Description

SEBI circular implementing prudential norms for derivatives on non-benchmark indices including BANKNIFTY, BANKEX, and FINNIFTY with phased compliance approach.

Summary

SEBI implements eligibility criteria for derivatives on existing Non-Benchmark Indices (NBIs) through constituent and weight adjustments. BANKEX (BSE) and FINNIFTY (NSE) will comply in single tranche, while BANKNIFTY (NSE) will implement changes in four monthly tranches to ensure orderly rebalancing of tracking AUM. This follows SEBI circular SEBI/HO/MRD/TPD-1/P/CIR/2025/79 dated May 29, 2025.

Key Points

  • Minimum 14 constituents required for NBIs with derivatives
  • Top constituent weight capped at 20%
  • Combined weight of top 3 constituents limited to 45%
  • Descending weight structure mandatory for all constituents
  • BANKEX and FINNIFTY: single tranche implementation
  • BANKNIFTY: phased implementation over 4 monthly tranches
  • Stock exchanges must adjust existing indices rather than create separate indices
  • Decision based on public consultation from August 18, 2025 and SMAC recommendations

Regulatory Changes

Prudential Norms for Non-Benchmark Index Derivatives:

  • Clause 5.7.1.1: Minimum 14 constituents
  • Clause 5.7.1.2: Top constituent weight ≤ 20%
  • Clause 5.7.1.3: Top 3 constituents combined weight ≤ 45%
  • Clause 5.7.1.4: Descending weight structure required

Implementation Approach:

  • Compliance achieved through constituent/weight adjustments in existing indices
  • No separate index creation required
  • Differentiated implementation timeline based on index size and AUM impact

Compliance Requirements

For Stock Exchanges:

  • NSE: Implement constituent/weight adjustments for BANKNIFTY (4 tranches) and FINNIFTY (single tranche)
  • BSE: Implement constituent/weight adjustments for BANKEX (single tranche)
  • Submit proposals for NBIs with derivatives contracts to SEBI

BANKNIFTY Phased Implementation (4 Monthly Tranches):

  • Tranche 1: Add new constituents; begin weight reduction of top 3 constituents
  • Weight adjustment calculation: Excess weight divided equally over remaining tranches
  • Re-evaluation of weights at beginning of each tranche to account for inter-tranche price movements
  • Example: If Rank 1 constituent at 28% with target 20%, reduce by 2% per tranche (8%÷4)

FINNIFTY and BANKEX:

  • Single tranche implementation of all constituent/weight adjustments

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
  • Implementation timeline: To be announced by respective stock exchanges (phased for BANKNIFTY, single tranche for FINNIFTY and BANKEX)

Impact Assessment

Market Impact:

  • Affects passive funds and ETFs tracking BANKNIFTY, FINNIFTY, and BANKEX
  • Derivatives contracts on these indices will experience rebalancing effects
  • Four-tranche approach for BANKNIFTY minimizes market disruption given larger AUM tracking the index
  • Single tranche approach for BANKEX and FINNIFTY indicates smaller relative AUM impact

Operational Impact:

  • Index providers must recalculate constituent weights and potentially add/remove stocks
  • Passive fund managers need to rebalance portfolios aligned with index changes
  • Derivatives market makers and arbitrageurs must adjust positions
  • Inter-tranche price movements require weight re-evaluation before each subsequent tranche

Structural Impact:

  • Reduces concentration risk in index derivatives
  • Promotes broader market participation through increased minimum constituents
  • Ensures more balanced weight distribution preventing excessive dominance by few stocks
  • Descending weight structure provides clear hierarchy and prevents concentration anomalies

Impact Justification

Major structural changes to three key derivative indices (BANKNIFTY, FINNIFTY, BANKEX) affecting passive funds, derivatives contracts, and index tracking strategies with phased implementation.