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Securities and Exchange Board of India
MASTER CIRCULAR
CIR/MRD/DRMNP/11/2013 April 1, 2013
To,
The Managing Directors/Executive Directors of Stock Exchanges
and their Clearing House/ Corporation.
Dear Sir / Madam,
Sub: Master Circular on Matters relating to Exchange Traded Derivatives
1. The Securities and Exchange Board of India has, from time to time, issued
various circulars regarding Exchange Traded Derivatives.
2. This master circular seeks to consolidate all the applicable circulars and related
clarifications issued on the subject as on date. The list of previous circulars on
the subject is referred to in Annexure V.
3. This Master Circular supersedes previous Master Circular CIR/DNPD/1/2012
dated January 2, 2012.
4. This Master Circular is available on SEBI website at www.sebi.gov.in, under the
category “Master Circulars”.
Yours faithfully,
Shashi Kumar
Deputy General Manager
Division of Risk Management and New Products
Market Regulation Department
shashikumarv@sebi.gov.in
Page 1 of 156
MASTER CIRCULAR
ON
EXCHANGE-TRADED DERIVATIVES
APRIL 2013
SECURITIES AND EXCHANGE BOARD OF INDIA
Page 2 of 156
Table of Contents
1 Index Futures ............................................................................................................. 11
1.1 Product Design ...................................................................................................... 11
1.1.1 Underlying ..................................................................................................... 11
1.1.2 Eligibility Criteria .......................................................................................... 11
1.1.3 Trading Hours ................................................................................................ 11
1.1.4 Size of the Contract ........................................................................................ 11
1.1.5 Quotation........................................................................................................ 11
1.1.6 Tenor of the contract ...................................................................................... 11
1.1.7 Available Contracts ........................................................................................ 11
1.1.8 Settlement Mechanism ................................................................................... 11
1.1.9 Settlement Price ............................................................................................. 12
1.1.10 Final Settlement Day...................................................................................... 12
1.1.11 Application ..................................................................................................... 12
1.2 Risk Management .................................................................................................. 12
1.2.1 Liquid Assets ................................................................................................. 13
1.2.2 Bank Guarantees ............................................................................................ 14
1.2.3 Securities ........................................................................................................ 14
1.2.4 Initial Margin Computation ........................................................................... 16
1.2.5 Margins for Calendar Spreads ....................................................................... 18
1.2.6 Exposure Limits ............................................................................................. 18
1.2.7 Real Time Computation ................................................................................. 18
1.2.8 Cross Margining............................................................................................. 18
1.2.9 Margin Collection and Enforcement .............................................................. 19
1.2.10 Reporting and Disclosure ............................................................................... 20
1.3 Surveillance and Disclosures ................................................................................ 20
1.3.1 Unique client code ......................................................................................... 20
1.3.2 Position Limits ............................................................................................... 20
1.3.3 Monitoring of Position Limits ....................................................................... 21
1.3.4 Surveillance System ....................................................................................... 23
1.4 Eligibility Criteria for Derivative Exchange / Derivative Segment of the
Exchange, Trading Members, Clearing Corporation/House for Equity Derivatives ....... 25
2 Index Options ............................................................................................................. 27
2.1 Product Design ...................................................................................................... 27
2.1.1 Underlying ..................................................................................................... 27
2.1.2 Eligibility Criteria .......................................................................................... 27
2.1.3 Trading Hours ................................................................................................ 27
2.1.4 Size of the Contract ........................................................................................ 27
2.1.5 Quotation........................................................................................................ 27
2.1.6 Tenor of the contract ...................................................................................... 27
2.1.7 Available Contracts ........................................................................................ 27
2.1.8 Settlement Mechanism ................................................................................... 27
Page 3 of 156
2.1.9 Settlement Price ............................................................................................. 27
2.1.10 Final Settlement Day...................................................................................... 27
2.1.11 Application ..................................................................................................... 27
2.2 Risk Management .................................................................................................. 29
2.2.1 Initial Margin Computation ........................................................................... 29
2.2.2 Portfolio Based Margining ............................................................................. 29
2.2.3 Exposure Limits ............................................................................................. 31
2.2.4 Real Time Computation ................................................................................. 31
2.2.5 Margin Collection and Enforcement .............................................................. 31
2.2.6 Liquid Net Worth and Exposure Limits of a Clearing Member: ................... 31
2.2.7 Liquid Assets: ................................................................................................ 31
2.2.8 Bank Guarantees: ........................................................................................... 31
2.2.9 Securities ........................................................................................................ 31
2.2.10 Reporting and Disclosure:.............................................................................. 31
2.3 Surveillance and Disclosures ................................................................................ 31
2.3.1 Unique client code ......................................................................................... 31
2.3.2 Position Limits ............................................................................................... 31
2.3.3 Monitoring of Position Limits ....................................................................... 32
2.3.4 Surveillance System ....................................................................................... 32
3 Stock Futures .............................................................................................................. 33
3.1 Product Design ...................................................................................................... 33
3.1.1 Underlying ..................................................................................................... 33
3.1.2 Eligibility Criteria .......................................................................................... 33
3.1.3 Trading Hours ................................................................................................ 35
3.1.4 Size of the Contract ........................................................................................ 35
3.1.5 Quotation........................................................................................................ 35
3.1.6 Tenor of the contract ...................................................................................... 35
3.1.7 Available Contracts ........................................................................................ 36
3.1.8 Settlement Mechanism ................................................................................... 36
3.1.9 Settlement Price ............................................................................................. 36
3.1.10 Final Settlement Day...................................................................................... 37
3.1.11 Application ..................................................................................................... 37
3.2 Risk Management .................................................................................................. 38
3.2.1 Initial margin or worst scenario loss .............................................................. 38
3.2.2 Calendar spread .............................................................................................. 38
