SEBON moves to relax NEPSE circuit breaker rules to stabilize investor sentiment

KATHMANDU: Nepal’s capital market regulator, the Securities Board of Nepal (SEBON), is preparing to loosen the circuit breaker mechanism used to control extreme fluctuations in the country’s stock market index, the NEPSE Index, in a move aimed at strengthening investor confidence and improving market efficiency.

Officials said the review comes amid growing demands from stock market investors and follows recommendations from a government-formed task force established to propose reforms in Nepal’s equity market. The committee was formed at the initiative of Finance Minister Rameshwar Prasad Khanal after the formation of the current government following the Gen-Z movement.

Task Force Recommendation Drives Reform

According to SEBON Chairman Santosh Narayan Shrestha, the regulator is actively working to implement the recommendations of the share market reform task force coordinated by SEBON Executive Director Rupesh K.C..

Shrestha said the board is preparing to increase the circuit breaker thresholds or reduce market halt durations—or possibly revise both measures simultaneously.

“We are preparing additional initiatives to boost investor morale,” Shrestha said, adding that discussions are ongoing regarding policy adjustments and international practices. “Within the next few days, the circuit breaker limit will likely be relaxed.”

The circuit breaker mechanism temporarily halts trading when market movements exceed predefined thresholds, preventing panic-driven trading and extreme volatility. However, regulators now believe the current framework may be too restrictive for Nepal’s evolving capital market.

Current Circuit Breaker Structure

Under the existing system in the Nepal Stock Exchange trading regulations:

• If the NEPSE index rises or falls by 4% within the first hour, trading is halted for 20 minutes (first circuit).
• If the market moves 5% after reopening, a second circuit triggers a 40-minute trading halt.
• If the index fluctuates 6% after the second reopening, trading is suspended for the remainder of the day.

Between the first and second circuit breakers, trading resumes only after a specified interval period.

Proposed Changes Under Discussion

Officials involved in the discussions say multiple reform options are currently being evaluated. One proposal involves expanding circuit breaker thresholds to 4%, 6%, and 8%, giving the market greater flexibility before trading is halted.

Another option involves shortening the trading suspension periods currently set at 20 and 40 minutes.

A SEBON official confirmed that regulators and the exchange have held detailed discussions on the matter.

“There are currently two or three alternative models under discussion. No final decision has been made yet,” the official said.

The task force has also suggested introducing circuit breaker triggers based on the free-float index, rather than relying solely on the overall market index.

Market Halt After Election Result Sparks Debate

The push for reform gained urgency after a dramatic trading halt earlier this week. Following the Falgun 21 election results, the market opened strongly but was forced to close after only three minutes of trading due to circuit breaker triggers.

Regulators say the incident highlighted inefficiencies in the current system.

“If the market closes after just three minutes of trading, who actually benefits from that?” the official questioned.

The event prompted SEBON to summon officials from the Nepal Stock Exchange for an urgent review meeting on Tuesday.

Overuse of Circuit Breakers in Nepal

SEBON officials acknowledged that circuit breakers in Nepal have been triggered far more frequently than international norms.

Globally, circuit breaker mechanisms vary significantly across stock exchanges. Some markets apply a single circuit breaker, while others only halt trading during sharp declines but not during rallies.

“In Nepal’s context, circuit breakers have been used too frequently,” the official said. “They should be reserved for extraordinary market events rather than routine political or policy developments.”

Regulators also emphasized that normal developments—such as a new minister taking office or monetary policy announcements—should not be enough to halt the entire stock market.

Regulatory Framework

The current circuit breaker provisions are outlined in Regulation 17 of the trading regulations governing Nepal’s securities market. The system is designed to prevent excessive market volatility and protect investors from sudden losses during sharp market movements.

While the circuit breaker system applies to the overall market index, individual listed companies are already subject to a 10% daily price fluctuation limit on their share prices.

With Nepal’s stock market experiencing increasing participation from retail investors and institutional players, policymakers say reforms to trading rules are necessary to ensure smoother market operations while maintaining safeguards against extreme volatility.