Sebi floats consultation paper on prudential norms for derivatives on non-benchmark indices

Markets regulator Sebi on Monday issued a consultation paper on how to implement new eligibility norms for derivatives on non-benchmark indices. The paper follows a May 29 circular that mandated stricter prudential rules to ensure such indices remain broad-based and not overly concentrated.

As per the circular, non-benchmark indices with derivatives must have at least 14 constituents, with the top constituent’s weight capped at 20% and the combined weight of the top three limited to 45%. Weights must also follow a descending order across constituents.

Stock exchanges have been evaluating two options: Alternative A – Launch new indices that meet the criteria while continuing existing ones and Alternative B – Adjust the constituent structure and weights of existing indices.

BSE, which runs the Bankex index with 10 constituents and no ETF tracking, has preferred Alternative B, opting to adjust weights and constituents in one go.

NSE, on the other hand, has two affected indices — Nifty Bank (12 constituents, Rs 34,251 crore AUM in ETFs) and Nifty Financial Services (20 constituents, Rs 511 crore AUM).

After consulting with mutual funds and AMFI, NSE has also favored Alternative B, but recommended a phased glide-path approach to avoid disruptions, particularly given the large AUM in Nifty Bank ETFs.Under the proposed glide path, adjustments in constituent weights would be carried out in up to four monthly tranches, ensuring a staggered and orderly transition.

Sebi has now invited comments from stakeholders on whether adjusting existing indices is the right approach and on the modalities of such weight adjustments. The deadline for submitting comments is September 8 via Sebi’s online portal (link here) or through email.