Eligibility Criteria for selection of Securities and Indices
The eligibility of a stock / index for trading in Derivatives segment is based upon the criteria laid down by SEBI through the various circulars issued from time to time. Based on SEBI guidelines and as a surveillance measure, following enhanced* criteria has been adopted by the Exchange for selecting stocks and indices on which Futures & Options contracts would be introduced.
New securities being introduced in the F&O segment are based on the eligibility criteria which take into consideration average daily market capitalization, average daily traded value, the market wide position limit in the security, the quarter sigma values, the Average daily deliverable value and as approved by SEBI. The average daily market capitalisation and the average daily traded value would be computed on the 16th of each month, on a rolling basis, to arrive at the list of top 500 securities. Similarly, the quarter sigma order size, considering the order book snapshots of securities in the previous six months and average daily deliverable value of a stock, on a rolling basis in the previous six months, would be calculated on the 16th of each month. Further, the market wide position limit (number of shares) shall be valued taking the closing prices of stocks in the underlying cash market on the date of expiry of contract for the previous month.
Futures & Options contracts may be introduced on new securities which meet the below mentioned eligibility criteria, subject to approval by SEBI.
- The stock shall be chosen from amongst the top 500 stocks in terms of average daily market capitalisation and average daily traded value in the previous six months on a rolling basis.
- The stock's median quarter-sigma order size over the last six months shall be not less than Rs. 25 lakhs. 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 crores on a rolling basis. The market wide position limit (number of shares) shall be valued taking the closing prices of stocks in the underlying cash market on the date of expiry of contract in the month. The market wide position limit of open position (in terms of the number of underlying stock) on futures and option contracts on a particular underlying stock shall be 20% of the number of shares held by non-promoters in the relevant underlying security i.e. free-float holding.
- The Average daily delivery value in cash market shall not be less than Rs.10 crores in the previous six months on a rolling basis. The Average Daily Deliverable Value shall be computed taking Deliverable quantity as per client level as computed by NSE Clearing Limited on a daily basis and close price of the trade date.
- All the existing F&O stocks based on the criteria mentioned in SEBI circular number SEBI/HO/MRD/DOPI/CIR/P/2018/161 dated December 31, 2018 are moved to physical settlement in a phased manner. The stock wise details are being provided in NSE circular no NSE/FAOP/39873 dated January 04,2019.
- If an existing security fails to meet aforesaid continued eligibility criteria for three months consecutively, then no fresh month contract shall be issued on that security. However, the existing unexpired contracts may be permitted to trade till expiry and new strikes may also be introduced in the existing contract months.
- Further, the members may also refer to circular no. NSCC/F&O/C&S/365 dated August 26, 2004, issued by NSE Clearing regarding Market Wide Position Limit, wherein it is clarified that a stock which has remained subject to a ban on new position for a significant part of the month consistently for three months, shall be phased out from trading in the F&O segment.
The number of eligible securities may vary from month to month depending upon the changes in average daily market capitalisation, average daily traded value, quarter sigma order sizes and average daily deliverable value calculated every month on a rolling basis for the past six months and also the market wide position limit in that security.
Re-introduction of excluded stocks
A stock which is excluded from derivatives trading may become eligible once again. In such instances, the stock is required to fulfill the enhanced eligibility criteria for six consecutive months to be re-introduced for derivatives trading.
The futures & options contracts on an index can be introduced only if the stocks contributing to 80% weightage of the index are individually eligible for derivative trading. However, no single ineligible stocks in the index shall have a weightage of more than 5% in the index. The above criteria is applied every month, if the index fails to meet the eligibility criteria for three months consecutively, then no fresh month contract shall be issued on that index, However, the existing unexpired contacts shall be permitted to trade till expiry and new strikes may also be introduced in the existing contracts.
Framework for continued eligibility of Index derivatives
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 National Stock Exchange of India for the purpose of product success framework is Nifty 50 Index
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 INR 10 crore during the review period, and
- Average daily open interest of INR 4 crore during the review period
Surrogate / Pseudo index
An index in an exchange shall have only one pseudo/surrogate index per exchange.
- 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.
- 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.
The following procedure is adopted for calculating the Quarter Sigma Order Size:
- The applicable VAR (Value at Risk) is calculated for each security based on the J.R. Varma Committee guidelines. (The formula suggested by J. R. Varma for computation of VAR for margin calculation is statistically known as 'Exponentially weighted moving average (EWMA)' method. In comparison to the traditional method, EWMA has the advantage of giving more weight to the recent price movements and less weight to the historical price movements.)
- Such computed VAR is a value (like 0.03), which is also called standard deviation or Sigma. (The meaning of this figure is that the security has the probability to move 3% to the lower side or 3% to the upper side on the next trading day from the current closing price of the security).
- Such arrived at standard deviation (one sigma), is multiplied by 0.25 to arrive at the quarter sigma. (For example, if one sigma is 0.009, then quarter sigma is 0.009 * 0.25 = 0.00225)
- From the order snapshots (taken four times a day from NSE's Capital Market Segment order book) the average of best buy price and best sell price is computed which is called the average price.
- The quarter sigma is then multiplied with the average price to arrive at quarter sigma price. The following example explains the same:
Security XYZ Best Buy (in Rs.) 306.45 Best Sell (in Rs.) 306.90 Average Price 306.70 One Sigma 0.009 Quarter sigma 0.00225 Quarter sigma price (Rs.) (Average Price *Quarter sigma) 0.70
- Based on the order snapshot, the value of the order (order size in Rs.), which will move the price of the security by quarter sigma price in buy and sell side is computed. The value of such order size is called Quarter Sigma order size. (Based on the above example, it will be required to compute the value of the order (Rs.) to move the stock price to Rs. 306.00 in the buy side and Rs. 307.40 on the sell side. That is Buy side = average price – quarter sigma price and Sell side = average price + quarter sigma price). Such an exercise is carried out for four order snapshots per day for all stocks for the previous six months period.
- From the above determined quarter sigma order size (Rs.) for each order book snap shot for each security, the median of the order sizes (Rs.) for buy side and sell side separately, are computed for all the order snapshots taken together for the last six months.
- The average of the median order sizes for buy and sell side are taken as the median quarter sigma order size for the security.
Vide its circular no. SEBI/DNPD/Cir-34/2008 dated January 11, 2008 SEBI has specifically permitted introduction of option contracts with longer tenure on Nifty 50 index.
* As per SEBI circular no. SEBI/HO/MRD/DP/CIR/P/2018/67 dated April 11, 2018
* As per SEBI circular no. SEBI/HO/MRD/DOPI/CIR/P/2018/161 dated December 31, 2018