Context:
There was a sharp decline of almost 20% in BSE Ltd’s stock price following the issuance of SEBI‘s consultation paper regarding market regulations. Initially, fears rose regarding a possible plunge in trading volumes, but analysts believe that some of the SEBI proposals might be less damaging than anticipated.
The paper is comprised of two parts.
Part-A Index Derivative Changes (Mainly Affected by the Market)
- Change from Notional Value to Delta Based Open Interest Calculation
- Open interest (OI) calculation will shift from the current notional value calculation mode to one based on delta based future equivalent approach.
- SEBI has proposed a limit of ₹500 crore net future equivalent for each entity.
Reality Check
- SEBI states that 89% of index derivative positions in November were within the proposed limit, meaning only 11% exceeded it.
- The intention behind the ruling is to prevent systemic risks should OI exceed ₹10,000 crore, which is a rare occurrence.
- This points towards the fact that perhaps trading volumes will not be impacted as much as originally feared.
Part-B Non Benchmark Indices Rules (Nifty Bank, BSE Bankex, etc.)
- New eligibility criteria for non benchmark indices derivatives (excluding Nifty 50 & Sensex)
- Minimum 14 constituents (vs. Nifty Bank’s current 12)
- Top stock weight capped at 20% (vs. HDFC Bank’s present 33% in Nifty Bank)
- Combined weight for the top 3 stocks capped at 45%
Reality Check
- It is quite simple for exchanges (NSE, BSE) to modify index composition to fulfil the newly imposed requirements. Hence derivatives based on those indices are highly unlikely to be discontinued.
- The measure really puts bounds on stock price manipulations by large players, thereby improving market integrity.
Effect on Single Stock Derivatives
- SEBI states that the revised position limits would apply for single stock derivatives
- 15% of free float market cap (down from 20%).
- 60x average daily delivery value (up from 30x).
- Reality Check
- The net impact is uncertain, but it probably impacts a few low liquidity F&O stocks.
Market concerns are exaggerated; actual trading volume impact could be limited. SEBI’s new rules tackle systemic risk & manipulation risk in the market rather than restricting trading activity.
Source: Mint
