In order to make Indian stock exchanges one stop financial shopping malls for various categories of investors with world class standards, the Securities and Exchange Board of India (Sebi) appointed Derivatives Market Review Committee, has recommended a slew of measures. The important measures includes physical settlement of derivative contract first in options and then in futures segment, revision in eligibility criteria for introduction of F&O on stocks and indexes, upward revision of position limits, revisiting Securities Transaction Tax (STT) and basing it on premium instead of strike price and simplification of margin requirements.
In addition to this the committee has also recommended to widen the range of new products introduced recently like introduction of mini contract in single stock F&O, options contract with longer life/tenure up to even five years to be made available on more equity indexes and single stocks, introduction of F&O contracts on the volatility index and bond indexes, exchange traded credit derivatives, over the counter products and exchange traded third party products that will be able to meet the needs of various classes of products. Further the committee has also recommended the introduction of ‘options on futures’ on currency futures traded on the exchanges and further extending it to index futures, stock futures and interest rate futures.
The committee in its report noted, “Each class of these products needs to be carefully designed and risk management specified by the exchanges with due approval by Sebi”.
The committees recommendations comes at a time when already at a global level in terms of the number of contracts traded, the National Stock Exchange (NSE) has captured the second position in index futures and stock futures while it stands at a fourth position in index options and 16th in stock options. Market participants believe the implementation of these recommendations will certainly bring in more depth and participation in the domestic derivative market.
On the physical settlement in the derivative segment, the committee has recommended physical settlement at the choice of buyer (long party), to be started with single stock options contract and to be extended to cover single stock futures. With regards to the revision in the eligibility criteria for stocks to qualify for the F&O segment, the Sebi appointed committee has recommended the selection of stocks from the top 500 in terms of daily average market capitalisation and average daily traded value in the previous six months on a rolling basis. Further the stocks median quarter sigma order size over the last six months shall not be lass than Rs 5 lakh and the market wide position limit in the stock shall not be less than Rs 100 crore.
The modification of the eligibility criteria assumes significance since the existing criteria has allowed a large amount of illiquid stocks getting admitted to F&O trade. Further the absence of physical settlement of derivative contracts has resulted in a heightened speculative activity on the bourses often taking a particular stocks to unusual levels on either side.
source: The Financial Express
