FAQ on Equity and Currency Derivatives
Q1 What are Derivatives?
A.
The term
"Derivative" indicates that it has no independent value, i.e.
its value is entirely "derived" from the value of the underlying
asset. The underlying asset can be securities, commodities, bullion, currency,
live stock or anything else. In other words, Derivative means a forward,
future, option or any other hybrid contract of pre determined fixed duration,
linked for the purpose of contract fulfillment to the value of a specified real
or financial asset or to an index of securities.
With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in the definition of
Securities. The term Derivative has been defined in Securities Contracts
(Regulations) Act, as:-
A Derivative includes: -
a. a security derived from a debt instrument,
share, loan, whether secured or unsecured, risk instrument or contract for
differences or any other form of security;
b. a contract which derives its value from
the prices, or index of prices, of underlying securities;
Q2 What is a
Futures Contract?
A. Futures Contract means a legally binding agreement to buy or sell the
underlying security on a future date. Future contracts are the
organized/standardized contracts in terms of quantity, quality (in case of
commodities), delivery time and place for settlement on any date in future. The
contract expires on a pre-specified date which is called the expiry date of the
contract. On expiry, futures can be settled by delivery of the underlying asset
or cash. Cash settlement enables the settlement of obligations arising out of
the future/option contract in cash.
Q3 What is an Option contract?
A. Options Contract is a type of Derivatives Contract which gives the
buyer/holder of the contract the right (but not the obligation) to buy/sell the
underlying asset at a predetermined price within or at end of a specified
period. The buyer / holder of the option purchases the
right from the seller/writer for a consideration which is called the premium.
The seller/writer of an option is obligated to settle the option as per the
terms of the contract when the buyer/holder exercises his right. The underlying
asset could include securities, an index of prices of securities etc.
Under Securities Contracts (Regulations) Act,1956 options on securities has been defined as "option
in securities" meaning a contract for the purchase or sale of a right to
buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi,
a galli, a put, a call or a put and call in
securities.
An Option to buy is called Call option and option to sell is called Put option. Further, if an option that is exercisable on or
before the expiry date is called American
option and one that is exercisable only on expiry date, is called European option. The price at which
the option is to be exercised is called Strike
price or Exercise price.
Therefore, in the case of American options the buyer
has the right to exercise the option at anytime on or before the expiry date.
This request for exercise is submitted to the Exchange, which randomly assigns
the exercise request to the sellers of the options, who are obligated to settle
the terms of the contract within a specified time frame.
As in the case of futures contracts, option contracts
can be also be settled by delivery of the underlying asset or cash. However,
unlike futures cash settlement in option contract entails paying/receiving the
difference between the strike price/exercise price and
the price of the underlying asset either at the time of expiry of the contract
or at the time of exercise / assignment of the option contract.
Q4 What are Index Futures and Index Option
Contracts?
A. Futures contract based on an index i.e. the underlying asset is the
index, are known as Index Futures Contracts. For example, futures contract on
NIFTY Index and BSE-30 Index. These contracts derive their value from the value
of the underlying index.
Similarly, the options contracts, which are based on
some index, are known as Index options contract. However, unlike Index Futures,
the buyer of Index Option Contracts has only the right but not the obligation
to buy / sell the underlying index on expiry. Index Option Contracts are
generally European Style options i.e. they can be exercised / assigned only on
the expiry date.
An index, in turn derives
its value from the prices of securities that constitute the index and is
created to represent the sentiments of the market as a whole or of a particular
sector of the economy. Indices that represent the whole market are broad based
indices and those that represent a particular sector are sectoral
indices.
In the beginning futures and options were permitted
only on S&P Nifty and BSE Sensex. Subsequently, sectoral indices were also permitted for derivatives
trading subject to fulfilling the eligibility criteria. Derivative contracts
may be permitted on an index if 80% of the index constituents are individually
eligible for derivatives trading. However, no single ineligible stock in the index
shall have a weightage of more than 5% in the index.
The index is required to fulfill the eligibility criteria even after derivatives trading on the index has begun. If the index
does not fulfill the criteria for 3 consecutive months, then derivative contracts
on such index would be discontinued.
By its very nature, index cannot be delivered on
maturity of the Index futures or Index option contracts therefore, these
contracts are essentially cash settled on Expiry.
Q5 Why
mini derivative contract?
A. The minimum contract size for the mini derivative contract on Index (Sensex and Nifty) is Rs. 1 lakh at the time of its introduction in the market. The
lower minimum contract size means that smaller investors are able to hedge
their portfolio using these contracts with a lower capital outlay. This means a
better hedge for portfolio, and also results in more liquidity in the market.
Q6 Why
longer dated index options?
A. Longer
dated derivatives products are useful for those investors who want to have a
long term hedge or long term exposure in derivative market. The premiums for longer term derivatives products are higher than for standard options
in the same stock because the increased expiration date gives the underlying
asset more time to make a substantial move and for the investor to make a
healthy profit. Presently, longer dated options on Sensex
and Nifty with tenure of upto 3 years are available
for the investors.
Q7 What is Bond Index?
A. A bond index is used to measure the performance of bond markets. The
index is used as a benchmark against which investment managers measure their
performance. It is also used as a measure to compare the performance of
different asset classes. The government bond market is the most liquid segment
of the bond market.
Q8 What is Volatility Index?
A. Volatility Index is a measure of expected stock market volatility, over
a specified time period, conveyed by the prices of stock / index options. It
depicts the collective sentiment of the market on the implied future volatility.
Q9 What is the
structure of Derivative Markets in
A. Derivative trading in
Q10 What are the
various membership categories in the equity derivatives market?
A. The various types of membership in the derivatives market are as
follows:
i.
Trading Member
(TM) – A TM is a member of the derivatives exchange and can trade on his own
behalf and on behalf of his clients.
ii.
Clearing Member
(CM) –These members are permitted to settle their own trades as well as the
trades of the other non-clearing members known as Trading Members who have agreed
to settle the trades through them.
iii.
Self-clearing
Member (SCM) – A SCM are those clearing members who can clear and settle their
own trades only.
Q11 What are the
requirements to be a member of the equity derivatives exchange/ clearing
corporation?
A.
i.
Balance Sheet Networth Requirements: SEBI has prescribed a networth requirement of Rs. 3 crores for clearing members. The clearing members are
required to furnish an auditor's certificate for the networth
every 6 months to the exchange. The networth requirement
is Rs. 1 crore for a
self-clearing member. SEBI has not specified any networth
requirement for a trading member.
ii.
Liquid Networth Requirements: Every clearing member (both clearing
members and self-clearing members) has to maintain atleast
Rs. 50 lakhs as Liquid Networth with the exchange / clearing corporation.
iii.
Certification
requirements: The Members are required to pass the certification programme approved by SEBI. Further, every trading member
is required to appoint atleast two approved users who
have passed the certification programme. Only the
approved users are permitted to operate the derivatives trading terminal.
Q12 What are
requirements for a Member with regard to the conduct of his business?
A. The derivatives member is required to adhere to the code of conduct
specified under the SEBI Broker Sub-Broker regulations. The following
conditions stipulations have been laid by SEBI on the regulation of sales
practices:
i.
Sales Personnel:
The derivatives exchange recognizes the persons recommended by the Trading
Member and only such persons are authorized to act as sales personnel of the
TM. These persons who represent the TM are known as Authorised
Persons.
ii.
Know-your-client:
The member is required to get the Know-your-client form filled by every one of
client.
iii.
Risk disclosure
document: The derivatives member must educate his client on the risks of
derivatives by providing a copy of the Risk disclosure document to the client.
iv.
Member-client
agreement: The Member is also required to enter into the Member-client
agreement with all his clients.
Q13 Which derivative
contracts are permitted by SEBI?
