By reducing the position limits in equity and debt derivatives, the regulator is hoping to rein in speculation. These limits will be applied to a select number of stocks which have seen maximum volatility.
The Securities and Exchange Board of India (SEBI) on Friday said short positions of investors should not exceed the value of their cash holdings. In a set of measures aimed at curbing volatility in the markets, the regulator also slashed market-wide position limits for F&O stocks by half. In addition, it said the margin for non-F&O stocks will be raised to 40% in a phased manner.
By reducing the position limits in equity and debt derivatives, the regulator is hoping to rein in speculation. These limits will be applied to a select number of stocks which have seen maximum volatility. The curbs on short-selling will be applicable to mutual funds, foreign portfolio investors (FPI), trading members (their proprietary books and clients’ holding in stocks).
Markets across the globe have been roiled following the outbreak of coronavirus with investors losing large amounts of wealth as prices crashed. SEBI’s moves are aimed at curbing rampant speculation. The regulator in its guidelines, said, “Short positions in index derivatives (short futures, short calls and long puts) shall not exceed (in notional value) the Mutual Funds’/FPIs’/Trading Members’ (Proprietary)/Clients’ holding of stocks.” These rules shall not apply to existing positions, which will expire later this month. Fresh positions, however, will be subject to the new guidelines.
The regulator has also cut market-wide position limits in F&O stock by half. As per the guidelines, no fresh position can be created on existing positions. These rules will be applicable to institutions and proprietary from Monday, but for retail this limit will be applicable from March 27.
In the event of the market-wide position limit utilisation in a security crosses 95%, “derivative contracts enter into a ban period, wherein, all clients/trading members are required to trade in the derivative contracts of said scrips only to decrease their positions through offsetting positions.”
There is one concern that mutual funds have, for which they will approach the regulator. The guidelines say that the revised index position limits would be capped at Rs 500 crore in equity index futures and equity index options. If this is applicable to a fund house then mutual funds claim it would be an issue, but if it is per scheme, it would not be a problem for them.
The regulator has also said that the dynamic price bands for F&O stocks may be “flexed” – only after a cooling off period of 15 minutes from the time of meeting the existing criteria specified by the stock exchanges. India has followed several other countries to take measures to curb rampant speculation. France, Italy and Spain also have cracked down on short-selling. The Philippine closure of equity, currency and bond markets came alongside the decision to widen a month-long lockdown of the region.
Sandeep Parekh, former ED at SEBI, said, “Broadly, the regulator has taken steps to protect the market. For large trades the regulator wants to protect system from defaults. The move is not to set levels of the market but to protect system from large defaults.”