SEBI tightens criteria for exit, entry of stocks in derivatives segment

Stock market regulator Securities and Exchange Board of India (SEBI) has updated the eligibility criteria for the entry and exit of stocks in the derivatives segment. Through a circular issued on August 30, SEBI announced significant changes to the rules governing including and removing stocks in the F&O segment.

"To help develop the securities market while being mindful of these concerns, SEBI vide section 3.1.2 of Chapter 5 of Master Circular on Stock Exchanges and Clearing Corporations, dated October 16, 2023, has, inter-alia, laid down the eligibility criteria for entry/exit of stocks in derivatives segment," SEBI said.

F&O stands for Futures and Options and refers to financial derivatives that allow traders to speculate on the price movements of an asset without owning the asset itself. In recent years, the need to revamp the methodology for selecting stocks eligible for Futures and Options (F&O) trading has been a subject of growing concern.

With the evolution of Indian stock markets, the demand for incorporating more stocks with strong liquidity into the F&O segment has intensified. Simultaneously, the necessity to remove underperforming stocks with poor liquidity has become increasingly evident.

Recognizing these concerns, SEBI ahs took action by updating the eligibility criteria for F&O trading. One of the key changes involves the Median Quarter Sigma Order Size (MQSOS) requirement, which has been significantly raised from Rs 25 lakh to Rs 75 lakh. This measure is aimed at ensuring that only stocks with substantial trading volumes are considered for the derivatives segment, thereby enhancing market efficiency.

In addition, the Market Wide Position Limit (MWPL) has been increased from Rs 500 crore to Rs 1,500 crore. This change is expected to accommodate a larger trading capacity for individual stocks, reflecting the growing size and liquidity of the Indian stock market.

Furthermore, as per the SEBI, the Average Daily Delivery Value (ADDV) in the cash market, which is a critical metric for assessing a stock's liquidity, must now be at least Rs 35 crore, up from the previous threshold of Rs 10 crore. This increase is designed to ensure that only stocks with significant trading activity in the cash market are included in the F&O segment.

SEBI has also introduced a requirement for stocks to meet these updated criteria continuously for six months to qualify for derivatives trading. This ensures that only consistently performing stocks are eligible for inclusion.

To address the issue of underperforming stocks, new exit rules have been introduced under the Product Success Framework (PSF) for individual stock derivatives. According to these rules, stocks that fail to meet the eligibility criteria for three consecutive months will be removed from the derivatives segment.

Moreover, SEBI has also mandated a one-year cooling-off period before any removed stock can be reconsidered for F&O trading.