SEBI/HO/MRD/MRD - PoD - 2/P/CIR/2024/116

1 · Background

1 · 1.Derivative markets enhance price discovery and market liquidity. However, without sufficient depth in the underlying cash market, sufficient volumes in derivatives markets, and appropriate position limits around leveraged derivatives, there can be higher risks of market manipulation, increased volatility, and compromised investor protection.

1 · 2.To help develop the securities market while being mindful of these concerns, SEBI vide section 3.1.2 of Chapter 5 of Master Circular on Stock Exchanges and Clearing Corporations, dated October 16, 2023 , has, inter-alia, laid down the eligibility criteria for entry/exit of stocks in derivatives segment.

1 · 3.Given the need to ensure that only high quality stocks with sufficient market depth are allowed to trade in derivatives segment and considering the growth witnessed in market parameters since the last review conducted in 2018, the eligibility criteria for entry/exit of stocks in derivatives segment has been revised as under .

2 · Entry Norms for stocks in derivatives segment

2 · 1.The stocks meeting the below stated eligibility criteria, based on performance of the underlying cash market, for a continuous period of six months, on a rolling basis, based on the data for previous 6 months, shall be eligible for entry into the derivatives segment.

2 · 2.Stocks which meet the eligibility criteria in the underlying cash market of any stock exchange would be permitted to trade in equity derivatives segment of all stock exchanges. The stock exchanges shall settle the derivative contracts at a price

2 · 3.In addition, other aspects , such as , any surveillance concerns, ongoing investigations, or other administrative considerations shall be taken into account by SEBI, while considering a stock for introduction into derivatives segment.

3 · Exit norms based on performance in underlying cash market

3 · 1.If a stock in derivatives segment fails to meet any of the above criteria, as mentioned at Table -1 above, for a continuous period of three months, on a rolling basis, based on the data for previous six months, then it shall exit from derivatives segment. No new contract shall be issued on stocks that may exit the derivatives segment. However, the existing unexpired contracts may be permitted to trade till expiry and new strikes may also be introduced in the existing contract months.

3 · 2.The abovementioned criteria for exit shall apply to only those stocks which have completed at-least 6 months from the date of introduction. After the said gestation period, the stocks failing to meet the eligibility criteria as stated at Table-1 above, shall exit from derivatives segment in the upcoming review cycle .

3 · 3.Additionally, for existing stocks in the derivatives segment, there would be a gestation period of 3 months before applicability of the said exit criteria. At the end of the gestation period, stocks not meeting the eligibility criteria, as stated at Table1 above, shall exit the derivatives segment in the upcoming review cycle .

3 · 4.A stock will exit from derivatives segment if it fails in meeting eligibility criteria across all exchanges based on performance in the underlying cash market. If a stock is

3 · 5.Once a stock is excluded from the derivatives segment, it shall not be considered for re-inclusion for a period of one year from its last trading day in the derivatives segment .

4 · Exit norms based on introduction of a Product Success Framework (PSF) for stock derivatives

4 · 1.On similar lines as the extant PSF for index derivatives, it has been decided to introduce additional exit criteria for stocks from the derivatives segment , by introducing PSF for single stock derivatives also. The criteria for the said PSF framework is as follows.

4 · 1.1. At least 15% of trading members active in all stock derivatives (trading member who has traded during the month) or 200 trading members, whichever is lower, shall have traded in any derivative contract on the stock being reviewed on an average on monthly basis during the review period,

4 · 1.2. Trading on a minimum of 75% of the trading days during the review period,

4 · 1.3. Average daily turnover (futures + options premium) of at least INR 75 crores during the review period, and

4 · 1.4. Average daily notional open interest (futures + options notional) of at least INR 500 crores during the review period.

4 · 2.Each of the above criteria shall be satisfied for continuation of the derivatives on the given stock. If any stock fails to satisfy any of the above mentioned criteria for a continuous period of three months, on a rolling basis, based on the data for previous six months, then no fresh contracts shall be issued on that stock. However, the

4 · 3.Further, only those stock derivatives which have completed at least 6 months from the date of introduction shall be considered for review in the upcoming review cycle . After the said gestation period, the stocks failing to meet the eligibility criteria as stated at para 4.1. above, for three subsequent months, shall exit from derivatives segment.

4 · 4.For existing stocks, the PSF shall apply after six months from the date of implementation of this circular. At the end of the gestation period, stocks not meeting the PSF criteria as stated at para 4.1. above, shall exit the derivatives segment in the upcoming review cycle .

4 · 5.Once a stock is excluded from the derivatives segment due to PSF, it shall not be considered for re -inclusion for a period of one year from its last trading day in the derivatives segment .

4 · 6.The PSF review cycle shall be aligned with the review of entry and exit norms based on performance in underlying cash market i.e. all the above criteria for PSF shall be calculated on the 15th of each month, on a rolling basis, considering the data for previous six months.

4 · 7.A stock will exit from derivatives segment if it fails to meet the PSF criteria on all the exchanges. If a stock is meeting the PSF criteria on any exchange , it will continue to be eligible for derivatives segment on all exchanges.

5 · 1.Exit norm based on performance of the underlying

5 · 2.Exit norm based on Product Success Framework

7 · 1.Make amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision, as may be applicable/necessary;

7 · 2.Carry out system changes, if any, to implement the above;

7 · 3.Disseminate the provisions of this circular on their website;

7 · 4.Communicate to SEBI, the status of implementation of provisions of this circular.