SEBI's new F&O norms: How they affect your trading strategy
The Securities and Exchange Board of India (SEBI) has implemented stricter criteria for including and excluding stocks in the Futures and Options (F&O) segment. As per IIFL's note, these revised guidelines are largely consistent with the proposal released on June 28, 2024. This move aims to enhance market stability, improve investor protection, and promote the inclusion of only liquid and actively traded stocks in derivatives.
Revised criteria for F&O stocks
The revised criteria include an increase in the stock's Median Quarter Sigma Order Size from ₹25 lakh to ₹75 lakh. The Market Wide Position Limit has been raised from ₹500 crore to ₹1,500 crore (minimum). Additionally, the stock's Average Daily Delivery Value in the cash market must now be at least ₹35 crore, up from the previous requirement of ₹10 crore. Stocks that fail to meet these standards for three consecutive months will be removed from the F&O segment.
23 stocks face potential exclusion
Based on the new criteria, 23 stocks are at risk of being removed from the F&O segment. These include Laurus Labs, Ramco Cements, Deepak Nitrite, Torrent Pharmaceuticals, Chambal Fertilizers, Gujarat Gas, Coromandel International, Granules India, Sun TV Network, and Gujarat Narmada Valley Fertilizers & Chemicals. Bata India, Dr. Lal PathLabs, Abbott India, United Breweries, IPCA Laboratories, Mahanagar Gas, and JK Cement may also face exclusion due to SEBI's updated eligibility criteria for the F&O segment.
SEBI's new product-success framework for single-stock derivatives
SEBI has also introduced a product-success framework for single-stock derivatives, similar to the existing one for index derivatives. This new framework will determine which stocks will be asked to exit the segment if they fail to meet certain criteria. The regulator's revised guidelines aim at ensuring market stability and reducing potential manipulation in stock prices.
How SEBI's new norms affect a trader
SEBI's stricter F&O inclusion criteria will likely result in only the most liquid and actively traded stocks being eligible. This focus on high-quality stocks aims to enhance market stability by reducing volatility associated with less liquid derivatives. While investors benefit from increased transparency, it may limit options for trading a wider variety of stocks using derivatives. Traders who prefer to speculate on less liquid stocks or explore alternative investment strategies may find their options more constrained.
