SEBI Takes Measures To Check Short Selling, Curb Volatility

The market regulator lowered the limit of positions that can be taken in the futures and options market, increased margin requirements and capped derivatives exposure as it looks to counter volatility and short-selling triggered by the Covid-19 pandemic.

The regulator has brought down market wide position limit—the maximum number of open positions in F&O contracts of a particular underlying stock—subject to conditions, according to a statement by the Securities and Exchange Board of India. It also increased margin requirement on F&O stocks having positions above this new cap, among other measures.

While there hasn’t been any disruption in settlement cycles so far despite the volatility, measures have been announced starting March 23 for a month to curb volatility and reduce trading activity, SEBI said. The regulator and stock exchanges will monitor and review the position to take any further actions, as may be required, it said.

Volatility is at multi-year highs as Indian equities track global selloff as the new coronavirus outbreak has stalled demand and trade. Even as NSE Nifty 50 index jumped nearly 6 percent today, the benchmark has tumbled 28 percent so far this year. SEBI’s measures are largely to curb extreme volatility in individual stocks and index derivatives segment which will effectively lead to reduced trading and may also put a lid on further short selling.

Here are the key measures:

Revision Of Market Wide Position Limit

The market wide position limit for F&O stocks will be reduced to 50 percent from existing levels if the below conditions are met:

• Average daily price high-low variation percentage during the last five sessions is 15 percent or more than that.

Or

• Average MWPL utilisation percentage during the last five trading days is more than or equal to 40 percent.

MWPL is expressed in number of shares as 20 percent of the number of shares in the free float.

SEBI has proposed to bring down the 20 percent limit to 10 percent of number of shares in free float only for stocks which meet the above mentioned two conditions .

In the event of total open Interest in F&O market for a security crosses 95% of MWPL utilization security enters into a ban period, where trading is done only to decrease positions . Any increase in open positions attracts a penalty. The penalty for increasing positions beyond 95 percent of reduced MWPL stocks has been increased to 10 times of the minimum and five times of the maximum penalties specified by exchanges.

The revised limit will be applicable on fresh positions. As of now, there are nine stocks according to the revised MWPL limits which have entered in to ban period for Monday’s trade.

These stocks have tumbled and have seen a build-up of short positions. Any ban would lead to short-covering.

The penalty for increasing positions beyond the limit has been increased to 10 times of the minimum and five times of the maximum penalties specified by exchanges.

Higher Margins For F&O Stocks

The regulator increased margin requirement to 40 percent in the cash market for F&O stocks with market wide position of 50 percent:

• 20 percent from March 23.
• 30 percent from March 26.
• 40 percent from March 30.

Higher Margins For Non-F&O Stocks

For stocks with a price band of 20 percent—the maximum up and down movement—and witnessing an intraday (high-low) price variation of more than 10 percent for three or more days in the last one month, the minimum margin rate shall be:

• 30 percent from March 23.
• 40 percent from March 26.
• 40 percent or max intraday high-low variation (in the last one month), whichever is higher.

Cap On Exposure To Index Derivatives

Mutual funds, foreign investors and trading members—proprietary or on behalf of clients—may take exposure in equity index derivatives subject to the following limits:

• Short positions in index derivatives cannot exceed the notional value of stocks held in cash.
• Long positions in index derivatives shall not exceed the notional value cash held, government securities, T-Bills.
• Additional position limits besides the first 2 will be Rs 500 crore in equity index futures and equity index options contracts, respectively.
• If the limits are exceeded, an additional deposit and margins shall be payable.
  

Flexing Of Dynamic Price Bands For F&O Stocks

Stocks in the F&O segment are subject to dynamic price bands. One of the conditions followed by stock exchanges for relaxing the price band is that a minimum of 25 trades should be executed with five different unique client codes on each side of the trade at or above 9.9 percent and so on. In addition to the existing requirements, the dynamic price bands may be flexed only after a cooling-off period of 15 minutes from the time of meeting the existing criteria specified by stock exchanges.

It’s a welcome step but most of the damage has been done, said Chandan Taparia of Motilal Oswal. The reduction in MWPL limit and change in participants position limit in index derivatives to reduce the short-selling could help the market to get stability but major relief will come only if there is stability in global markets coupled with reduced selling cash segment by foreign investors, he said.