sebi

Copy Page

Published on 9 April 2025

SEBI's New Circular: Enhancing Dynamic Price Bands for Derivatives

Introduction

On May 24, 2024, the Securities and Exchange Board of India (SEBI) released a circular (SEBI/HO/MRD/TPD-1/P/CIR/2024/58) aimed at improving the dynamic price bands for scrips in the derivatives segment. This circular is intended to enhance market stability by managing volatility, mitigating risks from abrupt price changes, and reducing information asymmetry.

Current Mechanism and Its Shortcomings

Dynamic price bands, or operating ranges, are set by stock exchanges for derivatives to regulate price volatility. According to the SEBI Master Circular dated October 16, 2023, the start-of-the-day price band is established at 10% of the previous day's closing price. These bands can be adjusted by increments of 5% throughout the trading day, contingent upon certain criteria, including a specified minimum number of trades and unique client codes (UCCs) on both sides of the trade.

Key Enhancements in the Circular

1. Enhanced Conditions for Flexing Price Bands

The criteria for adjusting price bands have been tightened to prevent erratic market behaviors. Key changes include:

  • Increasing the number of trades required to flex price bands from 25 to 50.
  • Raising the number of unique UCCs from 5 to 10.
  • Implementing a requirement for 3 trading members on each side of the trade.

These modifications are designed to ensure that only substantial market movements can lead to alterations in price bands.

2. Alignment Between Underlying and Futures Contracts

Under the previous framework, if the price band for a scrip in the cash market was altered, the corresponding futures contracts were simultaneously adjusted. The new rule requires that when flexing conditions are satisfied for either cash market or current month futures contracts, all related scrips and their futures will be flexed after a cooling-off period. This change promotes uniformity across trading instruments.

3. Adjusted Cooling Off Period and Flexing Percentage

The cooling-off period, which was previously fixed at 15 minutes, will now vary based on the number of flexes. The schedule is as follows:

  • For the first two flexes, a 15-minute cooling-off period will be observed.
  • The next two will involve a 30-minute cooling-off period.
  • Any subsequent flexes will have a 60-minute cooling-off period.

The associated flexing percentages will decrease incrementally from 5% to 3%, then to 2%, as more flexes occur. This strategy aims to provide market participants with adequate time to respond to news, thus curbing extreme price volatility.

4. Sliding Price Bands

A novel sliding mechanism allows both upper and lower price bands to shift in response to price movements. For example, if the upper band is adjusted upwards due to pricing trends, the lower band will also rise correspondingly. This mechanism serves to limit the price band as the scrip price fluctuates, thereby enhancing volatility management.

5. Temporary Price Ceilings/Floors in Options Trading

Temporary price limits will be applied to options contracts during the cooling-off period, aligned with the current price movements of the underlying scrip. These limits are intended to stabilize the options market during high volatility, facilitating position management for traders until the price bands are adjusted.

Implementation Timeline and Responsibilities

The circular outlines a phased approach for implementation:

  • New conditions for flexing price bands (Para A) take effect on June 3, 2024.
  • Alignment of price bands between underlying and futures contracts (Para B) and adjustments to cooling-off periods and percentages (Para C) will be effective from August 19, 2024.
  • The sliding price band mechanism (Para D) and temporary price ceilings/floors in options trading (Para E) will commence on October 21, 2024.

Stock exchanges are mandated to create comprehensive Standard Operating Procedures (SOPs), upgrade their infrastructure, and inform market participants of these changes.

Conclusion

The enhancements introduced by SEBI regarding dynamic price bands for derivatives are designed to bolster market stability and protect investors. By instituting stricter flexing conditions, aligning price bands across markets, adjusting cooling-off periods and flexing percentages, and introducing sliding price bands and temporary limits in options trading, SEBI aims to manage volatility effectively and promote orderly market conduct. These changes demonstrate SEBI's dedication to advancing market infrastructure and safeguarding investor interests within a dynamic financial landscape.

Share: