Recently, the SEBI board approved a set of rules to rationalise and strengthen the equity derivatives market. Among these, the most important proposals is physical settlement for all stock derivatives which the Securities and Exchange Board of India plans to carry out in a calibrated manner.
To ensure that, SEBI has mooted a set of criteria to eliminate certain stocks from F&O. Accordingly, market wide position limit and median quarter-sigma order size have been revised upwards from the current ₹300 crore and ₹10 lakh to ₹500 crore and ₹25 lakh, respectively.
An additional criterion, of average daily ‘deliverable’ value in the cash market of ₹10 crore, has also been prescribed.
The enhanced criteria are to be met for a continuous period of six months. To begin with, stocks which are currently in derivatives but fail to meet any of the enhanced criteria, would be physically settled, said SEBI.
Such stocks would exit the derivative segment if they fail to meet any of the enhanced criteria within a period of one year from the specified date or fail to meet any of the existing criteria for a continuous period of three months, SEBI further added.
No doubt, these moves will filter out companies with lower trading interest from the F&O segment. However, SEBI could even do better if it restricts F&O trading to only the top 100 or 50 companies by market-cap to ensure quality of the stocks. Besides, uniform market lot will help in better deliverable mechanism.
Income-based restriction
Another proposal from SEBI is to alienate retail investors from F&O is restriction on trade in cash and derivatives based on their disclosed income according to their income tax return over a period of time.
“For exposure beyond the computed exposure, the intermediary would be required to undertake rigorous due diligence and take appropriate documentation from the investor,” it added.
However, it would be practically impossible for brokers to implement this rule. First, no individual would like to disclose his/her income to a third party, as these are private matters. Secondly, the calculation of exposure based on disclosed income is not very easy. Also, what kind of diligence, in addition to their day-to-day routine work, will brokers be able to do, is another important point to be addressed.
Also, a client, in an urge to make a quick buck, can give the same ITR proof with multiple brokers and take a lot more exposure. Instead of this cumbersome process, SEBI could tone up investor education. Too many regulations will play spoilsport and kill the derivative segment, besides challenging the financial freedom individuals are entitled to.