3.2.3 Exposure Limits ............................................................................................. 38
3.2.4 Real Time Computation ................................................................................. 39
3.2.5 Cross Margining............................................................................................. 40
3.2.6 Margin Collection and Enforcement .............................................................. 40
3.2.7 Liquid Net Worth and Exposure Limits of a Clearing Member .................... 40
3.2.8 Liquid Assets: ................................................................................................ 40
3.2.9 Bank Guarantees: ........................................................................................... 40
3.2.10 Securities ........................................................................................................ 40
3.2.11 Reporting and Disclosure:.............................................................................. 40
3.3 Surveillance and Disclosures ................................................................................ 41
3.3.1 Unique client code ......................................................................................... 41
Page 4 of 156
3.3.2 Position Limits ............................................................................................... 41
3.3.3 Monitoring of Position Limits ....................................................................... 43
3.3.4 Surveillance System ....................................................................................... 43
4 Stock Option ............................................................................................................... 44
4.1 Product Design ...................................................................................................... 44
4.1.1 Underlying ..................................................................................................... 44
4.1.2 Eligibility Criteria .......................................................................................... 44
4.1.3 Trading Hours ................................................................................................ 44
4.1.4 Size of the Contract ........................................................................................ 44
4.1.5 Quotation........................................................................................................ 44
4.1.6 Tenor of the contract ...................................................................................... 44
4.1.7 Available Contracts ........................................................................................ 44
4.1.8 Settlement Mechanism ................................................................................... 44
4.1.9 Settlement Price ............................................................................................. 44
4.1.10 Final Settlement Day...................................................................................... 44
4.1.11 Application ..................................................................................................... 44
4.2 Risk Management .................................................................................................. 46
4.2.1 Initial Margin Computation: .......................................................................... 46
4.2.2 Portfolio Based Margining ............................................................................. 46
4.2.3 Exposure Limits ............................................................................................. 46
4.2.4 Real Time Computation ................................................................................. 46
4.2.5 Margin Collection and Enforcement .............................................................. 46
4.2.6 Liquid Net Worth and Exposure Limits of a Clearing Member .................... 46
4.2.7 Liquid Assets: ................................................................................................ 46
4.2.8 Bank Guarantees: ........................................................................................... 46
4.2.9 Securities ........................................................................................................ 46
4.2.10 Reporting and Disclosure:.............................................................................. 47
4.3 Surveillance and Disclosures ................................................................................ 48
4.3.1 Unique client code ......................................................................................... 48
4.3.2 Position Limits ............................................................................................... 48
4.3.3 Monitoring of Position Limits ....................................................................... 48
4.3.4 Surveillance System ....................................................................................... 48
5 Currency Futures ....................................................................................................... 49
5.1 Product Design ...................................................................................................... 49
5.1.1 Underlying ..................................................................................................... 49
5.1.2 Trading Hours ................................................................................................ 49
5.1.3 Size of the contract ......................................................................................... 49
5.1.4 Quotation........................................................................................................ 49
5.1.5 Tenor of the contract ...................................................................................... 49
5.1.6 Available contracts ......................................................................................... 49
5.1.7 Settlement mechanism ................................................................................... 49
5.1.8 Settlement price ............................................................................................. 49
5.1.9 Final settlement day ....................................................................................... 49
5.1.10 Participants ..................................................................................................... 50
5.2 Risk Management Measures ................................................................................. 50
5.2.1 Initial Margin ................................................................................................. 50
Page 5 of 156
5.2.2 Formula for determining standard deviation .................................................. 51
5.2.3 Portfolio based margining .............................................................................. 52
5.2.4 Real time computation ................................................................................... 52
5.2.5 Calendar spread margins ................................................................................ 52
5.2.6 Extreme Loss margin ..................................................................................... 52
5.2.7 Liquid networth .............................................................................................. 53
5.2.8 Liquid assets................................................................................................... 53
5.2.9 Mark to market settlement ............................................................................. 53
5.2.10 Margin collection and enforcement ............................................................... 53
5.2.11 Safeguarding client’s money .......................................................................... 53
5.2.12 Periodic risk evaluation report ....................................................................... 54
5.3 Surveillance and Disclosures ................................................................................ 55
5.3.1 Unique client code ......................................................................................... 55
5.3.2 Position limits ................................................................................................ 55
5.3.3 Surveillance system ....................................................................................... 57
5.4 Eligibility Criteria of the Segment, Exchanges and Trading Members ................ 59
5.4.1 Eligibility criteria of currency futures segment ............................................. 59
5.4.2 Eligibility criteria for the Clearing Corporation of the currency futures
segment ........................................................................................................................ 60
5.4.3 Eligibility criteria for members in the currency futures segment .................. 61
5.4.4 Regulatory and legal aspects .......................................................................... 62
6 Currency options ........................................................................................................ 63
6.1 Product Design ...................................................................................................... 63
6.1.1 Underlying ..................................................................................................... 63
6.1.2 Trading Hours ................................................................................................ 63
6.1.3 Size of the contract ......................................................................................... 63
6.1.4 Quotation........................................................................................................ 63
6.1.5 Tenor of the contract ...................................................................................... 63
6.1.6 Available contracts ......................................................................................... 63
6.1.7 Settlement mechanism ................................................................................... 63
6.1.8 Settlement price ............................................................................................. 63
6.1.9 Final settlement day ....................................................................................... 63
6.1.10 Participants ..................................................................................................... 63
6.1.11 Exercise at Expiry .......................................................................................... 63
6.2 Risk Management Measures ................................................................................. 64
6.2.1 Initial Margin ................................................................................................. 64
6.2.2 Portfolio based margining .............................................................................. 65
6.2.3 Real time computation ................................................................................... 65
6.2.4 Calendar spread margins ................................................................................ 65
6.2.5 Settlement of Premium .................................................................................. 65
6.2.6 Extreme Loss margin ..................................................................................... 66
6.2.7 Net Option Value ........................................................................................... 66
6.2.8 Liquid net worth ............................................................................................. 66
6.2.9 Liquid assets................................................................................................... 66
6.2.10 Margin collection and enforcement ............................................................... 66
6.2.11 Safeguarding client’s money .......................................................................... 66
Page 6 of 156
6.2.12 Periodic risk evaluation report ....................................................................... 66
6.3 Surveillance and Disclosures ................................................................................ 66
6.3.1 Unique client code ......................................................................................... 66
6.3.2 Position limits ................................................................................................ 66
6.3.3 Surveillance system ....................................................................................... 67
6.4 Eligibility Criteria of the Segment, Exchanges and Trading Members ................ 67
6.4.1 Eligibility criteria of currency options segment ............................................. 67
6.4.2 Eligibility criteria for the Clearing Corporation of the currency options
segment 67
6.4.3 Eligibility criteria for members in the currency futures segment .................. 67
6.4.4 Regulatory and legal aspects .......................................................................... 67
7 Interest Rate Futures on 10-Year GoI Security ...................................................... 68
7.1 Product Design, Margins and Position Limits ...................................................... 68
7.1.1 Underlying ..................................................................................................... 68
7.1.2 Coupon ........................................................................................................... 68
7.1.3 Trading Hours ................................................................................................ 68
7.1.4 Size of the Contract ........................................................................................ 68
7.1.5 Quotation........................................................................................................ 68
7.1.6 Tenor of the Contract ..................................................................................... 68
7.1.7 Available Contracts ........................................................................................ 68
7.1.8 Delivery Month and Delivery Period ............................................................. 68
7.1.9 Daily Settlement Price ................................................................................... 68
7.1.10 Settlement Mechanism ................................................................................... 69
7.1.11 Deliverable Grade Securities ......................................................................... 69
7.1.12 Conversion Factor .......................................................................................... 70
7.1.13 Invoice Price .................................................................................................. 70
7.1.14 Delivery Schedule and Delivery Process/Mechanism ................................... 70
7.1.15 Last Trading Day ........................................................................................... 71
7.1.16 Last Delivery Day .......................................................................................... 71
7.1.17 Initial Margin ................................................................................................. 71
7.1.18 Extreme Loss Margin ..................................................................................... 72
7.1.19 Calendar Spread Margin ................................................................................ 72
7.1.20 Model for Determining Standard Deviation .................................................. 72
7.1.21 Formula for Determining Standard Deviation ............................................... 72
7.1.22 Position Limits ............................................................................................... 75
7.2 Risk Management Measures ................................................................................. 76
7.2.1 Introduction .................................................................................................... 76
7.2.2 Portfolio Based Margining ............................................................................. 76
7.2.3 Real-Time Computation ................................................................................. 76
7.2.4 Liquid Networth ............................................................................................. 76
7.2.5 Liquid Assets ................................................................................................. 76
7.2.6 Mark-to-Market (MTM) Settlement .............................................................. 76
7.2.7 Margin Collection and Enforcement .............................................................. 77
7.2.8 Safeguarding Client’s Money ........................................................................ 77
7.2.9 Periodic Risk Evaluation Report .................................................................... 77
7.3 Regulatory and Legal aspects ................................................................................ 78
Page 7 of 156
7.3.1 Exchange: ....................................................................................................... 78
7.3.2 Clearing Corporation / Clearing House ......................................................... 78
7.3.3 Clearing Member and Trading Member ........................................................ 78
7.3.4 SEBI-RBI Coordination Mechanism ............................................................. 78
7.4 Miscellaneous Issues ............................................................................................. 79
7.4.1 Banks Participation in Interest Rate Futures .................................................. 79
7.4.2 Extending the Tenor of Short Sales ............................................................... 79
7.4.3 Penalties ......................................................................................................... 79
8 Interest Rate Futures on 91-Day Government of India (GoI) Treasury-Bill (T-
Bill) ...................................................................................................................................... 82
8.1 Product Design, Margins and Position Limits ...................................................... 82
8.1.1 Underlying ..................................................................................................... 82
8.1.2 Trading hours ................................................................................................. 82
8.1.3 Size of the contract ......................................................................................... 82
8.1.4 Quotation........................................................................................................ 82
8.1.5 Tenor of the contract ...................................................................................... 82
8.1.6 Contract months ............................................................................................. 82
8.1.7 Settlement mechanism ................................................................................... 82
8.1.8 Contract value ................................................................................................ 82
8.1.9 Daily Contract Settlement value .................................................................... 82
8.1.10 Expiry/Last trading day/Final settlement day ................................................ 83
8.1.11 Final Contract Settlement value ..................................................................... 83
8.1.12 Initial margin .................................................................................................. 83
8.1.13 Extreme Loss margin ..................................................................................... 83
8.1.14 Calendar spread margin ................................................................................. 83
8.1.15 Formula for determining standard deviation .................................................. 83
8.1.16 Position limits ................................................................................................ 85
8.2 Regulatory and Legal aspects ................................................................................ 85
8.2.1 Exchange ........................................................................................................ 85
9 Interest Rate Futures on 2 Year Notional Coupon Bearing Government of India
(GoI) Security ..................................................................................................................... 86
9.1 Product Design, Margins and Position Limits ...................................................... 86
9.1.1 Underlying ..................................................................................................... 86
9.1.2 Trading hours ................................................................................................. 86
9.1.3 Size of the contract ......................................................................................... 86
9.1.4 Quotation........................................................................................................ 86
9.1.5 Tenor of the contract ...................................................................................... 86
9.1.6 Contract months ............................................................................................. 86
9.1.7 Settlement mechanism ................................................................................... 86
9.1.8 Contract Value ............................................................................................... 86
9.1.9 Daily Contract Settlement Value ................................................................... 86
9.1.10 Expiry/Last trading day .................................................................................. 87
9.1.11 Final Contract Settlement Value .................................................................... 87
9.1.12 Initial Margin ................................................................................................. 87
9.1.13 Extreme Loss margin ..................................................................................... 87
9.1.14 Calendar spread margin ................................................................................. 87
Page 8 of 156
9.1.15 Formula for determining standard deviation .................................................. 87
9.1.16 Position Limits ............................................................................................... 88
9.1.17 Settlement Mechanism ................................................................................... 90
9.1.18 Worked out Example of Settlement price calculation: .................................. 91
9.2 Regulatory and Legal aspects ................................................................................ 92
9.2.1 Exchange ........................................................................................................ 92
10 Interest Rate Futures on 5 Year Notional Coupon Bearing Government of India
(GoI) Security ..................................................................................................................... 93
10.1 Product Design, Margins and Position Limits ................................................... 93
10.1.1 Underlying ..................................................................................................... 93
10.1.2 Trading hours ................................................................................................. 93
10.1.3 Size of the contract ......................................................................................... 93
10.1.4 Quotation........................................................................................................ 93
10.1.5 Tenor of the contract ...................................................................................... 93
10.1.6 Contract months ............................................................................................. 93
10.1.7 Settlement mechanism ................................................................................... 93
10.1.8 Contract Value ............................................................................................... 93
10.1.9 Daily Contract Settlement Value ................................................................... 93
10.1.10 Expiry/Last trading day .............................................................................. 94
10.1.11 Final Contract Settlement Value ................................................................ 94
10.1.12 Initial Margin .............................................................................................. 94
10.1.13 Extreme Loss margin ................................................................................. 94
10.1.14 Calendar spread margin .............................................................................. 94
10.1.15 Formula for determining standard deviation .............................................. 94
10.1.16 Position Limits ........................................................................................... 95
10.1.17 Settlement Mechanism ............................................................................... 97
10.1.18 Worked out Example of Settlement price calculation ................................ 98
10.2 Regulatory and Legal aspects ............................................................................ 99
10.2.1 Exchange ........................................................................................................ 99
11 Derivative Contracts on Foreign Indices ............................................................... 100
11.1 Underlying ....................................................................................................... 100
11.2 Eligibility Criteria ............................................................................................ 100
11.3 Failure to meet Eligibility Criteria................................................................... 101
11.4 Currency Denomination .................................................................................. 101
11.5 Risk Management Framework......................................................................... 101
11.6 Position Limits ................................................................................................. 101
11.7 Information Sharing ......................................................................................... 101
11.8 Legal Compliance ............................................................................................ 101
11.9 Enforcement..................................................................................................... 102
11.10 Trading............................................................................................................. 102
12 Miscellaneous............................................................................................................ 103
12.1 Corporate Action Adjustments: ....................................................................... 103
12.2 Reporting and Disclosure ................................................................................ 106
12.2.1 Monthly Activity Report .............................................................................. 106
12.2.2 Reporting of derivative transactions to the media and the newspapers ....... 106
12.3 Straight through Processing ............................................................................. 106
Page 9 of 156
12.4 Certification ..................................................................................................... 110
12.5 Introduction of Volatility and Bond Index ...................................................... 110
12.5.1 Volatility Index ............................................................................................ 110
12.5.2 Derivatives on Volatility Index .................................................................... 110
12.5.3 Bond Index ................................................................................................... 111
12.6 Modification of Client Codes of Non-institutional Trades Executed on Stock
Exchanges (All Segments) ............................................................................................. 111
12.6.1 Modification of Client Codes ....................................................................... 111
12.6.2 Penalty Structure .......................................................................................... 112
12.7 Short-collection/Non-collection of client margins .......................................... 113
12.8 Liquidity Enhancement Schemes for Illiquid Securities in Equity Derivatives
Segment ......................................................................................................................... 114
12.9 Requirement of Base Minimum Capital for Trading Member ........................ 115
13 ANNEXURES ........................................................................................................... 117
13.1 ANNEXURE I ................................................................................................. 117
13.2 ANNEXURE II................................................................................................ 118
13.2.1 ANNEXURE II(A) ...................................................................................... 130
13.3 ANNEXURE– III ............................................................................................ 131
13.4 ANNEXURE-IV .............................................................................................. 151
13.5 ANNEXURE V ............................................................................................... 153
Page 10 of 156
1 INDEX FUTURES
1.1 Product Design
1.1.1 Underlying
The benchmark indices and the various sectoral indices are permitted as per
eligibility criteria.
1.1.2 Eligibility Criteria
The Exchange may consider introducing derivative contracts on an index, if
weightage of constituent stocks of the index, which are individually eligible for
derivatives trading, is atleast 80%. However, no single ineligible stock in the index
shall have a weightage of more than 5% in the index. The index on which futures
and options contracts are permitted shall be required to comply with the eligibility
criteria on a continuous basis. The Exchange shall check whether the index
continues to meet the aforesaid eligibility criteria on a monthly basis. If the index
fails to meet the eligibility criteria for three consecutive months, then no fresh
contract shall be issued on that index. However, the existing unexpired contracts
shall be permitted to trade till expiry and new strikes may also be introduced in the
existing contracts.
1.1.3 Trading Hours
The trading hours for index futures would be decided from time to time by the
exchange subject to the condition that the trading hours are between 9 AM and 5
PM, and the exchange has in place risk management system and infrastructure
commensurate to the trading hours.
1.1.4 Size of the Contract
A derivative contract shall have a value of not less than Rs. 2 Lakhs at the time of
its introduction in the market.
1.1.5 Quotation
The index futures contract shall be quoted in rupee terms.
1.1.6 Tenor of the contract
The index futures contract shall have a maximum maturity of 12 months.
1.1.7 Available Contracts
Monthly maturities from 1 to12 months would be available.
1.1.8 Settlement Mechanism
The index futures contract shall be settled in Indian Rupees.
Page 11 of 156
1.1.9 Settlement Price
The settlement price shall be the closing price of the underlying index on the day of
expiry. The closing price of the underlying index shall be based on last half an hour
VWAP(Volume Weighted Average Price) of the constituents of the underlying
index.
1.1.10 Final Settlement Day
The Stock Exchanges have the flexibility to set the expiry date/day for index
futures. While doing so, the Stock Exchanges shall have to ensure that there is no
change in the contract specifications or the risk management framework and the
integrity of the market is not affected in any manner.
1.1.11 Application
The Derivative Exchange/Segment shall submit their proposal for approval of the
index futures contract to SEBI which shall include:
a. the details of proposed derivative contract to be traded on the exchange
b. the economic purpose it is intended to serve,
c. likely contribution to market development,
d. the safeguards and the risk protection mechanism adopted by the exchange to
ensure market integrity, protection of investors and smooth and orderly trading,
e. the infrastructure of the exchange and the surveillance system to effectively
monitor trading in such contracts, and
f. details of settlement procedures & systems with regard to Index Futures.
1.2 Risk Management
Liquid Net Worth and Exposure Limits of a Clearing Member
The Liquid Net Worth is defined as under:
total liquid assets deposited with the exchange / clearing corporation / house towards initial
margin and capital adequacy, LESS
initial margin applicable to the total gross open positions at any given point of time on all
trades to be cleared through the clearing member.
The clearing member’s liquid net worth must satisfy both the conditions given below on a
real time basis:
Condition 1: Liquid Net Worth shall not be less than Rs 50 lacs at any point of time.
Condition 2: The mark to market value of gross open positions at any point of time of all
trades cleared through the clearing member shall not exceed 33 1/3 (thirty three one by
three) times his liquid networth.
The notional value of gross open positions at any point in time in the case of Index Futures
shall not exceed 33 1/3 (thirty three one by three) times the liquid net worth of a member.
Exposure limits are in addition to the initial margin requirements.
A numerical example of computation of capital adequacy, exposure limits and initial
margin requirements is given below;
Page 12 of 156
1. Beginning of day one
Suppose that the position at the beginning of day one is as follows:
Member’s Liquid Assets Cash equivalent deposits 35,00,000
Securities deposits (net of haircuts) 40,00,000
Member’s Open Position 200 contracts long in the 3 month contract
Futures Prices 3 month contracts is Rs. 1,00,000
1 month contract is Rs. 98,000
Initial Margin 5%
Days to expiry Fifth day before expiry of one month contract
The margin and capital adequacy calculations will be as follows:
Initial margin = 5% * 200 * 1,00,000 = 10,00,000
Total open position = 2,00,00,000
Total liquid assets will be treated as 70,00,000 only since at least 50% of total liquid assets
must be in cash equivalents (see Para 4(v)).
Liquid net worth = 70,00,000 - 10,00,000 = 60,00,0000
Both conditions of networth and exposure limit are satisfied as shown below:
Condition 1. 60,00,000 > 50,00,000
Condition 2. 60,00,000 * 331/3 = (20,00,00,000) > 2,00,00,000.
2. Initiation of spread trade on day one
Suppose that the member does a calendar spread trade by buying 300 contracts of 3 months
futures and selling 300 contracts of 1 month futures.
Since the near month contract of the spread is five days to expiry, the member will have the
full benefit of spread margining:
Margin on spread = 1% * 300 * 1,00,000 = 3,00,000
Spread open position 300 * 1,00,000 * 1/ 3 = 1,00,00,000
Adding the figures for the earlier long position we get:
Total open position = 2,00,00,000 + 1,00,00,000 = 3,00,00,000
Liquid net worth = 70,00,000 - 10,00,000 - 3,00,000 = 57,00,000
Both conditions in para 4(ii) of the circular are satisfied as shown below:
Condition 1. 57,00,000 > 50,00,000
Condition 2. 57,00,000 * 331/3= 19,00,00,000 > 300,00,000
1.2.1 Liquid Assets
At least 50% of the total liquid assets shall be in the form of cash equivalents viz.
cash, bank guarantee, fixed deposits, T-bills and dated government securities.
Liquid Assets for the purposes of initial margins as well as liquid net worth would
include cash, fixed deposits, bank guarantees, Treasury bills, government securities
or dematerialized securities (with prescribed haircuts) pledged in favour of the
exchange / clearing corporation or bank guarantees as defined hereunder. Units of
money market mutual funds and units of gilt funds may be accepted towards cash
equivalent component of the liquid assets of a clearing member. The unit 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. The valuation or the marking to
market of such units shall be carried out on a daily basis.
Page 13 of 156
1.2.2 Bank Guarantees
The clearing corporation / house would set an exposure limit for each bank, taking into
account all relevant factors including the following:
a. The Governing Council or other equivalent body of the clearing corporation / house
shall lay down exposure limits either in rupee terms or as percentage of the trade
guarantee fund that can be exposed to a single bank directly or indirectly. The total
exposure would include guarantees provided by the bank for itself or for others as
well as debt or equity securities of the bank which have been deposited by members
as liquid assets for margins or net worth requirement.
b. Not more than 5% of the trade guarantee fund or 1% of the total liquid assets
deposited with the clearing house, whichever is lower, shall be exposed to any
single bank which is not rated P1 (or P1+) or equivalent, by a RBI recognised credit
rating agency or by a reputed foreign credit rating agency, and not more than 50%
of the trade guarantee fund or 10% of the total liquid assets deposited with the
clearing house, whichever is lower, shall be exposed to all such banks put together.
c. The exposure limits and any changes thereto shall be promptly communicated to
SEBI. The clearing corporation shall also periodically disclose to SEBI its actual
exposure to various banks.
1.2.3 Securities
Equity securities classified under Group I in the underlying cash market may be accepted
towards liquid assets in the derivative markets. Securities classified under Group I shall be
those as defined by SEBI from time to time. The equity securities shall be valued/marked
to market on a daily basis after applying a haircut equivalent to the respective VaR of the
equity security. The list of acceptable equity securities shall be updated on the basis of
trading and mean impact cost on the 15th of each month. When a security is dropped from
the list of acceptable equity securities, the existing deposits of that security shall continue
to be counted towards liquid assets till the end of the month. Equity securities shall be in
dematerialized form.
Units of all mutual funds may also be accepted as the securities component of liquid assets.
The unit shall be valued on the basis of its Net Asset Value (NAV) after applying a hair cut
equivalent to the VaR of the units NAV and any exit load charged by the mutual fund. The
valuation or the marking to market of such units shall be carried out on a daily basis. The
valuation / marking to market of all securities, including debt securities, dated government
securities and T-bills, shall be carried out daily, with appropriate haircuts.
Debt securities shall be acceptable only if they are investment grade. Haircuts shall be at
least 10% with daily mark to market.
The total exposure of the clearing corporation to the debt or equity securities of any
company shall not exceed 75% of the trade guarantee fund or 15% of the total liquid assets
of the clearing corporation / house whichever is lower. Exposure for this purpose means the
mark to market value of the securities less the applicable haircuts. All securities deposited
for liquid assets shall be pledged in favour of the clearing corporation.
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Reserve Bank of India (RBI) vide A. P. (DIR Series) Circular no. 2 dated July 19, 2007 has
permitted clearing corporations and clearing members –
a. to open and maintain demat accounts with foreign depositories and to acquire, hold,
pledge and transfer the foreign sovereign securities, offered as collateral by FIIs;
b. to remit the proceeds arising from corporate action, if any, on such foreign
sovereign securities; and
c. to liquidate such foreign sovereign securities if the need arises.
Further, Reserve Bank of India vide RBI/2012-13/439 A.P. (DIR Series) Circular No. 90
dated March 14, 2013 has permitted FIIs to use, in addition to already permitted collaterals,
their investments in government securities and corporate bonds as collaterals in the F&O
segment.
In light of the above, FIIs are permitted to offer the following collaterals - government
securities, corporate bonds, cash and foreign sovereign securities with AAA ratings, for
their transactions in F&O segments. In this regard, the stipulations specified by SEBI and
RBI with regard to the acceptance of various collaterals shall be adhered to
Clearing members are permitted to accept foreign sovereign securities with ‘AAA’ rating,
(hereinafter referred to as “sovereign securities”) as collateral from FII client with the
following necessary safeguards:
i. Before accepting sovereign securities as collateral from FII, the clearing
member shall enter into a written agreement with the FII and also with the
clearing corporation, containing, inter alia, the following terms:
a. In the event of any dispute regarding liquidation or return of the
sovereign securities tendered as collateral, or any other incidental matter,
the courts in India will have jurisdiction to decide such disputes.
Alternatively, the agreement may contain an arbitration clause.
b.The agreement shall also contain the right of the clearing corporation as
well as the clearing member to liquidate the sovereign securities
tendered as collateral, in the event of default by clearing member or FII,
as the case may be.
ii. The clearing member shall take due care to ensure that the sovereign
securities tendered as collateral are available for liquidation in the event of
insolvency of the FII or any intermediary or any other person located
overseas through whom the securities are held.
iii. The clearing corporation shall also take due care to ensure that sovereign
securities tendered as collateral are available for liquidation in the event of
insolvency of the clearing member or any intermediary or other person
located overseas through whom the securities are held.
iv. The clearing corporation shall take adequate care to ensure that the
sovereign securities accepted by it as margin are tendered under a
mechanism which does not unduly hinder timely liquidation in the event of
default by the clearing member.
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The clearing corporation shall value the collateral tendered by applying due
haircuts. The haircut may either be a fixed percentage or VaR based. A higher
haircut may be considered to cover the expected time frame for liquidation. A
market determined price as obtained from an internationally recognized data vendor
shall be considered for valuation. The prices shall be converted into rupee terms on
a daily basis. The rupee value so used for conversion shall be the “RBI Reference
rate”. The RBI reference rate shall be disclosed by the clearing corporation to the
clearing members, so as to enable them to report the value of the margins collected
from FIIs.
The sovereign securities tendered as collateral shall be treated as part of the cash
component of the liquid assets of the clearing member, and shall be subject to the
condition that the value of the sovereign securities shall not be more than 10% of
the total value of the cash component of the liquid assets of the clearing member.
The existing procedure for acceptance and release of collateral tendered by
domestic investors in the case of domestic securities shall be adopted mutatis
mutandis for the sovereign securities tendered by FII, except to the extent
specifically provided otherwise.
Further, Clearing Corporations while enabling the framework for acceptance of
corporate bonds as collateral for transactions of any entity, shall ensure that:
i. The bonds shall have a rating of AA or above (or with similar rating
nomenclature) by recognised credit rating agencies.
ii. The bonds shall be in dematerialized form.
iii. The bonds shall be treated as part of the non-cash component of the liquid
assets of the clearing member and shall not exceed 10% of the total liquid
assets of the clearing member.
iv. The bonds shall have a fixed percentage based or VaR based haircut. A
higher haircut may be considered to cover the expected time frame for
liquidation. To begin with the haircut shall be a minimum of 10%.
1.2.4 Initial Margin Computation
The Initial Margin requirements are based on worst scenario loss of a portfolio of an
individual client to cover 99% VaR over one day horizon across various scenarios of price
changes and volatility shifts. For Index products, the price scan range is specified at three
standard deviation (3 sigma) and the volatility scan range is specified at 4%.
The Exponential Weighted Moving Average method (EWMA) shall be used to obtain the
volatility estimate every day. For Index products the price scan range is specified at three
standard deviation (3 sigma) and the volatility scan range is specified at 4%. The estimate
at the end of day t (σ) is estimated using the previous volatility estimate, i.e., as at the end
t
of t-1 day (t-1), and the return (r) observed in the futures market during day t.
t
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The formula shall be as under:
2    2   1  r 2
t t1 t
where
 is a parameter which determines how rapidly volatility estimates changes. The value of
 is fixed at 0.94.
 (sigma) means the standard deviation of daily returns in the index futures market.
The margins for 99% VaR should be based on three sigma limits (three times the standard
deviation). The "return" is defined as the logarithmic return: r = ln (I/I ) where I is the
t t t-1 t
index futures price at time t. The plus/minus three sigma limits for a 99% VaR based on
logarithmic returns would have to be converted into percentage price changes by reversing
the logarithmic transformation. The percentage margin on short positions would be equal to
100(exp (3)-1) and the percentage margin on long positions would be equal to 100(1-
t
exp (-3)). This implies slightly larger margins on short positions than on long positions.
t
The derivatives exchange / clearing corporation may apply the higher margin on both the
buy and sell side.
On the first day of index futures trading the formula given above would require a value of
 , i.e. the estimated volatility at the end of the day preceding the first day of index
t-1
futures trading. This would be obtained as follows:
a. Calculate the standard deviation of returns in the cash index during the last one
year.
b. Set the volatility estimate at the beginning of that year equal to this average value.
c. Move forward through the year, one day at a time, using the formula above to get
the estimated volatility at the end of that day using cash index prices.
d. The estimated volatility by this method at the end of the day preceding the first day
of index futures trading would be the value of  to be used in the formula given
t-1
above at the end of the first day of futures trading. Thereafter each day’s estimate
 becomes the  for the next day.
t t-1
For the first six months of index futures trading, a parallel estimation of volatility would be
done using the cash index prices and the index futures prices and the higher of the two
volatility measures would be used to set margins, however, during the first six months, in
no case shall the initial margin be less than 5%.
The volatility estimated at the end of the day’s trading would be used in calculating the
initial margin calls at the end of the same day. The volatility estimation and margin fixation
methodology should be clearly made known to all market participants so that they can
compute what the margin would be for any given closing level of the index. Further, the
trading software itself should provide this information on a real time basis on the trading
workstation screen.
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There is also a minimum margin requirement. For index futures contracts it is specified that
in no case the initial margin shall be less than 5% of the value of the contract.
1.2.5 Margins for Calendar Spreads
A calendar spread is a situation in which a position at one maturity is hedged by an
offsetting position at a different maturity on the same underlying, e.g., a short
position in six months contract hedged by a long position in nine month contract.
The margin on calendar spreads shall be at a flat rate of 0.5% per month of spread
on the far month contract subject to a minimum margin of 1% and a maximum
margin of 3% on the far side of the spread.
1.2.6 Exposure Limits
It has been prescribed that the notional value of gross open positions at any point in
time in the case of Index Futures shall not exceed 33 1/3 (thirty three one by three)
times the liquid net worth of a member. Therefore, the exchanges would be required
to ensure that 3% of the notional value of gross open position in index futures is
collected/adjusted from the liquid networth of a member on a real time basis.
