Synopsis
SEBI has proposed a new method for calculating open interest in the derivatives market to prevent stock manipulation and reduce trading restrictions. The shift to a 'Future Equivalent' method aims to provide a more accurate assessment of market risk.Key Takeaways
- SEBI proposes a 'Future Equivalent' method for open interest.
- Change aims to prevent unjust stock bans.
- New calculations will reflect actual market risk.
- MWPL adjustments will ease trading for small investors.
- Intraday checks for MWPL breaches to be implemented.
Mumbai, Feb 25 (NationPress) The Securities and Exchange Board of India (SEBI) has unveiled a significant update regarding the calculation of open interest (OI) within the equity derivatives sector.
In an official announcement, the regulatory body proposed transitioning to a ‘Future Equivalent’ approach, moving away from the current notional value-based method.
This modification is aimed at curbing instances of stocks being unjustly forced into the ban period as a result of manipulative practices.
SEBI clarified that the present notional value method aggregates the total worth of all futures and options contracts without accounting for the actual market risk involved.
This can occasionally cause a stock to appear as if it is experiencing heavy trading, leading to a ban even when the risk is minimal.
On the other hand, the proposed Future Equivalent method assesses open interest by considering the extent to which a contract fluctuates with the stock rather than its aggregate value.
This would provide a more precise representation of market risk, thereby reducing unnecessary trading restrictions.
The ban period in the derivatives market commences when the trading threshold for a stock is exceeded.
When this occurs, traders are limited to closing their existing positions and cannot initiate new positions in futures and options contracts for that particular stock.
SEBI anticipates that this adjustment in calculation will lessen the occurrence of stocks entering the ban period, facilitating smoother trading for small-scale investors.
Additionally, SEBI has proposed modifications to the market-wide position limits (MWPL), which dictate the maximum allowable trading for a stock.
At present, MWPL is fixed at 20 percent of a stock’s free-float market capitalization.
The regulatory authority is now recommending a revised formula where MWPL will be the lesser of 15 percent of free-float market capitalization or 60 times the average daily delivery value (ADDV) in the cash market.
According to SEBI’s examination of market data from July to September 2024, these amendments could drastically decrease the number of stocks entering the ban period.
During this timeframe, there were 366 instances of stocks being subjected to a ban. Under the newly proposed calculation method, this figure would plummet to just 27.
To enhance market surveillance, SEBI is also looking to implement intraday checks for MWPL breaches at least four random times during each trading session.
Currently, these breaches are only evaluated at the end of the trading day. The revised system will enable traders to respond more swiftly to market fluctuations and mitigate sudden risks.
