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SEBI has announced to revise market-wide position limit for stocks in the derivatives segment, flexing dynamic price bands and other measures for one month starting from March 23. These aforesaid mentioned steps would limit short selling of shares as well as reduce volatility in individual stocks. These measures come amidst sharp movement in stocks and continuing volatility in the wake of the covid-19 pandemic that has also adversely impacted economic activities.
SEBI keeping in view the objective of ensuring orderly trading and settlement, effective risk management, price discovery and maintenance of market integrity has come up with the measures in this pandemic situation. Currently, the market-wise limits have been reduced which means more stocks are likely to go into F&O trading ban period. There is also practical short-selling cap at Rs 500 crore that’s been levied. If someone wants to speculate beyond prescribed limits of Rs 500 crore, they will need to put up twice the margin which will be blocked for three months. This practically is like Additional Surveillance Measure (ASM), a step taken for stocks a couple of years ago.
Among other steps, revised positions limits would be applicable in equity index derivatives (F&O) and there would be flexing in dynamic price bands in the F&O (Futures & Options) segment only after a cooling period of 15 minutes after fulfilling certain criteria, stated by the SEBI. Also, SEBI will continuously monitor the market developments and review the position and take any further suitable actions as may be required. The stock exchanges, clearing corporations and depositories would take appropriate measures for the existing circumstances of market volatility.
As on the date of issuance of the circulars by the stock exchanges/clearing corporations in this regard, would not impact the position. In the event MWPL utilization in security crosses 95 per cent, then derivative contracts enter into a ban period. This means that trading members can trade in derivative contracts only to decrease their positions. Any increase in open positions would attract appropriate penal and/or disciplinary action of the stock exchanges/clearing corporations
Stock exchanges and clearing corporations have been asked to check on the intra-day basis whether any member or client has exceeded their existing positions or have created a new position in the scrips in the new ban period. The current penalty structure adopted by the stock exchanges/clearing corporations may be enhanced to 10 times of the minimum and 5 times of the maximum penalties specified by the stock exchanges/clearing corporations, to function as an effective deterrent in the current market context.
An increase in margin would be allowed for stocks meeting certain criteria. The margin rate in the cash market would be raised to a minimum of 40 per cent in a phased manner. The minimum 20 per cent level would be from March 23, 30 per cent from March 26 and 40 per cent from March 30. The proposed margins would be applicable only in the cash market and derivatives contracts on the stocks concerned would continue to be charged margins as per the extant framework. Further, there would be an increase in margin for non-F&O stocks in the cash market.
Mutual funds, FPIs, trading members (proprietary) and clients can have exposure in equity index derivatives on the basis of certain conditions. Short positions in index derivatives should not exceed, in terms of notional value, these entities’ holding of stocks. When it comes to long positions in index derivatives, the same should not exceed their holding of cash, government securities, T-Bills and similar instruments, as per the statement. Also, there would be additional position limits for these entities. This would be Rs 500 crore each for equity index futures contracts and equity index options contracts.
In case the limits are exceeded, then an additional deposit has to be paid by the entity concerned. The existing positions as on the date of issuance of the circulars by the stock exchanges/ clearing corporations would not be impacted. However, if a fresh position is taken, then the entire positions (including the grandfathered positions) shall be subject to limits.
This framework would be in place for one-month starting from March 23 for institutions and trading members (proprietary). For others, it would be applicable from March 27. Currently, stocks in the F&O segment are subject to dynamic price bands. As per the latest directive, those bands would be flexed only after a cooling-off period of 15 minutes from the time of meeting the existing criteria specified by stock exchanges for flexing.
The market volatility in individual stocks could also reduce, although delivery sales and buys could still result in higher volatility resulting in traders in such stocks getting impacted. Liquidity in individual stocks may get impacted to some extent.
In view of the stock market volatility due to the Covid-19 outbreak, Securities and Exchange Board of India (SEBI) on Friday decided to impose several measures to boost investor confidence. The regulator prescribed enhanced margins for highly volatile stocks and reduced market-wide position limits for volatile scrips. The restrictions of positions and increased margins will kick in from Monday, and remain in place for a month. SEBI will subsequently review the measures and initiate other measures depending on the market conditions.
Read, More: RBI Revised Repo Rate during Covid-19 Pandemic.