The derivatives space on NSE will swell once the world’s largest derivatives exchange, in terms of contracts traded, adds 11 more stocks to the futures and options (F&O) platform. Stocks such as Adani Gas, HDFC AMC, ICICI General Insurance, L&T Info, Pfizer are among those 11 companies, which are qualified for the inclusion in F&O category, according to a latest report from ICICI Direct.com. It may be recalled that Sebi on April 22, 2019, announced a decision to exclude 34 stocks from F&O segment from July series onwards for not meeting the enhanced eligibility criteria. After this, as many as 175 securities, as on August 2019, were trading on F&O platform. In its immediate last F&O inclusion in April, 2020, NSE included SBI Life Insurance. Prior to that, three new stocks were added in F&O in February 2020 after a gap of almost two years.
Based parameters such as average daily market capitalisation and average daily traded value in the previous six months on a rolling basis and also the stock’s median quarter-sigma order size over the last six months shall not be less than Rs 25 lakh, NSE will take a decision on exclusion or inclusion of stocks from the top 500 stocks for F&O platform.
The eligibility of a stock for inclusion in the derivatives segment is based on the criteria laid down by the market regulator Securities and Exchange Board of India (Sebi) through various circulars issued from time to time. Based on the Sebi guidelines, F&O contracts would be introduced. F&O contracts may be introduced on new securities, which meet the below mentioned eligibility criteria, however, subject to approval by Sebi.
1) The stock shall be chosen from among the top-500 stocks in terms of average daily market capitalization and average daily traded value in the previous six months on a rolling basis.
2) The stock’s median quarter-sigma order size over the last six months shall not be less than Rs25 lakh. For this purpose, a stock’s quarter-sigma order size shall mean the order size (in value terms) required to cause a change in the stock price equal to one-quarter of a standard deviation.
3) The market wide position limit in the stock shall not be less than Rs 500 crore on a rolling basis. The market wide position limit (number of shares) shall be valued taking the closing price of stocks in the underlying cash market on the date of expiry of contract in the month. The market wide position limit of open positions (in terms of the number of underlying stock) on futures and option contracts on a particular underlying stock shall be 20 per cent of the number of shares held by non-promoters in the relevant underlying security i.e. free-float holding.
4) Average daily delivery value in cash market shall not be less than Rs10 crore in the previous six months on a rolling basis. The average daily deliverable value shall be computed taking deliverable quantity as per client level as computed by NSE Clearing Ltd on a daily basis and close price of the trade date.
The exclusion and inclusion is part of normal exercise taken up by NSE from time to time. With a sole objective of investor protection, NSE takes decision based on liquidity levels that stipulates the eligibility for inclusion in the derivatives segment. The exclusion may lead to short-term unwinding of arbitrage trades.
Considering the last six month’s average criteria of NSE parameters, ICICI Direct.com short listed certain stocks for fresh inclusion in the F&O segment. Hence, from a data perspective, ICICI Direct.com has identified the following 11 stocks that qualify for F&O inclusion. A few stocks from this list may be included in the next forthcoming announcement.
According to a Sebi circular released in 2018 on review of framework for stocks in derivatives segment, “after a period of one year from the date of the circular, only those stocks which meet the enhanced eligibility criteria shall remain in derivatives segment.”
Popular stocks such as Allahabad Bank, Syndicate Bank, Jet Airways, CG Power and Industrial Solutions, Suzlon Energy, IDFC Ltd and Wockhardt among others excluded from the F&O segment.
Generally, price bands or circuit filters are generally not applied to the F&O stocks as derivatives markets reflect expectation of spot prices in the future. However, the capital markets regulator earlier proposed to fix circuit filters or price bands on F&O scrips to curb excessive volatility.
In a discussion paper on ‘Applicability of Individual Scrip wise Price Bands or Circuit Filters’ on F&O scrips, Sebi said: “Concerns have been raised that investors’ wealth is getting wiped out in a single day by recent falls in stocks, on which derivative products are available, as no price bands or circuit filters are applicable on them. In view of recent abnormal intra-day price movements, suggestions are being made to review the rules to prevent such extraordinary price movements.”
The writer is a business journalist with 27 years of experience