Description

SEBI mandates eligibility criteria for derivatives on Non-Benchmark Indices including minimum constituents, weight caps, and phased implementation for BANKNIFTY, BANKEX, and FINNIFTY.

Summary

SEBI implements eligibility criteria for derivatives on existing Non-Benchmark Indices (NBIs) following SEBI circular SEBI/HO/MRD/TPD-1/P/CIR/2025/79 dated May 29, 2025. Stock exchanges must adjust constituents and weights in existing NBIs (BANKNIFTY, BANKEX, FINNIFTY) to comply with prudential norms. BANKNIFTY will implement changes in four monthly tranches, while BANKEX and FINNIFTY will adjust in a single tranche to ensure orderly rebalancing.

Key Points

  • Minimum of 14 constituents required for Non-Benchmark Indices with derivatives
  • Top constituent weight capped at ≤ 20%
  • Combined weight of top three constituents limited to ≤ 45%
  • All constituents must follow descending weight structure (lower-weighted constituents cannot exceed higher-weighted ones)
  • BANKEX (BSE) and FINNIFTY (NSE) will implement compliance in single tranche
  • BANKNIFTY (NSE) will implement compliance through four monthly tranches for orderly AUM rebalancing
  • Stock exchanges must undertake constituent/weight adjustments in existing indices rather than creating separate indices

Regulatory Changes

Prudential Norms for Non-Benchmark Indices:

  • Clause 5.7 of SEBI circular stipulates new eligibility criteria for derivatives on NBIs
  • Criteria apply in addition to existing requirements in Clause 1.1.2 of Chapter 5 of SEBI Master Circular for Stock Exchanges and Clearing Corporations dated December 30, 2024
  • Stock exchanges directed to submit NBI proposals to SEBI within 30 days of circular issuance

Implementation Approach:

  • Based on public consultation (August 18, 2025) and Secondary Market Advisory Committee (SMAC) recommendations
  • Compliance achieved through constituent/weight adjustments in existing indices rather than creating new indices
  • Decision made considering impact on passive funds tracking indices and existing derivatives contracts

Compliance Requirements

For Stock Exchanges:

  • Undertake necessary constituent/weight adjustments in existing NBIs to meet eligibility criteria
  • Ensure minimum 14 constituents in each NBI
  • Maintain top constituent weight at or below 20%
  • Keep combined top three constituents’ weight at or below 45%
  • Implement descending weight structure across all constituents

Implementation Schedule:

  1. BANKEX (BSE) and FINNIFTY (NSE): Single tranche adjustment

  2. BANKNIFTY (NSE): Phased implementation over four monthly tranches:

    • Tranche 1: Add new constituents; begin weight adjustment for top 3 constituents
    • Tranches 2-4: Continue progressive weight adjustments
    • Weight adjustment methodology: If top constituent exceeds target, excess divided equally across remaining tranches
    • Example: If Rank 1 constituent is 28% (target 20%, excess 8%), reduce by 2% per tranche
    • Weights re-evaluated at beginning of each tranche to account for inter-tranche price movements

Important Dates

  • May 29, 2025: Original SEBI circular issued (SEBI/HO/MRD/TPD-1/P/CIR/2025/79)
  • August 18, 2025: Public consultation conducted
  • October 30, 2025: Implementation circular issued
  • BANKNIFTY implementation: Four monthly tranches (specific dates to be announced by NSE)
  • BANKEX and FINNIFTY: Single tranche implementation (dates to be announced by respective exchanges)

Impact Assessment

Market Impact:

  • Affects derivatives trading on three major indices: BANKNIFTY, BANKEX, and FINNIFTY
  • Changes will impact index composition and constituent weights
  • Phased approach for BANKNIFTY aims to minimize market disruption given large AUM tracking the index

Passive Funds Impact:

  • Funds tracking these indices will need to rebalance portfolios according to new constituent/weight structures
  • Four-tranche approach for BANKNIFTY provides time for orderly portfolio adjustments
  • Single tranche for BANKEX and FINNIFTY requires faster adjustment

Derivatives Contracts Impact:

  • Existing derivatives contracts will be affected by index rebalancing
  • Weight adjustments may impact hedging strategies and positions
  • Progressive implementation reduces sudden volatility in derivatives pricing

Operational Impact:

  • Stock exchanges must implement rebalancing mechanisms
  • Market participants need to monitor tranche-wise adjustments for BANKNIFTY
  • Enhanced transparency through weight re-evaluation at each tranche accounting for price movements

Impact Justification

Major regulatory change affecting derivatives trading on key indices BANKNIFTY, BANKEX, and FINNIFTY with phased implementation requiring constituent and weight adjustments that will impact passive funds and derivatives contracts