In a significant move to ensure the robustness of the derivatives market, the Securities and Exchange Board of India (SEBI) has revised the eligibility criteria for stocks to enter or exit the Futures and Options (F&O) segment. The new rules, announced on Friday, August 29, 2024, aim to ensure that only stocks with substantial market activity and quality make it to this segment.
 

Key Updates in SEBI's New Norms:

1. Median Quarter Sigma Order Size (MQSOS) Tripled:

   • The MQSOS requirement has been increased from ₹25 lakh to ₹75 lakh. This change reflects the considerable growth in market turnover since the last review in 2018.

2. Market Wide Position Limit (MWPL) Increased:

   • The MWPL for stocks has been raised from ₹500 crore to ₹1,500 crore, corresponding to the rise in market capitalization.

3. Higher Average Daily Delivery Value:

   • SEBI has increased the required Average Daily Delivery Value in the cash market to ₹35 crore, up from the previous ₹10 crore, due to a notable rise in market trading volumes.

4. Stricter Removal Criteria:

   • Stocks failing to meet these enhanced standards for three consecutive months will be delisted from the F&O segment. While no new contracts will be issued for such stocks, existing unexpired contracts will continue to trade until their expiry.

5. Introduction of Product Success Framework (PSF):

   • SEBI has introduced the PSF to enforce more stringent exit criteria, focusing on trading activity, turnover, and open interest benchmarks.

6. Six-Month Transition Period:

   • SEBI has provided a six-month gestation period for existing stocks in the F&O segment to comply with the new norms. Stocks removed due to non-compliance will be barred from re-entering the F&O segment for at least a year.
      

Implications for Market Participants

These changes mark a new era in the Indian derivatives market, where SEBI is prioritizing market quality and the integrity of the F&O segment. By tightening the criteria for entry and exit, SEBI aims to maintain a segment where only the most liquid and actively traded stocks participate, thereby reducing the risk of market manipulation and ensuring better price discovery.

The revision in the MQSOS, MWPL, and delivery value thresholds indicates SEBI's response to the evolving market landscape, characterized by increased market capitalization and higher trading volumes. This move is expected to foster a more resilient derivatives market that better reflects the underlying cash market activity.
 

Conclusion

SEBI's latest amendments are a proactive step towards strengthening the Indian derivatives market. By setting higher standards for stocks in the F&O segment, SEBI ensures that this market remains a domain for high-quality, actively traded stocks. Market participants must now adapt to these stricter norms, which aim to enhance market efficiency and safeguard investor interests.