F&O trade in sectoral indices gets nod

Regulator relaxes Eligibility norms for stocks

The Securities and Exchange Board of India (Sebi) has provided for trading in sectoral indices, and has relaxed the eligibility criteria for identifying stocks eligible for derivatives trading. The changes, notified today, will be effective September 1, 2004.

Till now, derivatives trading (futures and options) were available only on the Bombay Stock Exchange's Sensex and the National Stock Exchange's Nifty.

A Sebi notification today paves the way for derivatives trading in sectoral indices such as the BSE IT index, Bankex, BSE PSU index or the BSE consumer durables index.

The BSE has eight sectoral indices while the NSE has two sectoral indices, the NSE S&P CNX IT index and the CNX Bank Index.

Investors will, thus, will be able to take a call on a basket of stocks in a particular sector rather than be constrained to deal with the headline index or a few individual stocks.

But the Sebi notification says derivatives contracts on an index can be introduced only if 80 per cent of the index constituents are individually eligible for derivatives trading.

Further, in a move that will bring respite to the markets, Sebi has done away with the doubling of margins when the market-wide position limit in a stock reaches 80 per cent of the total exposure in the derivatives market.

Indeed, market sources had been demanding the relaxation as they are required to cough up twice as much margins whenever activity in a stock reaches the trigger point. This move will lead to stability in expectations and carry costs through the life of the contract, market sources added.

While maintaining that a stock has to be among the top 500 stocks in terms of average daily market capitalisation and average daily traded values in the previous six month on a rolling basis, Sebi has relaxed some other criteria, which could lead to the basket of eligible stocks being expanded.

For instance, the stock's median quarter-sigma order size has been reduced from the earlier Rs 5 lakh to Rs 1 lakh. Ashok Mittal, head of derivatives trading at SSKI Securities said that this would mean that more stocks will be eligible for trading in the derivatives segment.