Sebi Tightens Derivative Market Rules: Key Proposals & Impact

Sebi Proposes Stricter Rules for Derivative Markets

In a move to mitigate market risks, the Securities and Exchange Board of India (SEBI) has introduced new proposals aimed at tightening regulations for derivative markets. These proposals focus on lowering position limits for equity stock derivatives and tightening rules for index derivatives.

Following Previous Changes

These fresh proposals follow changes announced in October, where SEBI raised the entry barrier for derivatives trading and increased trading costs to better protect retail investors.

Concerns Over Market Volatility

The new measures are being considered against a backdrop of concerns that volatility from the futures and options market is impacting the broader stock market. The stock market has experienced a decline after reaching record highs in September 2024.

Proposed Changes

Here's a breakdown of the key proposals:

• Equity Stock Derivatives: SEBI proposes linking the market-wide position limit for single-stock derivatives to the cash markets. This position limit would be set at the lower of 15% of the free-float market capitalization of a stock or 60-times the average daily delivery value.
• Index Derivatives: The regulator proposes stricter criteria for offering derivatives on indices other than the BSE Sensex and NSE Nifty 50. These indices must meet certain requirements to be eligible for derivative contracts.

Rationale Behind the Proposals

SEBI believes that the new measures will:

• Reduce potential market manipulation.
• Better align derivatives risk with underlying cash market liquidity.
• Ensure that derivative contracts are only introduced on indices with a minimum of 14 constituents.
• Prevent excessive concentration in a few stocks, which could lead to market manipulation and volatility. The combined weight of the top three constituents of the indexes should be less than 45%, and the top constituent should not have a weight of more than 20%.

Pre-Open Session for Futures Market

SEBI has also proposed introducing a pre-open session to the futures market, similar to the practice in the cash market. This would initially apply to current-month futures on both single stocks and indices.

Seeking Market Feedback

SEBI has invited feedback on these proposals from market participants until March 17.

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Categories: derivative market, market regulation, Sebi