A. Derivative products have been introduced in a phased manner starting
with Index Futures Contracts in June 2000. Index Options and Stock Options were
introduced in June 2001 and July 2001 followed by Stock Futures in November
2001. Sectoral indices were permitted for derivatives
trading in December 2002. During December 2007 SEBI permitted mini derivative
(F&O) contract on Index (Sensex and Nifty).
Further, in January 2008, longer tenure Index options contracts and Volatility
Index and in April 2008, Bond Index was introduced. In addition to the above,
during August 2008, SEBI permitted Exchange traded Currency Derivatives.
Q14 What is the
eligibility criteria for stocks on which derivatives trading may be permitted?
A. A stock on which stock option and single stock future contracts are
proposed to be introduced is required to fulfill the following broad
eligibility criteria:-
i.
The stock shall
be chosen from amongst the top 500 stock in terms of average daily market capitalisation and average daily traded value in the
previous six month on a rolling basis.
ii.
The stock’s
median quarter-sigma order size over the last six months shall be not less than
Rs.1 Lakh. A stock’s quarter-sigma order size is the mean order size (in value
terms) required to cause a change in the stock price equal to one-quarter of a
standard deviation.
iii.
The market wide
position limit in the stock shall not be less than Rs.50 crores.
A stock can be included for derivatives trading as
soon as it becomes eligible. However, if the stock does not fulfill the
eligibility criteria for 3 consecutive months after being admitted to
derivatives trading, then derivative contracts on such a stock would be
discontinued.
Q15 What is the lot
size of contract in the equity derivatives market?
A.
For example, if shares of XYZ Ltd are quoted at
Rs.1000 each and the minimum contract size is Rs.2 lacs,
then the lot size for that particular scrips stands
to be 200000/1000 = 200 shares i.e. one contract in XYZ Ltd. covers 200 shares.
Q16 What is corporate
adjustment?
A. The basis for any adjustment for corporate action is such that the value
of the position of the market participant on cum and ex-date for corporate
action continues to remain the same as far as possible. This will facilitate in
retaining the relative status of positions viz. in-the-money, at-the-money and
out-of-the-money. Any adjustment for corporate actions is carried out on the
last day on which a security is traded on a cum basis
in the underlying cash market. Adjustments mean modifications to positions
and/or contract specifications as listed below:
a.
Strike price
b.
Position
c.
Market/Lot/
Multiplier
The adjustments are carried out on any or all of the
above based on the nature of the corporate action. The adjustments for
corporate action are carried out on all open, exercised as well as assigned
positions.
The corporate actions are broadly classified under
stock benefits and cash benefits. The various stock benefits declared by the
issuer of capital are:
a.
Bonus
b.
Rights
c.
Merger/ demerger
d.
Amalgamation
e.
Splits
f.
Consolidations
g.
Hive-off
h.
Warrants, and
i.
Secured Premium
Notes (SPNs) among others
The cash benefit declared by the issuer of capital is
cash dividend.
Q17 What is the margining system in the equity derivatives
market?
A. Two type of margins have been specified -
i.
Initial
Margin - Based on 99% VaR and worst case loss over a specified horizon, which
depends on the time in which Mark to Market margin is collected.
ii.
Mark to
Market Margin (MTM) - collected in
cash for all Futures contracts and adjusted against the available Liquid Networth for option positions. In the case of Futures
Contracts MTM may be considered as Mark to Market Settlement.
Dr. L.C Gupta Committee had recommended that the
level of initial margin required on a position should be related to the risk of
loss on the position. The concept of value-at-risk should be used in
calculating required level of initial margins. The initial margins should be
large enough to cover the one day loss that can be encountered on the position
on 99% of the days. The recommendations of the Dr. L.C Gupta Committee have
been a guiding principle for SEBI in prescribing the margin computation &
collection methodology to the Exchanges. With the introduction of various
derivative products in the Indian securities Markets, the margin computation
methodology, especially for initial margin, has been modified to address the
specific risk characteristics of the product. The margining methodology
specified is consistent with the margining system used in developed financial
& commodity derivative markets worldwide. The exchanges were given the
freedom to either develop their own margin computation system or adapt the
systems available internationally to the requirements of SEBI.
A portfolio based margining approach which takes an
integrated view of the risk involved in the portfolio of each individual client
comprising of his positions in all Derivative Contracts i.e. Index Futures,
Index Option, Stock Options and Single Stock Futures, has been prescribed. The
initial margin requirements are required to be based on the worst case loss of
a portfolio of an individual client to cover 99% VaR
over a specified time horizon.
The Initial Margin is Higher
of
(Worst Scenario Loss
+Calendar Spread Charges)
Or
Short Option Minimum
Charge
The worst
scenario loss are required to be computed for a portfolio of a client
and is calculated by valuing the portfolio under 16 scenarios of probable changes
in the value and the volatility of the Index/ Individual Stocks. The options
and futures positions in a client’s portfolio are required to be valued by
predicting the price and the volatility of the underlying over a specified
horizon so that 99% of times the price and volatility so predicted does not
exceed the maximum and minimum price or volatility scenario. In this manner
initial margin of 99% VaR is achieved. The specified
horizon is dependent on the time of collection of mark to market margin by the
exchange.
The probable change in the price of the underlying
over the specified horizon i.e. ‘price scan range’, in the case of Index
futures and Index option contracts are based on three standard deviation
(3σ ) where ‘σ ’ is the volatility estimate of the Index. The
volatility estimate ‘σ ’, is computed as per the Exponentially Weighted
Moving Average methodology. This methodology has been prescribed by SEBI. In
case of option and futures on individual stocks the price scan range is based
on three and a half standard deviation (3.5 σ) where ‘σ’ is the daily
volatility estimate of individual stock.
If the mean value (taking order book snapshots for
past six months) of the impact cost, for an order size of Rs.
0.5 million, exceeds 1%, the price scan range would be scaled up by square root
three times to cover the close out risk. This means that stocks with impact
cost greater than 1% would now have a price scan range of - Sqrt
(3) * 3.5σ or approx. 6.06σ. For stocks with impact cost of 1% or
less, the price scan range would remain at 3.5σ.
For Index Futures and Stock futures it is specified
that a minimum margin of 5% and 7.5% would be charged. This means if for stock
futures the 3.5 σ value falls below 7.5% then a minimum of 7.5% should be
charged. This could be achieved by adjusting the price scan range.
The probable change in the volatility of the
underlying i.e. ‘volatility scan range’ is fixed at 4% for Index options and is
fixed at 10% for options on Individual stocks. The volatility scan range is
applicable only for option products.
Calendar spreads are offsetting positions in two
contracts in the same underlying across different expiry. In a portfolio based
margining approach all calendar-spread positions automatically get a margin
offset. However, risk arising due to difference in cost of carry or the ‘basis
risk’ needs to be addressed. It is therefore specified that a calendar spread
charge would be added to the worst scenario loss for arriving at the initial
margin. For computing calendar spread charge, the system first identifies
spread positions and then the spread charge which is 0.5% per month on the far
leg of the spread with a minimum of 1% and maximum of 3%. Presently, calendar
spread position on Exchange traded equity derivatives has been granted calendar
spread treatment till the expiry of the near month contract.
In a portfolio of futures and options, the non-linear
nature of options make short option positions most risky. Especially, short
deep out of the money options, which are highly susceptible to, changes in
prices of the underlying. Therefore a short option
minimum charge has been specified. The short option minimum charge is 3% and
7.5 % of the notional value of all short Index option and stock option
contracts respectively. The short option minimum charge is the initial margin
if the sum of the worst –scenario loss and calendar spread charge is lower than
the short option minimum charge.
To calculate volatility estimates the exchange are
required to uses the methodology specified in the Prof J.R Varma
Committee Report on Risk Containment Measures for Index Futures. Further, to
calculate the option value the exchanges can use standard option pricing models
- Black-Scholes, Binomial, Merton, Adesi-Whaley.
The initial margin is required to be computed on a
real time basis and has two components:-
i.
The first is
creation of risk arrays taking prices at discreet times taking latest prices
and volatility estimates at the discreet times, which have been specified.
ii.
The second is
the application of the risk arrays on the actual portfolio positions to compute
the portfolio values and the initial margin on a real time basis.
The initial margin so computed is deducted from the
available Liquid Networth on a real time basis.
CONDITIONS FOR LIQUID NETWORTH
Liquid net worth means the total liquid assets
deposited with the clearing house towards initial margin and capital adequacy;
LESS initial margin applicable to the total gross open position at any given
point of time of all trades cleared through the clearing member.
The following conditions are specified for liquid net
worth:
i.
Liquid net worth
of the clearing member should not be less than Rs 50 lacs at any point of time.
ii.
Mark to market
value of gross open positions at any point of time of all trades cleared
through the clearing member should not exceed the specified exposure limit for
each product.
Liquid Assets
At least 50% of the liquid assets should be in the
form of cash equivalents viz. cash, fixed deposits, bank guarantees, T bills,
units of money market mutual funds, units of gilt funds and dated government
securities. Liquid assets will include cash, fixed deposits, bank guarantees, T
bills, units of mutual funds, dated government securities or Group I equity
securities which are to be pledged in favor of the exchange.
Collateral Management
Collateral Management consists of managing,
maintaining and valuing the collateral in the form of cash, cash equivalents
and securities deposited with the exchange. The following stipulations have
been laid down to the clearing corporation on the valuation and management of
collateral:
i.
At least weekly
marking to market is required to be carried out on all securities.
ii.
Debt securities
of only investment grade can be accepted.10% haircut with weekly mark to market
will be applied on debt securities.
iii.
Total exposure
of clearing corporation to the debt or equity of any company not to exceed 75%
of the Trade Guarantee Fund or 15% of its total liquid assets whichever is
lower.
iv.
Units of money
market mutual funds and gilt funds shall be valued on the basis of its Net
Asset Value after applying a hair cut of 10% on the NAV and any exit load
charged by the mutual fund.
v.
Units of all
other mutual funds shall be valued on the basis of its NAV after applying a
hair cut equivalent to the VAR of the units NAV and any exit load charged by
the mutual fund.
vi.
Equity
securities to be in demat form. Only Group I
securities would be accepted. The securities are required to be valued / marked
to market on a daily basis after applying a haircut equivalent to the
respective VAR of the equity security.
Mark
to Market Margin
Options – The
value of the option are calculated as the theoretical value of the option times
the number of option contracts (positive for long options and negative for
short options). This Net Option Value is added to the Liquid Networth of the Clearing member. Thus MTM gains and losses
on options are adjusted against the available liquid networth.
The net option value is computed using the closing price of the option and are
applied the next day.
Futures –
The system computes the closing price of each series, which is used for
computing mark to market settlement for cumulative net position. If this margin
is collected on T+1 in cash, then the exchange charges a higher initial margin
by multiplying the price scan range of 3 σ & 3.5 σ with square
root of 2, so that the initial margin is adequate to cover 99% VaR over a two days horizon. Otherwise if the Member
arranges to pay the Mark to Market margins by the end of T day itself, then the
initial margins would not be scaled up. Therefore, the Member has the option to
pay the MTM margins either at the end of T day or on T+1 day.
Summary of parameters specified for Initial Margin
Computation
|
|
Index Options |
Index
Futures |
Stock Options |
Stock Futures |
|
|
3 sigma |
3 sigma |
3.5 sigma |
For order size of
Rs.5 Lakh, if mean value of impact cost > 1%, the |
|
|
4% |
|
10% |
|
|
Minimum margin
requirement |
|
5% |
|
7.50% |
|
Short option
minimum charge |
3% |
|
7.50% |
|
|
Calendar Spread |
0.5% per month on
the far month contract (min of 1% and max of 3%) |
|||
|
Mark to Market |
Net Option Value
(positive for long positions and negative for short positions) to be adjusted
from the liquid networth on a real time basis. The daily closing
price of Futures Contract for Mark to Market settlement would be calculated
on the basis of the last half an hour weighted average price of the contract. |
|||
MARGIN COLLECTION
Initial Margin - is adjusted from the available Liquid Networth of the Clearing Member on an online real time
basis.
Mark to Market Margins-
Futures contracts: The open positions (gross against clients and net of
proprietary / self trading) in the futures contracts for each member are marked
to market to the daily settlement price of the Futures contracts at the end of
each trading day. The daily settlement price at the end of each day is the
weighted average price of the last half an hour of the futures contract. The
profits / losses arising from the difference between the trading price and the
settlement price are collected / given to all the clearing members.
Option Contracts: The marked to market for Option contracts is
computed and collected as part of the
Client Margins
Clearing Members and Trading Members are required to
collect initial margins from all their clients. The collection of margins at
client level in the derivative markets is essential as derivatives are
leveraged products and non-collection of margins at the client level would
provide zero cost leverage. In the derivative markets all money paid by the
client towards margins is kept in trust with the Clearing House / Clearing
Corporation and in the event of default of the Trading or Clearing Member the
amounts paid by the client towards margins are segregated and not utilised towards the dues of the defaulting member.
Therefore, Clearing members are required to report on
a daily basis details in respect of such margin amounts due and collected from
their Trading members / clients clearing and settling through them. Trading
members are also required to report on a daily basis details of the amount due
and collected from their clients. The reporting of the collection of the
margins by the clients is done electronically through the system at the end of
each trading day. The reporting of collection of client level margins plays a
crucial role not only in ensuring that members collect margin from clients but
it also provides the clearing corporation with a record of the quantum of funds
it has to keep in trust for the clients.
Q18 What are the
exposure limits in equity derivatives market?
A. It has been prescribed that the notional value of gross open positions
at any point in time in the case of Index Futures and all Short Index Option
Contracts shall not exceed 33 1/3 (thirty three one by three) times the
available liquid networth of a member, and in the
case of Stock Option and Stock Futures Contracts, the exposure limit shall be
higher of 5% or 1.5 sigma of the notional value of gross open position.
Q19 What are the
position limits in equity derivatives market?
A. The position limits specified are as under-
Client / Customer level position limits:
For index based products there is a disclosure
requirement for clients whose position exceeds 15% of the open interest of the
market in index products.
For stock specific products the gross open position across
all derivative contracts on a particular underlying of a customer/client should
not exceed the higher of –
i.
1% of the free float
market capitalisation (in terms of number of shares)
Or,
ii.
5% of the open interest
in the derivative contracts on a particular underlying stock (in terms of
number of contracts).
This position limits are applicable on the combine
position in all derivative contracts on an underlying stock at an exchange. The
exchanges are required to achieve client level position monitoring in stages.
Trading Member Level Position Limits:
For Index options the Trading Member position limits
are Rs. 250 cr or 15% of
the total open interest in Index Options whichever is higher and for Index
futures the Trading Member position limits are Rs. 250
cr or 15% of the total open interest in Index Futures
whichever is higher.
For stocks specific products, the trading member
position limit is 20% of the market wide limit subject to a ceiling of Rs. 50 crore.
It is also specified that once a member reaches the
position limit in a particular underlying then the member shall be permitted to
take only offsetting positions (which result in lowering the open position of
the member) in derivative contracts on that underlying. In the event that the
position limit is breached due to the reduction in the overall open interest in
the market, the member are required to take only offsetting positions (which
result in lowering the open position of the member) in derivative contract in
that underlying and fresh positions shall not be permitted. The position limit
at trading member level is required to be computed on a gross basis across all
clients of the Trading member.
