The Securities and Exchange Board of India (Sebi) will review the eligibility criteria for shares to be traded in the derivatives segment, it said in the annual report released on Monday. It is also mulling a revision in the framework to set the price bands for stocks that also have derivatives contracts, for ensuring a more effective risk management and orderly trading.
The regulator is looking to better manage volatility and minimise information asymmetry regarding scrips and contracts in equity derivatives. The proposed framework, it says, will limit the impact of a possible price risk arising out of sudden volatility, fat finger errors, or issues with systems of a trading member.
Derivatives contracts in stocks can, at present, be traded on the recognised stock exchanges only if underlying stocks satisfy certain objective criteria.
The regulator observed that the last review of the eligibility criteria for introduction of stocks in the derivatives segment was done in 2018. Since then, the broad market parameters reflecting the size and liquidity of the cash market, such as market capitalisation and turnover, have considerably increased. As a result, it now proposes to review the eligibility criteria for the introduction and continuation of stocks in the derivatives segment.
At present, stocks that have derivative contracts have a dynamic price band both for the scrip and derivatives. These price bands can be flexible, subject to certain conditions and trading activity in the particular scrip.
During FY23, the Indian derivatives market displayed a significant growth in comparison to the cash market. While the cumulative trading turnover of the equity cash segment declined by 20% during the financial year vis-à-vis FY22, the equity derivatives segment witnessed a 119% jump in notional turnover over the period, primarily driven by proprietary traders and individual investors.