InvestorQ : What types of indices are eligible for inclusion in F&O and who decides them?
Lavanya Subramanian made post

What types of indices are eligible for inclusion in F&O and who decides them?

user profile image
2 years ago

The futures & options contracts on an index can be introduced only if the stocks contributing to 80% weightage of the index are individually eligible for derivative trading. However, no single ineligible stocks in the index shall have a weightage of more than 5% in the index. The above criteria is applied every month, if the index fails to meet the eligibility criteria for three months consecutively, then no fresh month contract shall be issued on that index, However, the existing unexpired contacts shall be permitted to trade till expiry and new strikes may also be introduced in the existing contracts.

The product success framework shall be applicable to all index derivatives at the underlying level. The framework shall not be applicable to flagship index of the exchange. The flagship index for National Stock Exchange of India for the purpose of product success framework is Nifty 50 Index

The criteria for evaluation of the index derivatives are as follows:

15% of trading members active in all index derivatives or 20 trading members whichever is lower should have traded in any derivative contract on the index being reviewed in each of the month during the review period,

Trading on a minimum of 75% of the trading days during the review period,

Average daily turnover of at least INR 10 crore during the review period, and

Average daily open interest of INR 4 crore during the review period

Each of the above criteria shall be satisfied for continuation of the derivatives on the given index. If any index fails to satisfy any of the above mentioned criteria, then no fresh contracts shall be issued on that index. However, the existing unexpired contracts may be permitted to trade till expiry and new strikes may also be introduced in the existing contracts.

Surrogate / Pseudo index

However, even if an index does not fulfil all the criteria during a review, the Exchange may not discontinue derivatives on that index provided there is a surrogate/pseudo index in another exchange(s), which continue to meet the evaluation criteria on the respective exchange. The index under review must have been surrogate/pseudo to another index on the date of review and must have remained as such for the major duration of the review period.

For this purpose, an index may be considered to be surrogate/pseudo of another index, if all the following conditions are met:

The number of constituents is equal in both the indices. If not, then the number of constituents in the smaller index (index with smaller number of constituents) is not less than 80% of the number of constituents in the larger index,

At least 50% of the constituent stocks in the larger index are also part of the smaller index, and

The correlation between the two indices is at least 0.90 for the previous 6 months on a rolling basis.

An index in an exchange shall have only one pseudo/surrogate index per exchange.

All index derivatives would be reviewed semi-annually in the first week of April and October based on the data for the preceding six months i.e. period of review would be October to March for the April review and April to September for the October review.

Only those index derivatives which have completed at least 21 months from the launch month would be liable for review.

Once an index is excluded from the derivatives list, it shall not be considered for re-inclusion for a period of at least six months. Exchanges may consider re-launching derivative contracts on the same index after carrying out suitable modification(s) in contract specifications based on market feedback, after a cooling off period of at least six months, subject to SEBI approval.