The Hindu Business Line : SEBI relaxes entry/exit norms for F&O contracts

The procedure for introduction, dropping and reintroduction of derivatives contracts, market wide position limits for stock-based derivatives and position limits for index derivatives were reviewed by the SEBI-constituted Secondary Market Advisory Committee (SMAC) on Friday.

Subsequently, SMAC has relaxed its entry norms for reintroduction of derivative contracts and modified position limits. Industry sources said that it would increase liquidity and the number of participants in the F&O segment. "The modified position limits will ensure that more and more people can trade in index F&Os," said a derivatives dealer.

In the first instance, the capital markets regulator has said that a stock, which has been dropped from derivatives trading may become eligible again and reintroduced for derivatives trading, if it meets the eligibility criteria for three consecutive months, instead of the one month specified earlier.

Derivative contracts on such stocks may be reintroduced by the exchange itself. However, the introduction of F&O contracts on a stock for the first time would continue to be subject to the SEBI approval.

The stock will have to fail to meet the criteria for three consecutive months for it to be dropped out of the derivatives segment.

The committee has also relaxed the market wide position limits up to10 per cent, before a stock can become ineligible. Sources said that the exit criteria has been made more flexible as compared to entry criteria, in order to prevent frequent entry and exit of stocks in the derivatives segment.

The capital markets regulator has also on Friday modified the market wide position limits for single stock futures and stock option contracts. Henceforth, the market wide position will be linked to the free float market capitalisation and shall be equal to 20 per cent of the number of shares held by non-promoters in the relevant underlying security (i.e., free-float holding).

Capital market sources said that earlier the market wide position was linked to 30 day trading volume or 20 per cent of free float capital.

Modified limit

In another significant move the committee today also modified the trading Member/FII/ Mutual Fund position limits in the index-based derivative contracts. Henceforth, a trading member/FII/Mutual Fund position limits in equity index option contracts shall be higher of Rs 500 crore or 15 per cent of the total open interest in the market in equity index option contracts. This is against the Rs 250-crore limit earlier. The modified limit would be applicable on open positions in all option contracts on a particular underlying index.

Similarly, trading member/FII/Mutual Fund Position limits in equity index futures contracts will also be higher of Rs 500 crore or 15 per cent of the total open interest in the market in equity index futures contracts. This is also against the Rs 250-crore limit specified earlier. In addition to the above, the position limit prescribed for hedging purposes by mutual fund and FII shall continue to be applicable, the circular said.

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