BSE Ltd stock tanks on Sebi proposal to tighten F&O rules. Are investors overreacting?

Subscribe to enjoy similar stories. BSE Ltd stock is down about 20% since closing at ₹5,609 on 24 February, owing to a new consultation paper from markets regulator Sebi later that day. The fear is clear: trading volumes may drop further if Sebi’s recommendations are implemented.

Still, the sharp fall in the stock suggests the Street may be overreacting. A deep dive into Sebi’s paper indicates that the actual impact of the recommendations could indeed be small. The consultation paper is divided into two parts.

The Street seems to be more concerned about the first part, or part A, which deals with index derivatives, a popular trading instrument. Currently, calculating open interest is based on notional value (the total monetary value of contracts), and Sebi recommends shifting to a delta-based future equivalent calculation. Also read: Dalmia Bharat has a lot of ground to cover to achieve a pan-India presence For most investors, there’s no need to grapple with terms such as ‘notional value’ and ‘delta based future equivalent open interest’.

All one needs to understand is the impact on the stock market's derivative volumes if the proposed norms – i.e. a net future equivalent limit of ₹500 crore for each entity – were in force in November. Sebi’s own study shows that in 89% of instances, it was within the limit in November.

This means the limit was exceeded in just 11% of instances, which means fears of the impact on trading volumes are exaggerated. So why is Sebi proposing the change? Because in the rare instance in which the notional value exceeds ₹10,000 crore, it could create systemic risk. The impact of part B is easier to understand.