Regulator SEBI today decided to rationalise and strengthen the framework for equity derivatives market by facilitating greater alignment of the cash as well as futures and options segments. Besides, physical settlement for all stock derivatives would be carried out in a phased and calibrated manner, according to a release issued by SEBI after its board meeting.
The regulator has approved a proposal to update and strengthen the existing entry criteria for introduction of stocks into the derivative segment in line with the increase in market capitalisation since the last revision of the criteria in 2012, Accordingly, existing criteria like market wide position limit and median quarter-sigma order size would be revised upward from current level of Rs 300 crore and Rs 10 lakh, respectively to Rs 500 crore and Rs 25 lakh, respectively.
An additional criterion of average daily ‘deliverable’ value in the cash market of Rs 10 crore has also been prescribed. The enhanced criteria need to be met for a continuous period of six months. To begin with, SEBI said that stocks which are currently in derivatives but fail to meet any of the enhanced criteria, would be physically settled.
Such stocks would exit the derivative segment if they fail to meet any of the enhanced criteria within one year from the specified date or fail to meet any of the current existing criteria for a continuous period of three months. Stocks which are currently in derivatives and meet the enhanced criteria would be cash settled.
Such stocks if they fail to meet any one of the enhanced criteria for continuous three months shall move from cash settlement to physical settlement. After moving to physical settlement if such stock does not meet any of the current existing criteria for a continuous period of three months, then it would exit out of derivatives. After a period of one year from the specified date, only those stocks which meet the enhanced criteria would remain in derivatives.
The board of SEBI took note of discussion papers titled ‘Growth and development of equity derivatives market in India’ and ‘physical settlement in stock derivatives’ and public comments received there on and also recommendations of the Secondary Market Advisory Committee, as per the release.
Derivative in financial markets typically refers to a forward, future, option or any other hybrid contract of pre- determined fixed duration, linked for the purpose of contract fulfilment to the value of a specified real or financial asset or to an index of securities. Broadly, there are two types of derivative contracts — futures and options.
A futures contract means a legally binding agreement to buy or sell the underlying security on a future date, while options contract gives the buyer or holder of the contract the right (but not the obligation) to buy or sell the underlying asset at a predetermined price within or at end of a specified period.moneycontrol