, a third source stated: “The working group may also look into whether investor awareness or any other appropriate measure is needed to restrict the retail frenzy in F&O.”
Even while the regulator has put in place a robust margin system to mitigate potential risks, it still needs to evaluate the effects of derivatives spillovers into the cash section.
The volumes of equities derivatives have been discussed by Chief Economic Advisor V Anantha Nageswaran, RBI Governor Shaktikanta Das, and Finance Minister Nirmala Sitharaman in recent months.Derivatives were referred to as “cholesterol” in 2017 by V Anantha Nageswaran, an adjunct senior fellow at Gateway House at the time. According to Nageswaran, derivatives are similar to cholesterol in the human body—useful in moderation, harmful in excess—in an essay co-authored with Praveen Chakravarty.
The quantity of options is the primary source of concern. Over time, the volume of premiums for stocks and indexes in options had been rising, but a notable increase was only observed following COVID-19. The volume of options premiums was approximately Rs 8.5 lakh crore in 2018–19; this increased to Rs 13 lakh crore in FY20 and Rs 32 lakh crore by the end of FY21, and increased to Rs 69 lakh crore in FY22—more than twice as much. Options premium turnover increased significantly to Rs 119 lakh crore at the end of FY23, and Rs 151 lakh crore at the closing of FY24.
In the past several months, SEBI has been considering various options for quantifying and managing the risk in the event that cash spillover from derivatives to cash occurs.
A review of the open interest formulation method is one of the concepts that have been discussed thus far because the current one is prone to abuse. Therefore, SEBI is thinking about the idea of Future Equivalent Open Interest, or FutEQ OI, where the open positions across futures and options will be modified based on the delta, which is a unit change in the underlying Similar to the current OI, portfolios and exchanges will share the FutEQ OI data.
In a similar vein, the Market Wide Position Limit (MWPL) rescaling due to Fut EQ OI is also being considered. Generally speaking, FutEQ OI is predicted to be lower than Notional OI. According to SEBI, this will allow for the addition of more positions within the current cap. MWPL is restricted to twenty percent of the total shares on a free float basis and is correlated with the free float of shares.
In addition to limiting overheating in derivatives linked to cash volume, SEBI is considering tying FutEQ OI to the cash market’s Average Daily Delivery Value (ADDV). In comparison to the open position, SEBI feels that the underlying cash market should have enough liquidity in the derivatives market to allow for the absorption of any shock caused by either excess supply or demand. Additionally, there must to be a built-in mechanism in derivatives positions to impede future position construction.
SEBI may develop an intraday MWPL monitoring method in addition to reexamining the current intraday MWPL monitoring mechanism. To determine whether it has been breached, combined open interest is currently calculated at the end of the day across exchanges and clearing firms. According to SEBI, risk computation procedures should be used in conjunction with four daily monitorings of the intraday Fut EQ OI.
Setting distinct positioning restrictions for individual stocks
A review of the individual position restrictions for specific stocks is another suggestion under discussion by the regulator. SEBI is worried that there may be a concentration of available roles with one or a small number of businesses in the event of a high MWPL but low OI. Linking the position limits in individual stocks to the overall OI in the scrip across all exchanges is a concept that SEBI is currently debating.
While the issue of a significant disparity between cash and futures and options trades is not new, SEBI published a study in 2017 proposing a framework for product appropriateness for investors in equities derivatives. However, a number of factors prevented things from progressing.
Account opning link:
- Groww Account- https://app.groww.in/v3cO/kyrp1zph
- Kotak neo Account https://kotaksecurities.ref-r.com/c/i/32531/109103906
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