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 through various circulars from time to time.
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:
Futures & Options Contracts on Stocks
- SEBI vide circular number SEBI/HO/MRD/DP/CIR/P/2018/67 dated
April 11, 2018 has reviewed framework for stocks in Derivatives segment.
Enhanced eligibility criteria for inclusion of Securities 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. 25 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
- The Market Wide Position Limit in the stock shall not be less than Rs 500 crore . 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.
- Average Daily Delivery value in cash market shall not be less than Rs.10Crs in previous six months on rolling basis.
Above criteria are to be met for a continuous period of six months.
The other criterias including criteria for exclusion of Securities in F&O segment shall be as under:
Derivatives on stocks (new/existing) which meet the enhanced eligibility criteria (mentioned above) shall be cash settled until further notification, however such stocks, if they fail to satisfy any of the enhanced eligibility criteria for a continuous period of three months, shall move from cash settlement to physical settlement. After moving to physical settlement, if such stocks do not meet any of the eligibility criteria (specified vide circular CIR/DNPD/3/2012 dated July 23, 2012) for a continuous period of three months, then they shall exit from derivatives segment.
Stocks which are currently in derivatives segment and meet the eligibility criteria (specified vide circular CIR/DNPD/3/2012 dated July 23, 2012) but do not meet the enhanced criteria shall be physically settled. Such stocks, however, shall exit from derivatives segment in case;
- They fail to meet any of the eligibility criteria (specified vide circular CIR/DNPD/3/2012 dated July 23, 2012) for a continuous period of three months, or
- They fail to meet any of the enhanced eligibility criteria after a period of one year from the date SEBI circular. (i.e April 11,2019)
After April 2019, only those stocks which meet the enhanced eligibility criteria shall remain in derivatives segment.
Stock which meet the enhanced eligibility criteria as per aforementioned SEBI circular shall also move to physical settlement albeit in a phased/calibrated manner.
The methodology used for calculating quarter sigma order size is as follows:
- 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.
Relevant SEBI circulars - SEBI/HO/MRD/DP/CIR/P/2018/67 dated April 11, 2018, SEBI/HO/MRD/DP/CIR/P/2016/135 dated December 16, 2016, CIR/DNPD/3/2012 dated July 23, 2012, CIR/DNPD/4/2010 dated July 15, 2010.
Futures & Options Contracts on Index - Eligibility Criteria
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. 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.
Framework for Index Derivatives -
Surrogate / Pseudo index
- The product success framework shall be applicable to all index derivatives at the underlying level. The framework shall not be applicable to flagship index of the exchange. The flagship index for BSE for the purpose of product success framework is S&P BSE SENSEX.
- The criteria for evaluation of the index derivatives are as follows:
- 15% of trading members active in all index derivatives or 20 trading members whichever is lower should have traded in any derivative contract on the index being reviewed in each of the month during the review period,
- Trading on a minimum of 75% of the trading days during the review period,
- Average daily turnover of at least Rs. 10 crore during the review period, and
- Average daily open interest of Rs. 4 crore during the review period
- Each of the above criteria shall be satisfied for continuation of the derivatives on the given index. If any index fails to satisfy any of the above mentioned criteria, then no fresh contracts shall be issued on that index. However, the existing unexpired contracts may be permitted to trade till expiry and new strikes may also be introduced in the existing contracts.
- However, even if an index does not fulfil all the criteria during a review, the Exchange may not discontinue derivatives on that index provided there is a surrogate/pseudo index in another exchange(s), which continue to meet the evaluation criteria on the respective exchange. The index under review must have been surrogate/pseudo to another index on the date of review and must have remained as such for the major duration of the review period.
- For this purpose, an index may be considered to be surrogate/pseudo of another index, if all the following conditions are met:
- The number of constituents is equal in both the indices. If not, then the number of constituents in the smaller index (index with smaller number of constituents) is not less than 80% of the number of constituents in the larger index,
- At least 50% of the constituent stocks in the larger index are also part of the smaller index, and
- The correlation between the two indices is at least 0.90 for the previous 6 months on a rolling basis.
An index in an exchange shall have only one pseudo/surrogate index per exchange.
- All index derivatives would be reviewed semi-annually in the first week of April and October based on the data for the preceding six months i.e. period of review would be October to March for the April review and April to September for the October review.
- Only those index derivatives which have completed at least 21 months from the launch month would be liable for review.
- Once an index is excluded from the derivatives list, it shall not be considered for re-inclusion for a period of at least six months. Exchanges may consider re-launching derivative contracts on the same index after carrying out suitable modification(s) in contract specifications based on market feedback, after a cooling off period of at least six months, subject to SEBI approval.