Introduction

It is common to see news headlines announcing the ban of some stocks in the F&O segment on the National Stock Exchange (NSE). But do you know the reasons for delisting and the criteria for listing stocks and indices in the F&O segment? Here’s what you need to know.

What are Futures & Options?

Futures and Options are two different types of derivatives. They are derivatives because their value is derived from the underlying assets.

The Security and Exchange Board of India (SEBI) sets and amends the criteria for including stocks and indices in the F&O segment. The prescribed criteria were last reviewed in 2018. Since market capitalization and turnover have increased considerably in the last five years, as of 2023, the regulator is planning to revisit the eligibility criteria for including stocks in the derivatives segment.

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Eligibility criteria for the inclusion of stocks

To include new securities in the F&O segment, they are evaluated based on the eligibility criteria, which consider average daily traded value, average daily market capitalisation, the quarter sigma values, the market-wide position limit in the security, and the average daily deliverable value.

The list of top 500 securities is prepared by computing the average daily market capitalization and the average daily traded value on a rolling basis on the 16th of every month. A stock's average daily deliverable value on a rolling basis for the past six months and the quarter sigma order value based on the order book snapshots of securities in the last six months are computed on the 16th of every month.

To calculate the market-wide position limit, the closing prices of stocks in the underlying cash market on the expiration date for the previous month are calculated.

The ones fulfilling the following criteria are included in the F&O segment, subject to SEBI’s approval.

• The selection of stocks should be from the list of the top 500 stocks based on the averages of daily market capitalisation and daily traded value in the past six months on a rolling basis.
• The market-wide position limit in the security should be Rs. 500 crores or more.
• A stock is included when the median quarter-sigma order size for the previous six months is over Rs. 25 lakhs.
• The average daily delivery value in the cash market should be more than Rs. 10 crores in the past six months on a rolling basis.

Each of the criteria above is to be fulfilled for six months continuously.

Eligibility criteria for the inclusion of indices

Index derivatives must fulfil the following criteria for inclusion in the F&O segment:

• The F&O segment includes indices only if 80% of its constituents are individually fit for derivative trading.
• But the weightage of not even one ineligible stock in the derivative should be over 5% in the index.
• The eligibility criteria are reviewed each month.
• Indices not fulfilling the three-month eligibility criteria do not get a new month contract. It is dropped from the segment.
• An existing contract yet to expire is available for trade till expiry. The existing F&O contracts can also have a new strike price.

Criteria for continued eligibility of index derivatives

• During the review period, active trading must occur on at least 75% of the trading days.
• The average daily turnover during the review period must be a minimum of Rs. 10 crore.
• The average daily open interest must be Rs. 4 crore during the review period.
• For every month of the review period, 20 trading members in all index derivatives or 15% of trading members, the lower of the two, should have executed a trade in any derivative contract.

Conclusion

Each year, the stock exchanges perform inclusion and exclusion exercises, adhering to SEBI rules. They also review eligibility criteria to keep investors protected. This review focuses on altering the benchmark liquidity levels for scrips to remove illiquid scrips from and retain highly liquid stocks in the F&O segment. The process of including and excluding scrips is used as an indicator to understand performance.

You can leverage the news of including or excluding stocks and indices in the F&O segment for portfolio optimization on Motilal Oswal.

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