Market wide limits:
There are no market wide limits for index products.
For stock specific products the market wide limit of open positions (in terms
of the number of underlying stock) on an option and futures contract on a
particular underlying stock would be lower of –
i.
30 times the average
number of shares traded daily, during the previous calendar month, in the cash
segment of the Exchange, Or
ii.
20% of the number of
shares held by non-promoters i.e. 20% of the free float, in terms of number of
shares of a company.
Summary of Position Limits
|
|
Index Options |
Index Futures |
Stock Options |
Stock Futures |
|
Client level |
Disclosure requirement for any person or persons acting in
concert holding 15% or more of the open interest of all derivative contracts
on a particular underlying index |
Disclosure requirement for any person or persons acting in
concert holding 15% or more of the open interest of all derivative contracts
on a particular underlying index |
1% of free float or 5% of open interest whichever is
higher |
1% of free float or 5% of open interest whichever is
higher |
|
Trading Member level |
15% of the total Open Interest of the market or Rs. 250 crores, whichever is
higher |
15% of the total Open Interest of the market or Rs. 250 crores, whichever is
higher |
20% of Market Wide Limit subject to a ceiling of Rs.50 cr. |
20% of Market Wide Limit subject to a ceiling of Rs.50 cr. |
|
Market wide |
|
|
30 times the average number of shares traded daily, during
the previous calendar month, in the relevant underlying security in the
underlying segment or, - 20% of the number of shares held by non-promoters in the
relevant underlying security, whichever is lower |
30 times the average number of shares traded daily, during
the previous calendar month, in the relevant underlying security in the
underlying segment or, - 20% of the number of shares held by non-promoters in the
relevant underlying security, whichever is lower |
Q20 What are the requirements for a
A. A SEBI registered FIIs and its sub-account are
required to pay initial margins, exposure margins and mark to market
settlements in the derivatives market as required by any other investor.
Further, the
|
|
Index Options |
Index Futures |
Stock Options |
Single stock Futures |
|
|
Rs. 250 crores
or 15% of the OI in Index options, whichever is higher. In addition, hedge positions are permitted. |
Rs. 250 crores
or 15% of the OI in Index futures, whichever is higher. In addition, hedge positions are permitted. |
20% of Market Wide Limit subject to a ceiling of Rs. 50 crores. |
20% of Market Wide Limit subject to a ceiling of Rs. 50 crores. |
|
Sub-account level |
Disclosure requirement for any person or persons acting in
concert holding 15% or more of the open interest of all derivative contracts
on a particular underlying index |
Disclosure requirement for any person or persons acting in
concert holding 15% or more of the open interest of all derivative contracts
on a particular underlying index |
1% of free float market capitalization or 5% of open
interest on a particular underlying whichever is higher |
1% of free float market capitalization or 5% of open
interest on a particular underlying whichever is higher |
Q21 What are the requirements for a
A. NRIs
are permitted in invest in exchange traded derivative contracts subject to the
margin and other requirements which are in place for other investors. In
addition, a
|
|
Index Options |
Index Futures |
Stock Options |
Single stock Futures |
|
|
Disclosure requirement for any person or persons acting in
concert holding 15% or more of the open interest of all derivative contracts
on a particular underlying index |
Disclosure requirement for any person or persons acting in
concert holding 15% or more of the open interest of all derivative contracts
on a particular underlying index |
1% of free float market capitalization or 5% of open
interest on a particular underlying whichever is higher |
1% of free float market capitalization or 5% of open
interest on a particular underlying whichever is higher |
Q22 What are Currency Futures?
A. Currency futures are contracts to buy or sell a specific
underlying currency at a specific time in the future, for a specific price.
Currency futures are exchange-traded contracts and they are standardized in
terms of delivery date, amount and contract terms.
Currency future contracts allow investors to hedge
against foreign exchange risk. Since these contracts are marked-to-market
daily, investors can--by closing out their position--exit from their obligation
to buy or sell the currency prior to the contract's delivery date.
