The eligibility criteria to determine the eligibility of stocks and indices on which Futures & Options contract could be introduced for trading in Derivatives is based upon the criteria laid down by SEBI vide circulars SMDRP/DC/CIR-13/02 dated December 18, 2002, SEBI/DNPD/Cir-26/2004/07/16 dated July 16, 2004, SEBI/DNPD/Cir-31/2006 dated September 22, 2006 for the selection of stocks eligible for launching Futures and Options contracts in the Derivatives Segment and the Exchange vide Notice No. 20090421 dated April 21, 2009 regarding change in eligibility criteria of stocks on which single stock futures and options can be introduced.
Based on these circulars and notices and as per a SEBI surveillance measures the following criteria will be adopted by the Exchange for selecting stocks and indices on which Futures & Options contracts would be introduced:
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Futures & Options Contracts on Stocks
The eligibility criteria for inclusion of scrips in F&O segment shall be as under:
- The stocks would be chosen from amongst the top 500 stocks in terms of average daily market capitalization and average daily traded value in the previous six-month period on a rolling basis.
- For a stock to be eligible, the median quarter-sigma order size over the last six months should not be less than Rs. 5 lakh (Rs 0.5 million). 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
- The Market Wide Position Limit in the stock shall not be less than Rs 100 crore (Rs 1000 million). The Market Wide Position Limit is valued taking into consideration 20% of number of shares held by Non-Promoters (i.e. free-float holdings) in the relevant underlying stock and the closing prices of the stock in the underlying cash market on the date of expiry of contract in the month. Market Wide Position Limit is calculated at the end of every month.
The criteria for exclusion of scrips in F&O segment shall be as under:
- For an existing F&O stock, the continuing eligibility criteria is that market wide position limit in the stock shall not be less than Rs. 60 crores and the stock's median quarter-sigma order size over the last six months shall be not less than Rs. 2 lakhs. The stock shall be excluded if the above criteria are not fulfilled for consecutively three months.
The methodology used for calculating quarter sigma order size is as follows:
Eligibility criteria for stocks on account of corporate restructuring
- Quarter sigma order size is calculated by taking four snapshots in a day from the order book of the stock in the past six months.
- The sigma (standard deviation) or volatility estimate is calculated in the manner specified by Prof. J. R. Varma Committee on Risk Containment Measures for Index Futures. This daily closing volatility estimate value is applied to the day's order book snapshots to compute the order size.
- The quarter sigma percentage is applied to the average of the best bid and offer price in the order book snapshot to compute the order size to move price of the stock by quarter sigma.
- The median order size to cause quarter sigma price movement is determined separately for the buy side and the sell side. The average of the median order size for the buy and the sell side is taken as the median quarter sigma order size.
- The quarter sigma order size in stock is calculated on the 15th of each month, on a rolling basis, considering the order book snapshots in the previous six months. Similarly, the average daily market capitalization and the average daily traded value is also be computed on the 15th of each month, on a rolling basis, to arrive at the list of top 500 stocks.
All of the following conditions should be met in the case of shares of a company undergoing restructuring through any means for eligibility to re-introduce derivative contracts on that company from the first day of listing of the post restructured company in the underlying market:
Discontinuance / Exit of Futures & Options Contracts on stocks:
- The Futures and Options contracts on the stock of the original (pre-restructure) company were traded on any exchange prior to its restructuring.
- The pre restructured company had a market capitalization of at least Rs. 1000 crore (Rs 10 billion) prior to restructuring.
- The post restructure company would be treated like a new stock and if it is, in the opinion of the exchange, likely to be at least one third of the size of the pre structuring company in terms of revenues or assets or analyst valuations, and
- In the opinion of BSE, the scheme of restructuring does not suggest that the post restructured company would have any characteristic that would render the company ineligible for derivatives trading.
- If the post restructured company comes out with an Initial Public Offering , the same prescribed criteria as currently applicable for introduction of derivatives on a company coming out with an IPO will be applied for introduction of derivatives on stocks of the post restructured company from its first day of listing.
No fresh month contracts shall be issued on the stocks under the following instances:
- If a stock does not conform to the above eligibility criteria for a consecutive period of 3 months, no fresh month contracts shall be issued on the same.
- If the stock remains in the banned position in the manner stated in SEBI Circular No. SEBI/DNPD/Cir-26/2004/07/16 dated July 16, 2004 as per para 4 (i) (a), (b) (c) for a significant part of the month consistently for 3 months, no fresh month contracts shall be issued on those scrips.
- The exit criteria shall be more flexible as compared to entry criteria in order to prevent frequent entry and exit of stocks in the derivatives segment.
- If a stock fails to meet the aforesaid eligibility criteria for 3 months consecutively, then no fresh month contract shall be issued on that stock.
However, the existing unexpired contracts may be permitted to trade till expiry and new strikes may also be introduced in the existing contract months.
BSE may compulsorily close out all derivative contract positions in a particular underlying when that underlying has ceased to satisfy the eligibility criteria or BSE is of the view that the continuance of derivative contracts on such underlying is detrimental to the interest of the market keeping in view the market integrity and safety. The decision of such forced closure of derivative contracts shall be taken in consultation with other exchanges where such derivative contracts and are also traded shall be applied uniformly across all exchanges.
Re-Introduction of Stocks Discontinued from Futures & Options Trading
A stock, which is dropped from derivatives trading shall not be considered for re-inclusion for a period of one year after this period stock may become eligible once again. In such instances, the stock is required to fulfill the eligibility criteria for 3 consecutive months to be re-introduced for derivatives trading. Derivative contracts on such stocks may be re-introduced by BSE itself. However, introduction of futures and option contracts on a stock for the first time would continue to be subject to SEBI approval.
Futures & Options Contracts on Index
The Futures Options Contracts on an index can be issued only if 80% of the index constituents are individually eligible for derivatives trading. However, no single ineligible stock in the index should have a weightage of more than 5% in the index. The index on which Futures and Options contracts are introduced shall be required to comply with the eligibility criteria on a monthly basis.
SEBI has subsequently clarified that "The Exchange may consider introducing derivative contracts on an index if the stocks contributing to 80% weightage of the index are individually eligible for derivative trading. However, no single ineligible stock in the index shall have a weightage of more than 5% in the index."
Discontinuance of Futures & Options Contracts on Index:
If an index fails to meet the above eligibility criteria for 3 months consecutively, no fresh month contract shall be issued on that Index. However, the existing unexpired contracts shall be permitted to trade till expiry and new strike prices will continue to be introduced in the existing contracts.
The above requirements as prescribed by SEBI need to be necessarily met for introduction of F&O contracts on underlying stocks of the cash market. However, once the criteria are met, it is at the discretion of BSE to apply to SEBI for permission to launch F&O contract on the eligible stocks. Once SEBI approval in respect of those stocks is obtained, BSE shall issue a suitable notice to the market, in advance and then introduce F&O contracts on the respective stocks.
To obtain a list of the scrips which have become eligible for trading in the Derivatives Segment of BSE, check the Median Quarter Sigma Order Size section.