Sebi steps in to curb volatility, restricts wild F&O bets

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Sebi steps in to curb volatility, restricts wild F&O bets

Sebi has capped the bearish bets one can take without owning the underlying shares.

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MUMBAI: The Securities and Exchange Board of India (Sebi) has imposed curbs on trading in futures and options to curtail frenzied activity that has increased volatility amidst a near shut down of economic activity due to coronavirus.

The capital market regulator has capped the bearish bets that foreign investors, mutual funds and proprietary desks can take on index derivative contracts without owning the underlying shares.

Sebi has also made it expensive for these big-ticket investors to take bullish bets beyond a limit, while restricting trading in stock futures and options.

In a circular after trading on Friday evening, the regulator said foreign portfolio investors, mutual funds, proprietary desks and large traders cannot take short positions in index derivatives above a notional value of ₹500 crore without owning the underlying stocks. This means if a large trader wants to create a big bet that the Nifty or the Bank Nifty would fall, he can do so only for hedging his share portfolio. Brokers said many large foreign and local investors active in derivatives would fall into this ambit.

“The restrictions on index derivatives will make large traders more cautious about taking huge bets with systemic risk,” said Nithin Kamath, founder of Zerodha. “It need not stop large trading desks from taking short positions in index futures to hedge because many of them might already be owning underlying shares.”

The regulator has been under pressure from a section of market participants to ban traders from betting on market downsides, a practice popularly known as short-selling, following the 34% slump in the Nifty since February 19. Several countries in Europe and Asia have temporarily banned short-selling in various stocks.

Sebi has asked these mutual funds, FPIs, proprietary desks and large traders to deposit cash or liquid instruments like government bonds or treasury bills for incremental bullish bets on index futures and options above ₹500 crore. This means if a large trader wants to take long positions in Nifty or other index futures with notional value above ₹500 crore, he will not get the benefits of margins. For instance, if the notional value of the trade is ₹700 crore, the trader will have to cough up ₹200 crore in cash.

“If someone wants to speculate beyond prescribed limits of ₹500 crore, they will need to put up twice the margin which will be blocked for 3 months,” said Jimeet Modi, founder of Samco Securities. “This practically is like Additional Surveillance Measure (ASM) measure taken for stocks a couple of years ago.”

The move has created some confusion in the market.

“There are restrictions for large traders on both sides of the trade. But given the bearish environment that we are in, there is a section that is wildly speculating that the circular is aimed at restricting short-selling in a big way. That is far-fetched,” said the chief executive of a large brokerage. Sebi said the restrictions will not be applicable to existing positions in index derivatives. The measures would be effective from March 23 and would be in place for one month, it said.

Deepak Jasani, head-retail research of HDFC Securities said the limits on open positions for building short or long positions would be difficult to implement and track by brokers and exchanges on a real-time basis.

“Brokers on the safe side may restrict large fresh positions by large institutional and non-institutional players,” said Jasani. “Limits on creating long positions in index derivatives means that the up-move later may also be laboured.”

To cut excessive speculation in stock futures and options, Sebi has cut the market wide positions limits in these contracts to 50% in a phased manner. A market-wide position limit is the maximum outstanding positions allowed across all stock derivative contracts. At present, the market-wide position limit is 95%. The new restriction is also applicable to those stocks which hit the market limit of 40% or more in the previous five days. When a stock derivative contract hits this limit, he usually trades in it to cut his positions. If any trader wants to create a new position in a stock that is in the market-wide position limit, he will have to pay a penalty of 1% of the value of increased position or at least ₹5,000 per lot per day.

Brokers said the move will impact about 12% of the stock futures and options where volatility is high.

“There are very few stocks whose open interest has crossed the market wide limit of 40%,” said Kamath

Stocks like NCC, Indiabulls Housing, JSPL, Justdial, Adani Enterprises, Canara Bank, Yes Bank, PVR and Vodafone Idea would be the 11 stocks that would probably go into the ban period, said Modi.

For the stocks under 50% MWPL, Sebi has also increased the minimum margin requirement in the cash market to 20% from March 23, 30% from March 26 and 40% from March 30.

For stocks that are not part of F&O with price band of 20% and witnessed an intraday price movement of more than 10% for three or more days in past one month, the minimum margin has been increased in a phased manner. The new minimum margin would be 30% March 23, 40% from March 26. The new margin rates will be applicable for a period of one month, said the Sebi circular.

Source- Economic Times.