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SEBI relaxes price bands, volatility margins - Views on News from Equitymaster
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  • Jan 15, 2000

    SEBI relaxes price bands, volatility margins

    The Securities Exchange Board of India (SEBI) constituted Inter-Exchange Market Surveillance Group (ISG) has relaxed the price bands as well as the volatility margins.

    The decisions taken by the ISG include:

    • Once a scrip touches the present price band of eight percent in either direction, a further relaxation of four percent would be allowed in that direction after half-an-hour.
    • The volatility margins would be applicable to volatility (six weekly high-low) above 60% instead of the earlier limit of 40%.
    • The rate of the margins have however, been increased. For instance for volatility over the six-monthly rolling period of more than 150%, the margin would be 30% instead of the present rate of 20%.
    • The exemption limit for the compulsory collection of the margins by the brokers from their clients has been raised from Rs 50,000 to Rs 100,000
    • The above changes in price bands systems and the margin system do not apply to rolling settlement system.

    SEBI actually needs to abolish the system of circuit filters since they tend to extend the price adjustment over a number of days rather than on a single day thus creating an inefficiency in the market. If a particular company’s prospects are perceived to improve or the scrip is undergoing a positive re-rating, an 8% circuit just prevents the full adjustment on a single day since no further buying can take place. Similarly an 8% freeze on the lower side just prevents a full adjustment the same day. If the adjustment has to continue it will anyway continue in the next trading session.

    For mutual funds the circuits can actually be quite harmful. Suppose a unit holder has redeemed his units. But a fund will not be able to sell the scrip that has hit the upper/lower price band. Thus the unit holder is redeeming at lower/higher net asset value than the actual net asset value.

    And the fact remains that there are no circuit filters in the developed markets. Further the level of 8% itself is a very arbitrary level on which again there is no consensus.

    Also the market regulator has been concerned about volatility in the exchanges. But the fact remains that volatility is a part of the stock market. The regulator just doesn’t have the disclosure norms and the mechanism in place to even detect insider trading which would make far more sense than artificial norms for volatility. This is not to argue against margins, but the fact they should not be based on volatility.



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