SEBI announces measures to curb volatility in the markets

On Friday March 20, 2020, SEBI announced a slew of measures to curb volatility in the stock markets. Over the last one month, the volatility index (VIX) has gone up from around 18 to 70 levels. That resulted in the Nifty and Sensex crashing by 30% in the month of March. The slew of measures were announced to curb the rising volatility in stock markets. The new measures to curb volatility in the stock markets will be effective from the opening of trading on March 23, 2020. The volatility curbs essentially cover four areas.

• Revision of MWPL and Margins for F&O stocks
• Increase in Margins for non-F&O stocks
• Revised position limits for futures and options combined
• Tweaking of dynamic price bands for F&O stocks

The first of these items is the most elaborate change but let us look at the highlights of each of these changes in detail.

Revision of Market Wide Position Limits (MWPL)

MWPL is the open interest limit at which ban on fresh positions is imposed. After this point, only unwinding of existing positions is allowed. Here are some of the key changes proposed.

• MWPL is likely to be revised to 50% of current limits in case of stocks where High/Low variation in last 5 days is more than 15%.
• This decision to revise MWPL to 50% of existing limits could also be applied where the average MWPL utilization rate is more than 40% in last 5 trading days.
• Once the 95% MWPL limit is reached, fresh positions will be banned (like before). However, the penalties have been made more stringent (up to 10 times).
• Unlike in the past when the 95% MWPL limit would be opened up for fresh positions when it touches 80%, now it will only be allowed when it touches 50%.
• For the stocks meeting the above criteria, margins in the cash market will be increased in a phased manner:

                          Minimum 20% from March 23, 2020

                          Minimum 30% from March 26, 2020

                          Minimum 40% from March 30, 2020

• The proposed margins on cash markets will be applicable for 1 month.

Increase in margins for non-F&O stocks
In case of non-F&O stocks, cash market margins have also been increased proportionately. These new rates will be applicable for a period of 1 month and will specifically apply to stocks with a price band of 20% and witnessing an intraday High / Low variation of 10% for 3 days or more. The rates will be as under.

• Margins to be imposed at 30% effective from March 23, 2020
• Margins to be imposed at 40% effective from March 26, 2020
• Where intraday High / Low variation is more than 40%, the higher variation figure will be the margin

Position limits in case of index derivatives
Since foreign portfolio investors and mutual funds are significant players in the index F&O market, SEBI has also decided to specifically impose limits on the positions in index futures and options. This includes all indices like Nifty, Bank Nifty, and Nifty IT.

• Short positions in index derivatives shall be defined as (short futures + long puts + short calls). Long positions in index derivatives shall be (Long futures + long calls + short puts).
• The notional value of short positions cannot exceed the value of stocks held. Notional value of long positions cannot exceed the holding of cash, G-Secs, T-bills and near cash.
• In addition to the above, institutions and proprietary desks will have extra position limit of Rs500cr for index futures and Rs500cr for index options.
• Any position taken by the investors / traders exceeding the limit shall attract double the rates of extant margins payable on such positions
• These rules shall not apply to existing positions as of March 20, 2020. However, if any fresh position is taken then entire position comes under the new formula.

Tweaking dynamic price bands for F&O stocks
Currently, F&O stocks are subjected to dynamic price bands, which are gradually relaxed based on the price movement in either direction. The existing rule of tweaking the band when 25 trades are executed under 5 UCC codes shall continue.  However, as per the new rule, the dynamic price bands shall be flexed only after a cooling period of 15 minutes from the time the criteria is met.

To sum it up, these restrictions are in sync with what is being undertaken across the world to reduce the amount of speculative activity in the market. It is hoped that the steeply higher margins should calm the markets (especially algos) in the short term. However, currently, these rules may actually apply only to 10-12% of the F&O list and to that extent the impact may be limited.