To tackle volatility, SEBI curbs short-selling in equity derivatives

PALAK SHAH Mumbai | Updated on March 20, 2020

Entities can hold positions only up to the stock holding level

Capital market regulator SEBI today moved to clamp down on ‘excessive speculation’ in equity derivatives. This comes even as the Sensex and Nifty on Friday recovered nearly 6 per cent from their multi-year lows. The Nifty rose 482 points to close at 8,745, while the Sensex gained 1,627 points to end the day at 29,915.

On Friday, after the markets closed, SEBI said that ‘short positions’ in index derivatives of any entity, including foreign portfolio investors (FPIs), proprietary traders, mutual funds and clients (retail and high net worth individuals) should not exceed their stock holdings.

Simply put, if a trader holds ₹100 worth of stocks, the short positions initiated by him cannot exceed that amount in index futures. SEBI said existing positions will not be impacted as the rule will be implemented post expiry of the March series and will be in force for a month. The regulator has also increased margins on both derivatives and cash. Similarly, on initiating long positions, SEBI has gone easy to the extent that it has included instruments such as cash, government securities and Treasury Bills, apart from stocks, to calculate the underlying worth of a trader.

Cooling off period

The regulator also said that even when a stock hits a certain price band in derivatives, there would be a cooling-off period of 15 minutes before releasing the price band in that counter. Exchanges follow certain criteria to relax price bands in derivatives, and this SEBI’s rule will be an additional one.

On March 16, BusinesLine reported that FPIs held nearly 120 lakh contracts of net short positions in the index futures segment, which is dominated by the Nifty and Bank Nifty. These shorts had reached a life-time high of 173 lakh contracts in March. While the data on the amount is not available, the net short outstanding of FPIs in March could exceed $3-4 billion. Such short positions cause intense pressure in tandem with the selling in the cash market, when sentiment is poor and the majority are on the sell side. FPIs sold stocks worth nearly $5 billion in cash this year.

The SEBI diktat states that position limits worth ₹500 crore in index futures will only be available to each category of investors in addition to their underlying holdings. Any violation of the rules will attract double margins, which will remain with the exchange for three months.

SEBI has prescribed an increase in margins to 30 per cent from March 23, and 40 per cent from March 30 for stocks moving 10 per cent or more for three consecutive days. A 40 per cent, or maximum, margin has been set for intra-day volatility in derivative stocks for a month, effective March 30.

The regulator has also cut market-wide position limits of stocks to be put under a ban period from 100 per cent earlier to just 50 per cent.

Every stock has a market position limit allotted to it, if 50 per cent of that is hit, derivative trading will be halted till positions unwind.

Published on March 20, 2020

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor