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Sebi finalises criteria for options

Priya Ganapati in Bombay

The technical group on derivatives met at Securities and Exchange Board of India headquarters on Friday to finalise the risk management systems for individual stock options and the eligibility criteria for stocks on which options can be introduced.

While the group did not decide on the actual stocks that would be traded as options, it has set a five-point restrictive criteria that stocks will have to fulfill before they could be considered for options trading.

As per the guidelines, the stocks to be considered for options trading must be in the top 200 by market capitalisation and trading volume.

In addition to this, five other restrictions have been imposed. These are:

• The stock should meet a continuous trading requirement and must be traded at least 90 per cent of the days.
• The non-promoter holding should be at least 30 per cent.
• The market capitalisation of the non-promoter holding must be at least Rs 7.5 billion.
• The average daily trading is at least Rs 50 million over the last six months.
• The maximum of the ratio of the stock Value-at-Risk (VaR) to the index Value-at-Risk should not exceed 4.

All these criteria would have to be fulfilled by stocks that want to be eligible for options trading. "Initially, we are having a very restrictive criteria but these will be reviewed after six months with a view to expand the universe of stocks that can be traded in options," said J R Varma, Sebi board member and the chairperson of the meeting.

According to Varma, Sebi's criteria is likely to be fulfilled by a maximum of 35 stocks. From this list, he estimates that exchanges will narrow it down to an initial list of about ten to fifteen stocks that will be initially introduced for options.

Sebi's decision will rule out the highly volatile IT and media stocks from being introduced in the options market. "The options values are highly sensitive to volatility. Even more than the risk to stock price, volatility can introduce more problems. So, we have decided to keep highly volatile stocks out," Varma said.

Though he clarified that not all IT stocks would be ruled out, a significant chunk of IT scrips is expected to not become eligible for options trading.

Bombay Stock Exchange and the National Stock Exchange -- the two exchanges that have been authorised to trade in options - will be submitting a list of stocks for options trading to Sebi for approval.

"One of the key considerations is the issue of market manipulation. So Sebi still reserves the right to make changes to the list that the exchanges will submit," Varma said.

The meet had representatives of BSE, NSE and market players like ICICI and JP Morgan Chase. The options trading is expected to start from July 2.

The issue of position limits was also taken up. Sebi has decreed that the market wide open interest in any individual stock be limited to 20 times the average trading volume in the cash market over the last one month. "If you have a very large position in the derivatives market, there is a risk that it could distort the prices in the cash market. So we have tried to limit all such possiblities," Varma explained.

The limits on brokers will remain the same as it is in the existing derivative markets. Initially, American options with cash settlement will be introduced and within six months, it would be replaced by physical settlement.

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