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An in-depth analysis of SEBI circulars regarding price bands and circuit filters for F&O securities. It covers the background, recent measures, benefits, and options for strengthening fair price discovery. The document also invites public comments on the proposed options.
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Discussion Paper on Applicability of Individual Scrip wise Price Bands/ Circuit Filters on F&O scrips
A. Background
(a) Stocks on which derivatives products are available, (b) Stocks included in indices on which derivatives products are available, (c) Index futures, (d) Stock futures.
The dynamic price bands are to be relaxed by the stock exchanges in increments of 5%, in the event of a market trend in either direction. Stock exchanges were also directed to frame suitable rules with mutual consultation for such relaxation of dynamic price bands. The initial threshold set by the stock exchanges for flexing were “10 trades executed with multiple UCC on both sides of the trade at or above 7% or more of the base price and in further multiples of 5% of the price movement”.
consult and relax the dynamic price band with a 15 minutes notice to the market.
B. International Practices
C. Data Analysis
Benefits: Imposing price bands/ circuit filters on scrips on which derivatives products are available may arrest abnormal movement of the price of the scrip beyond a certain limit. It may also afford some opportunity to listed companies and its promoters to assess the movement of the stock price and enable them to make market announcement, if any, to address market sentiments, which may restore the price to its normalcy.
Concerns/ challenges: Presently, only those stocks which satisfy the enhanced eligibility criteria (which includes criterion for liquidity) are being permitted in derivatives segment. Imposition of price bands/ circuit filters on such stocks may hamper fair price discovery and liquidity. It may lead to mis-alignment between the price of underlying in cash segment and price of the derivative products. While the price movement of the underlying scrip in cash segment would be bound with the price band/ circuit filter, the price movement of the derivative products may go much beyond.
12.2.Option 2- Combination of Dynamic and Fixed price band/ circuit filter or call auction mechanism
The current framework for dynamic price band may be allowed to continue with the initial threshold set by the stock exchanges for flexing. This framework would be available upto a threshold (say 30% intraday movement in either direction).
Upon reaching such threshold, following options may be considered:
i. either a fixed price band/ circuit filter on the stock may be imposed. or ii. a call auction shall be conducted for a fixed duration as per criteria to be prescribed relating to minimum trades, volume, etc. The price discovered in such call auction may be considered for continuous market.
The perceived benefits and concerns/ challenges arising out of this proposal are as follows.
Benefits: Imposing fixed price bands/ circuit filters on scrips upon reaching certain threshold may arrest drastic movement of the price of the scrip beyond a certain limit.
Introducing call auction may ensure wider participation of investors thereby leading to better price discovery as compared to the current system of flexing of dynamic price bands which is based on limited number of trades and UCC.
Concerns/ challenges: Imposing fixed price bands/ circuit filters may have same concerns/ challenges as enumerated at Para 12.1 above. For a scrip which is also a constituent of an index, computation of the index may become a challenge during the period of the call auction on account of lack of availability of current market price of the scrip during the period.
12.3.Option 3- No change in existing framework
The present framework, including the recent measures to strengthen fair price discovery as enumerated at Para 11 above, may continue if considered as adequate to address the concerns arising out of significant price movements in scrips having presence in derivatives segment. In that case, no further measures may be required at this stage as the same may hamper free market and fair price discovery.
F. Public comments
Comments from public are invited on the proposed options given at Para 12 above in the following format:
Name of entity/ person Sl. No.
Reference Para of the discussion paper
Suggestions/ comments
Rationale
In view of the extraordinary price movements witnessed in recent times, there is a need to take a timely view in the matter. Accordingly, it is requested that comments should reach SEBI latest by February 20, 2019 by e-mail to manishkj@sebi.gov.in.