On 20 March 2020, SEBI issued a press release taking note of the continued volatility in Indian and global stock markets and observed that significant market movements had not yet disrupted settlement cycles in India. SEBI announced a slew of measures which came into effect at the start of trading on 23 March 2020 for a period of 1 month (subject to review at the end of this period).
These changes include revision of market wide position limits for stocks in the futures and options segment, increase in margin for stocks in the futures and options segment, increase in cash market margins for stocks which are not futures/options, revised position limits for equity index derivatives, and flexing of dynamic price bands for futures and options stocks.
- Revision of Market Wide Position Limit (MWPL)[1]:
For futures and options stocks (“F&O Stocks”) whose:
(a) average Daily Price High Low variation percentage[2] (during last 5 trading days) was more than or equal to 15%; or,
(b) whose average MWPL utilization percentage (during last 5 trading days) was more than or equal to 40%,
MWPL may be revised to 50% of the existing levels. This re-calculated MWPL shall be used to impose ban periods on fresh positions and not to determined enhanced eligibility criteria for derivative stocks.
If MWPL utilization for any security crosses 95%, derivative contracts will enter a ban period and further trading will be allowed only to decrease positions through offsetting positions[3].
Stock exchanges and clearing corporations have been instructed to put monitoring mechanisms in place and to conduct checks on an intra-day basis. Violations will result in penalties that will range from an amount 10 times higher than the current minimum penalty up to an amount 5 times higher than the current maximum penalty.
- Increase in margin rate in Cash Market:
For the stocks mentioned in (1) above, the margin to be maintained in the Cash Market will be increased in a phased manner: 20% (as on 23.03.2020); 30% (from 26.03.2020); and 40% (from 30.03.2020). These will apply for 1 month.
- Revised position limits in equity index derivatives:
Mutual Funds, foreign portfolio investors, proprietary trading members and clients shall be subject to the following limits in equity index derivatives:
(a) Short position[4] shall not exceed the notional value of their holding of stocks; and
(b) Long position[5] shall not exceed their holding of treasure bills, cash, government securities and similar instruments.
Additionally, equity index futures contracts and equity index options contracts shall each be capped at INR 500 crores.
Breach of these conditions will require an additional deposit that is twice the margin amount (chargeable on the excess) and stock exchanges and clearing houses shall retain such deposits for 3 months. However, positions that existed prior to the circulars issued by stock exchanges and clearing houses were permitted to continue till their expiry.
This position applies to institutional and proprietary trading members for 1 month from 23 March 2020. For all others, it applies on and from 27 March 2020.
- Flexing of dynamic price bands for F&O stocks:
As on date of this press release, F&O stocks are subject to a dynamic price band which relaxes based on certain specified market movement in either direction. For instance, if at least 25 trades occurred involving no less than 5 unique client codes (UCC) on each side of the trade, where each trade is at or above 9.9% of the base price.
To prevent premature relaxation of price bands, SEBI has now imposed a 15-minute cooling off period. After the relevant F&O stock satisfies any requirement specified by a stock exchange to qualify for a relaxation of the price band, no relaxation can occur until the expiry of a mandatory 15-minute cooling-off period.
These measures were taken by SEBI to prevent market distortion. For instance, after the implementation of this press release, speculative short selling has become much harder, given that the changed margin requirements make it expensive, there is now a limit of number of shares that can be traded in the derivatives segment, and there is a sharp increase in penalty for violation of these revised norms.
SEBI’s timely actions, both in easing the compliance burden on listed entities and in acting swiftly to stem the tide of market volatility are laudable and, one expects, will improve our market resilience.
[1] A market-wide position limit is defined, with respect to a specific underlying stock, as the maximum number of open positions allowed across all futures and options contracts of that stock.
[2] This is the percentage of the difference between the highest and lowest trading values of a particular stock on any given trading day.
[3] i.e. the taking of an equivalent but opposite position to reduce the net position to zero.
[4] In layman terms, this is the sale of a stock the investor does not own in the belief that she will buy it in future – this is based on the assumption that the price of the stock is expected to fall in future, therefore they expect to make a profit by selling the stock at a higher price now and buying it a lower price later.
[5] In layman terms, this is the purchase of a security in the hope that it will increase in value.
