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Sebi forms special control room, tweaks circuit limits to handle election impact

LiveMint logoLiveMint 12-05-2014 Anirudh Laskar

Mumbai: The capital markets regulator has set up a special control room to monitor trading as it prepares for possible volatility in the Indian stock markets after the release of exit polls on Monday evening and on Friday, when national election results will be declared.

The Securities and Exchange Board of India (Sebi) has also directed stock exchanges to recalibrate the dynamic price bands, also known as dummy filters, for stocks that trade in the derivatives segment. Two persons, including a Sebi official, confirmed Sebi’s latest steps put in place on Monday. They declined to be identified.

“The control room at Sebi is to monitor all market activities with additional care during the election time and a few days thereafter. The control room will be functional from Tuesday morning and may work at least till 19 May,” said the first person.

“Apart from ensuring smooth functioning of the market, the prime duty of the team in the control room will be to quickly alert other regulators, exchanges or clearing corporations in case any potential crisis situation is anticipated,” he said.

Sebi has also asked exchanges to conduct an assessment of their stress-absorbing capabilities with the amount of available resources, an exercise being termed as “reverse stress tests”. While market-wide circuit filters are in place and stocks in the cash market have circuit breakers, stocks in the derivatives segment do not have such trading restrictions. Circuit breakers are triggered when a stock rises or falls by a specified amount. In order to cap any risk emerging from this side of the market, Sebi has directed stock exchanges to tweak the dynamic price bands for stocks that are part of the derivatives segment.

The dynamic price bands prevent trades that are placed beyond the price limits set by the stock exchanges. The price bands are, however, relaxed by the stock exchanges when several trades are executed in either direction in smaller increments.

Under the present system, whenever such a stock moves by 7%, the dummy filter is relaxed to increase the price band to 15%. Subsequently, if the stock moves by 12%, the dummy filter is relaxed to 20% and so on. Sebi has now told exchanges that these filters will be relaxed only if the stock moves by 9.9%. The new norms will be applicable from 13 May.

“In the event of a market trend in either direction, the dynamic price bands may be relaxed during the day in co-ordination with the other exchange,” said circulars issued by both the BSE and the National Stock Exchange (NSE). “For the purpose of relaxing the dynamic price bands, the exchange will take into account that a minimum of 10 trades must be executed with multiple UCC (uniform client code) on both sides of the trade at or above 9.90% or more of the base price and in further multiples of 5% of the price movement,” added the circular. This will delay sharp movements in the stock, explained an exchange official, who declined to be identified.

“The idea is to make derivative-backed stocks a little conservative,” said the second person cited above.

“A lower or narrow price band hits the demand-supply balance thereby affecting price discovery,” said Jitendra Panda, managing director and chief executive of Peerless Securities Ltd. “I think the bands opening up at a higher level will take care of the demand-supply scenario. With the markets on a roll, a higher band will help in better price discovery,” he said.

On 23 April, Mint first reported that India’s financial regulators and stock exchanges have formed a special committee to ensure that sharp swings in financial markets on the day the results of the ongoing general elections come out (Friday, 16 May) do not cause any systemic or liquidity risks.

The Reserve Bank of India (RBI) and Sebi are jointly monitoring the country’s financial markets through special stress tests for equity, currency and bond markets even as the results come out. “Though people are anticipating the outcome of elections to be on a certain expected lines, as a regulator Sebi cannot rule out any possibility and that’s why this time Sebi is working on a proactive basis to ensure there is no liquidity or systemic risk in case of any surprises,” said the first person cited above.

In 2009, investors cheered the return to power of the UPA. On Monday, 18 May 2009, benchmark equity indices hit the upper circuit within 30 seconds of the market opening for the first time after the results were declared, and trading was halted for two hours.

The indices again hit the upper circuit within minutes of the markets re-opening, and trading was called off for the day.

The index-based market-wide circuit breaker system comes into effect in three stages, in either direction (up or down), at 10%, 15% and 20%.

These circuit breakers, when triggered, halt all trading in equity and equity derivative markets nationwide. Trading stops for 45 minutes if the benchmark index moves 10% either way before 1pm and for 15 minutes if it happens between 1pm and 2.30pm.

Trades are halted for 1 hour 45 minutes if the benchmark equity index moves 15% either way before 1pm, for 45 minutes if such a movement happens between 1pm and 2pm, and for the day if this happens after 2pm. If the benchmark index moves 20% either way at any time of the day, trading is halted for the entire day immediately.

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