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Sebi proposes circuit filters for F&O segment to curb price volatility

Staff reporter, New Delhi
12/02/2019   0 Comments

The Securities and Exchange Board of India has proposed price bands for all futures & options (F&O) stocks, seeking to curb excessive price volatility in equity scrips that have derivative instruments available for trading. The capital-markets regulator said an examination of the price movements of F&O stocks in the past six months showed that 40 scrips witnessed intra-day movement of more than 20%: Of this, 29 scrips saw intra-day movements between 20% and 30%. It further said that five stocks moved between 30% and 40% and six more than 40%. 

"Concerns have been raised that investor wealth is getting wiped out in a single day by recent falls in stocks for which derivative products are available, as no price bands or circuit filters are applicable on them,” SEBI said Monday in a discussion paper. “In view of the recent abnormal intra-day price movements, suggestions are being made to review the rules to prevent such extraordinary price movements." The regulator, which has proposed three solutions, would garner stakeholder views on the subject until Feb. 20. 

The first seeks to put in place individual, stock-wise price bands of 20% either way, including scrips on which derivatives are available under the compulsory rolling settlement. SEBI said the benefit of imposing price bands on such scrips is that the move may help arrest abnormal movements beyond a certain limit. It may also afford some opportunity to listed companies and their promoters to assess the movement of the stock, and enable them to make market announcements that may restore the price to a normal range. 

The challenge of implementing this proposal is that at present only those stocks satisfying the enhanced eligibility criteria are being permitted in the derivatives segment. Imposition of price bands on such stocks could potentially hamper fair price discovery and liquidity. The second option the regulator has proposed is a combination of the dynamic and fixed price bands, or a call auction mechanism. 

The current framework for dynamic price band may be allowed to continue with the initial threshold set by the stock exchanges. This framework would be available up to a threshold. Upon reaching a threshold of 30% intra-day movement, either a fixed price ban on the stock may be imposed or a call auction be conducted for a fixed duration. Imposing a fixed price band would arrest drastic movements in the price of the stock beyond a certain limit, while introducing the call auction may ensure wider participation from investors. The third course of action suggests no changes to the existing framework. 

"While the underlying cash market stocks could continue to have circuit filters, it would not be appropriate to impose any such filters in the F&O segment,” said Alok Churiwala, managing director, Churiwala Securities. “As long as there are proper margin and risk management systems in place, there is no need for such additional curbs."

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