Sebi to tweak F&O rules to check swings

Meets Brokers, Exchange Delegations
Feb 13, 2008
Ashish Rukhaiyar & Gaurav Pai

IN A move to check wild stock swings, markets regulator Securities and Exchange Board of India (Sebi) is planning to overhaul the derivatives segment. The proposals under consideration include circuit filters on stocks traded in the futures and options (F&O) segment, possible changes in the marketwide position limits and review of the margining system, a person familiar with the development said.

It is believed that the swift and massive fall on January 22 shook Sebi into action. Trading was halted within minutes of opening, as indices hit the downward limits on very low volumes. Sebi has also received several suggestions from market intermediaries on how the loopholes in the current system can be plugged.

Apart from the margining system, the large number of stocks in the F&O segment was also said to have contributed to the indices going into a free fall. “Sebi officials had a long discussion with many market players, including BSE and NSE representatives,” says the source. “There were suggestions to overhaul the derivatives segment to counter speculative activity. One of the proposals was introduction of circuit filters on stocks available in the F&O segment,” he added. Currently, stocks in which futures are available have no circuit filters on the cash side.

Circuit filter for stocks in F&O segment to be a first

The logic is that a person who has an opposite view to the ongoing trend in the cash segment, could simply exercise his opinion in the F&O market. Simply put, if a trader felt that a share was zooming without any reason behind it, he could just short-sell its futures. However, market players pointed out to Sebi that in recently, speculative activity had zoomed, causing many shares (Essar Steel and Ispat, for instance) to rise 40-45% in one session.

Interestingly, such a system, if introduced, will be the first of its kind in the world. “The idea is not to disturb the trading habits of investors and speculators,” says the source. He added that the circuit filter, if implemented, will be high enough to be hit only on days of extreme movement like on January 22. “It is unlikely that a 20% filter (positive or negative) will be hit on normal days,” he adds.

Many delegations from the broking community are learned to have made presentations to NSE and Sebi officials. The majority has been rooting for introduction of physical settlement (delivery of shares against contracts). But a section warns this delivery should be delayed by a day, enabling both players who want to take delivery and those who do not, without disrupting the operations of the market. “This will also curb the ramping (up or down) of shares on the last day of expiry,” says a broker.

Some brokers have called for providing an easier margining system to those trades which are in opposite directions, and therefore reduces risk: for instance, buying Nifty futures and selling stock futures against it. There is a feeling that high gross exposure margins (a second line of defence unique to India) are distorting the market. There is a also a debate among players whether market makers — big players who give quotes both ways — should be introduced.