SEBI proposes new measures to make derivative market trading safer
What's the story
The Securities and Exchange Board of India (SEBI) has proposed new measures to tighten the noose in the derivative market. The move comes amid fears of volatility from the futures and options market spilling over into the broader stock market. The broader indices has witnessed a major downturn since hitting record highs in September 2024.
Risk reduction
Strategy to reduce risk in derivatives
SEBI's plan involves lowering the position limits for equity stock derivatives and tightening rules for index derivatives. These steps are aimed at further curbing the buildup of risk in these markets. This comes after the changes announced in October, wherein the agency raised the entry barrier for trading in derivatives and made trading costlier to protect retail investors.
Market linkage
SEBI suggests linking position limit to cash markets
In a recent consultation paper, SEBI recommended that the market-wide position limit for single-stock derivatives must be linked to the cash markets. The regulator suggested setting this limit at either 15% of a stock's free-float market capitalization or 60 times its average daily delivery value. "This will reduce the potential manipulation and better align derivatives risk with the underlying cash market liquidity," SEBI said.
Criteria
New criteria for non-benchmark index derivatives
SEBI has also proposed that derivatives on indices barring BSE Sensex and NSE Nifty 50 should only be offered if the index meets certain criteria. The regulator stated, "Index derivatives are cash-settled, but the nexus between cash and derivative markets nevertheless exists." To address this issue, SEBI suggested introducing derivative contracts only on indices with at least 14 constituents.
Market opening
Pre-open session for futures market
Further, SEBI has recommended bringing a pre-open session, a common practice in the cash market, to the futures market. This would initially be applicable to current-month futures on both single stocks and indices. The regulator is asking for feedback on these proposals from market participants till March 17.