Sebi unveils measures to tackle market volatility, curbs short selling

The Securities and Exchange Board of India (Sebi) on Friday announced measures to control volatility in stocks. Curbs on short selling, a steep increase in margins, a 10-fold increase in penalties, and reducing the outstanding positions available for derivatives trading are some key changes the regulator announced.

Sebi has said the short positions in the derivatives market cannot exceed the value of the holdings of the underlying stocks or the collaterals provided by them. 

An additional position limit of Rs 500 crore will be available for the futures and options (F&O) segment.

Market players said the move was to discourage traders from aggressively building short positions.

“There is a practical short-selling cap at Rs 500 crore that has been levied. If people want to speculate beyond the prescribed limit of Rs 500 crore, they will need to put up twice the margin, which will be blocked for three months,” said Jimeet Modi, founder and chief executive officer, Samco Securities.

The market regulator and stock exchanges have been under pressure to rein in huge fluctuations in stocks, which were causing heartburn to long-term investors. 

The benchmark indices have dropped 12 per cent this week and 22 per cent so far this month.

Further, Sebi has halved the so-called market-wide position limit (MWPL) for highly volatile stocks — those that see an average daily variation of 15 per cent during the week. 

In recent weeks, many stocks in the futures and options (F&O) segment have seen fluctuations of up to 40 per cent daily. 

The MWPL, linked to the free-float market capitalisation of a stock, is the extent of positions that is allowed in the derivatives segment.

Experts say changes to the MWPL structure will reduce the number of contracts available for trading in the derivatives market. For instance, if positions worth Rs 1,000 crore were allowed in a particular stock, that will stand reduced to Rs 500 crore. This could lead to unwinding existing positions or otherwise traders will be levied heavy penalties.

Once 95 per cent of the MWPL is utilised for a stock, it enters a “ban period”, following which only offsetting existing positions are allowed until the limits get freed.

Sebi has asked for daily monitoring of new positions in the ban period. Further, it has hiked penalties by 10 times. The regulator has decided to increase the margin rate to 40 per cent in the cash segment in three phases. This would mean traders will have to cough up more to deal in securities. Sebi has also tweaked the formula for calculating price bands for F&O stocks.

“Taking note of the continued abnormally high volatility in the market, Sebi discussed with the stock exchanges, clearing corporations and depositories appropriate measures that may be taken in the existing circumstances,” the regulator said in the circular.  Samco Securities said about 12 per cent of the stocks in the derivative segment would be hit by the changes. Stocks like NCC, Indiabulls Housing, Adani Enterprises, Vodafone Idea, and YES Bank could go into “ban period”, it said.

The changes will take effect on Monday for one month. Sebi might decide to relax some of the measures, depending on the market situation a month down the line.

Sebi has said the robustness of the risk management frameworks has helped in the smooth functioning of the markets.

“On account of our existing robust risk management framework, despite significant movements in the market, there has not been any disruption in the settlement cycles,” Sebi said.

In recent weeks, many global markets have taken measures such as prohibiting short selling, while some have gone to the extent of shutting down the markets.