Q23 What are the parameters for initial margin,
exposure margin and what are the position limits
specified for exchange traded currency futures?
A.
|
Currency Futures |
Price scan Range |
Minimum Margin Requirement |
Calendar spread |
|
|
Initial
Margin Computation |
3.5 Sigma |
1% |
Rs. 250 per month on the far month
contract |
|
|
Exposure Margin |
I% of gross open positions |
|||
|
|
Client level |
Trading Member level (Non-Bank) |
Trading Member level (Bank) |
|
|
Position limits |
6% of open interest or 10 million USD whichever is higher |
15% of total open interest or 50 million USD whichever is
higher |
15% of total open interest or 100 million USD whichever is higher |
|
Q24 What are the eligibility criteria for
members of the currency futures segment?
A. The trading member is subject to a balance
sheet networth requirement of Rs.
1 crore while the clearing member is subject to a
balance sheet networth requirement of Rs. 10 crores. The clearing
member is subject to a liquid networth requirement of
Rs. 50 lakhs.
Q25 What are the eligibility criteria for
setting up of currency futures segment in a recognized stock exchange?
A. A recognized stock exchange having nationwide
terminals or a new exchange recognized by SEBI may set up currency futures
segment after obtaining SEBI’s approval. The currency
futures segment should fulfill the following eligibility conditions for
approval:
The trading should take place through an online screen-based trading
system, which also has a disaster recovery site.
i.
The clearing of the
currency derivatives market should be done by an independent Clearing
Corporation, which satisfies the eligibility for a clearing corporation.
ii. The exchange must have an online surveillance
capability which monitors positions, prices and volumes in real time so as to
deter market manipulation.
iii. The exchange shall have a balance sheet networth of atleast Rs. 100 crores.
iv. Information about trades, quantities, and quotes
should be disseminated by the exchange in real time to at least two information
vending networks which are accessible to investors in the country.
v. The per-half-hour capacity of the computers and the
network should be at least 4 to 5 times of the anticipated peak load in any
half hour, or of the actual peak load seen in any half-hour during the
preceding six months, whichever is higher. This shall be reviewed from time to
time on the basis of experience.
vi. The segment should have at least 50 members to start
currency derivatives trading.
vii. The exchange should have arbitration and investor
grievances redressal mechanism operative from all the
four areas/regions of the country.
viii. The exchange should have adequate inspection
capability.
ix. If already existing, the exchange should have a
satisfactory record of monitoring its members, handling investor complaints and
preventing irregularities in trading.
Q26 What measures have been specified by SEBI to protect
the rights of investor in Derivatives Market?
A. The measures specified by SEBI include:
a.
Investor's money
has to be kept separate at all levels and is permitted to be used only against
the liability of the Investor and is not available to the trading member or
clearing member or even any other investor.
b.
The Trading
Member is required to provide every investor with a risk disclosure document
which will disclose the risks associated with the derivatives trading so that
investors can take a conscious decision to trade in derivatives.
c.
Investor would
get the contract note duly time stamped for receipt of the order and execution
of the order. The order will be executed with the identity of the client and
without client ID order will not be accepted by the system. The investor could
also demand the trade confirmation slip with his ID in support of the contract
note. This will protect him from the risk of price favour,
if any, extended by the Member.
d.
In the
derivative markets all money paid by the Investor towards margins on all open
positions is kept in trust with the Clearing House/Clearing corporation
and in the event of default of the Trading or Clearing Member the amounts paid
by the client towards margins are segregated and not utilized towards the
default of the member. However, in the event of a default of a member, losses
suffered by the Investor, if any, on settled / closed out position are
compensated from the Investor Protection Fund, as per the rules, bye-laws and
regulations of the derivative segment of the exchanges.
e.
The Exchanges
are required to set up arbitration and investor grievances redressal
mechanism operative from all the four areas / regions of the country.