Market regulator unveils steps to counter volatility
nMUMBAI: In view of the stock market volatility due to the Covid-19 outbreak, Securities and Exchange Board of India (Sebi) on Friday decided to impose several measures to boost investor confidence. The regulator prescribed enhanced margins for highly volatile stocks and reduced market wide position limits for volatile scrips. The restrictions of positions and increased margins will kick-in from Monday, and remain in place for a month. Sebi will subsequently review the measures and initiate other measures depending on the market conditions.
However, Sebi did not ban short-selling, which is often cited as a key reason for volatility. Short-selling is the act of selling a stock that a seller does not own. Sebi did not take this step as data did not support its efficacy in curbing volatility.
But, Sebi decided to ban naked shorts to ensure that neither foreign investors nor domestic investors can short sell beyond the stocks they hold. Mint had first reported on March 17 that Sebi will enhance margins for volatile stocks, and they will continue to remain high till volatility reduces.
“In the recent past, the-worldover, the stock markets have been quite volatile owing to concerns relating to Covid-19 pandemic and the resultant fear of an economic slowdown. The movement in the Indian stock market has been broadly in tandem with the other global markets,” said Sebi in a press statement. It added that despite volatility there have been no disruptions in settlement of trades.
For stocks in the derivatives segment displaying price variation of more than 15%, over the past five trading sessions, Sebi limited the market wide position by half, or 50%, from what is currently allowed. If a trading member breaches the limits then the penalty will be five times of what is currently being imposed by the bourses, it added.
A market-wide position limit is the maximum number of open positions allowed across all derivatives contracts of the underlying stock. The marketwide position limit is typically 20% of the free float market capitalisation of a stock. So, new market-wide position limit will be capped at 10% of the market cap of a company.
For stocks in the cash market, which display volatility of 15% over five trading days, the margin will be increased to 40% in a phased manner—20% from March 23, 30% from March 26 and 40% from March 30.
Margins for scrips in the futures and options (F&O) segment will also be enhanced to 40% in a phased manner. This will be applicable for stocks which show intraday price movement of more than 10% for three days during a month.