Product Success Framework
Also written PSF · Product Success Framework (PSF)
SEBI's exit-eligibility test for index and stock derivatives, based on trading-member participation, trading frequency and turnover, applied after a 6-month gestation period.
In plain language
Not every futures or options contract an exchange launches stays worth keeping. SEBI wants a rule-based way to decide when a contract has failed to attract enough trading and should be retired.
The Product Success Framework (PSF) is that rule. It sets minimum thresholds for participation and turnover, and a contract that fails to clear them across a review period is exited from the derivatives segment.
How it works
Chapter 6, section 6.2.1, gives the criteria separately for stocks and indices, both checked only after a stock or index has completed at least 6 months from its introduction:
Stock derivatives — all of the following:
- At least 15% of trading members active in all stock derivatives, or 200 trading members, whichever is lower, must have traded the contract, on a monthly average, during the review period.
- Trading on a minimum of 75% of trading days during the review period.
- Average daily turnover (single-sided, futures + options premium) of at least Rs 75 crore.
- Average daily notional open interest (single-sided) of at least Rs 500 crore.
Index derivatives (applied to all index derivatives except an exchange's flagship index), at the underlying level:
- 15% of trading members active in all index derivatives, or 20 trading members, whichever is lower, trading the contract every month of the review period.
- Minimum 75% of trading days traded.
- Average daily turnover of at least Rs 10 crore.
- Average daily open interest of at least Rs 4 crore.
A stock or index that fails these across all criteria exits the derivatives segment in the next review cycle: no fresh-month contracts are issued, though existing unexpired contracts trade to expiry and new strikes may still be added. Once excluded, an index cannot be reconsidered for re-inclusion for at least 6 months.
A worked example
A recently listed mid-cap stock has been trading derivatives for 8 months — past the 6-month gestation period, so PSF now applies.
Over the review period, only 12% of active stock-derivative trading members traded it (below the 15% test), and its average daily turnover is Rs 60 crore — below the Rs 75 crore floor. Even if it clears the 75%-trading-days and open-interest tests, failing these two is enough: the stock exits the derivatives segment in the next review cycle. No fresh-month contracts are introduced, but any unexpired contract already trading continues to expiry.
Why NISM asks about it
Chapter 6, section 6.2.1, sets out the PSF criteria for stock derivatives in detail and cross-refers to the pre-existing PSF for index derivatives, giving both sets of thresholds. Expect a question naming the Rs 75 crore stock-derivative turnover floor or the Rs 10 crore index-derivative turnover floor, and the 6-month gestation and re-inclusion periods.
Common exam traps
- Stock and index PSF thresholds are different numbers — Rs 75 crore turnover for stocks versus Rs 10 crore for indices; do not swap them.
- The flagship index of an exchange is excluded from the index PSF test.
- PSF applies only after 6 months from introduction — a brand-new contract is not yet tested against it.
- Existing unexpired contracts keep trading to expiry even after a stock or index is excluded; only fresh-month contracts stop.
- Re-inclusion of an excluded index requires at least a 6-month wait.
Check yourself
1.A stock currently trading in the derivatives segment fails the continued eligibility criteria for three consecutive months. What follows?
- a)All open positions in the stock are compulsorily closed out at the next settlement price
- b)No fresh month contract shall be issued, but existing unexpired contracts may trade till expiry and new strikes may be introduced in the existing contract months
- c)The stock continues trading normally until the next annual review
- d)Trading is suspended immediately and the stock is delisted from the cash market
Show the answer
Answer: (b) No fresh month contract shall be issued, but existing unexpired contracts may trade till expiry and new strikes may be introduced in the existing contract months
The workbook's wording is precise and is reused for every failure case in this chapter: if an existing security fails to meet the continued eligibility criteria for three months consecutively, then no fresh month contract shall be issued on that security. However, the existing unexpired contracts may be permitted to trade till expiry and new strikes may also be introduced in the existing contract months.
Option A is the trap, and it is worth killing off permanently: no failure or exit in this chapter forcibly closes open positions. The same three-part formula applies to a stock failing eligibility, an index failing eligibility, and a stock exiting under the Product Success Framework. Existing holders are always allowed to run their contracts to expiry.
Option C ignores the rule entirely. Option D confuses the derivatives segment with the cash market — losing derivatives eligibility says nothing about the stock's listing.
The follow-on fact examiners pair with this: once a stock is excluded, it shall not be considered for re-inclusion for a period of one year from its last trading day in the derivatives segment, and to come back it must fulfil the eligibility criteria for six consecutive months.
Where this is taught
Free preparation for NISM Series VIIIRelated terms
- Market Wide Position LimitThe ceiling on total open interest in a stock's futures and options across exchanges — 20% of non-promoter shares. Above 95% no fresh positions are allowed until it falls to 80%.
- median quarter-sigma order sizeA liquidity eligibility test for stock derivatives — the median order size, over six months, needed to move the stock price by a quarter of a standard deviation — which must be at least Rs 75 lakh.
- Index constructionChoosing an index's constituent stocks and deciding its calculation methodology — a trade-off between diversification and liquidity, with the final inclusion call taken by an Index Committee.
- Index derivativesDerivative contracts — chiefly index futures and index options — that have a stock index as the underlying asset. In India they are cash settled and used to hedge market risk.
- Surrogate (pseudo) indexA closely correlated substitute index on another exchange that lets derivatives continue on an index that has itself failed the eligibility review, subject to overlap and correlation conditions.