Exposure limits are in addition to the initial margin requirements.
1.2.7 Real Time Computation
The computation of Worst Scenario Loss has two components. The first is the
valuation of the portfolio under sixteen scenarios. At the second stage, these
Scenario Contract Values are applied to the actual portfolio positions to compute
the portfolio values and the initial margin (Worst Scenario Loss). For computational
ease, exchanges are permitted to update the Scenario Contract Values only at
discrete time points each day and the latest available Scenario Contract Values
would is applied to member/client portfolios on a real time basis.
However, in order to ensure that the most recent scenario are applied for
computation of the portfolio values and the initial margin, the scenario contract
values shall be updated at least 5 times in the day, which may be carried out by
taking the closing price of the previous day at the start of trading and the prices at
11:00 a.m., 12:30 p.m., 2:00 p.m., and at the end of the trading session.
1.2.8 Cross Margining
The positions of clients in both the cash and derivatives segments to the extent they
offset each other shall be considered for the purpose of cross margining as per the
following priority:
a. Index futures position and constituent stock futures position in derivatives
segment,
b. Index futures position in derivatives segment and constituent stock position
in cash segment, and
c. Stock futures position in derivatives segment and the position in the
corresponding underlying in cash segment
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A basket of positions in index constituent stock/stock futures, which is a complete
replica of the index in the ratio specified by the Exchange/Clearing Corporation,
shall be eligible for cross margining benefit. The positions in the derivatives
segment for the stock futures and index futures shall be in the same expiry month to
be eligible for cross margining benefit.
A spread margin of 25% of the total applicable margin on the eligible off-setting
positions, as mentioned above, shall be levied in the respective cash and derivative
segments. Cross margining benefit shall be computed at client level on an online
real time basis and provided to the trading member/clearing member/custodian, as
the case may be, who, in turn, shall pass on the benefit to the client. For institutional
investors, however, the cross margining benefit shall be provided after confirmation
of trades.
To avail the facility of cross margining, a client may maintain two accounts with the
trading member/clearing member, namely arbitrage account and a non-arbitrage
account, to allow converting partially replicated portfolio into a fully replicated
portfolio by taking opposite positions in two accounts. However, for the purpose of
compliance and reporting requirements, the positions across both accounts shall be
taken together and client shall continue to have unique client code.
A client may settle through a trading member/clearing member/custodian, as the
case may be, who is clearing in both the segments or through two trading
members/clearing members/custodians, one of whom is a trading member/custodian
in the cash segment and the other is a clearing member in the derivatives segment.
However, in course of time, a client will settle through only one clearing member
who is a member in both the segments.
In the event of default by a trading member/clearing member/custodian, as the case
may be, whose clients have availed cross margining benefit, the Stock
Exchange/Clearing Corporation shall have the option to:
a. Hold the positions in the cross margin account till expiry in its own name.
b. Liquidate the positions/collateral in either segment and use the proceeds to
meet the default obligation in the other segment.
The Exchange/Clearing Corporation shall enter into agreement with client/clearing
member/trading member/custodian, as the case may be, clearly laying down the
inter-se distribution of liability / responsibility in the event of default. The exchange
shall also specify the legal agreements between the clearing entities for the purpose
of margin utilization in case of liquidation/default etc.
1.2.9 Margin Collection and Enforcement
The Exchange may offer a choice to the members to opt for payment of Mark to
Market Margin (MTM) –
a. either before the start of trading the next day, i.e., T+0, or
b. on the next day, i.e., T+1.
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If the member opts for payment of MTM by T+1, then correspondingly higher
initial margin shall be collected by the clearing corporation/house before the start of
the trading on the next day to cover the potential losses over the time elapsed in the
collection of margins. The clearing corporation/clearing house should lay down
operational guidelines for collection of margin and standard guidelines for back
office accounting at the level of clearing member and trading member to facilitate
the detection of non-compliance at each level. The accounting guidelines shall be in
conformity with the guidelines, if any, issued by SEBI from time to time. The initial
margin (or the worst scenario loss) plus the calendar spread charge shall be adjusted
against the available Liquid Net worth of the member who, in turn, shall collect the
initial margin from their clients.
1.2.10 Reporting and Disclosure
The derivatives exchange and clearing corporation shall submit quarterly reports to
SEBI regarding the functioning of the risk estimation methodology highlighting the
specific instances where price moves have been beyond the estimated 99% VaR
limits. The clearing corporation / clearing house shall disclose the details of
incidences of failures in collection of margin and/or the settlement dues on a
quarterly basis. Failure for this purpose means a shortfall for three consecutive
trading days of 50% or more of the liquid net worth of the member.
Any proposal for changes in the methodology to compute the initial margin should
be filed with SEBI and released to the public for comments along with detailed
comparative back testing results of the proposed methodology and the current
methodology. The proposal shall specify the date from which the new methodology
will become effective and this effective date shall not be less than three months
after the date of filing with SEBI. At any time, up to two weeks before the effective
date, SEBI may instruct the derivatives exchange and clearing corporation/house
not to implement the change, or the derivatives exchange and clearing corporation/
house may on its own decide not to implement the change.
The derivatives exchange/segment of the exchange/clearing corporation/clearing
house of the exchange may choose to impose more stringent requirements, other
than those prescribed above.
1.3 Surveillance and Disclosures
1.3.1 Unique client code
The Exchange shall ensure that each client is assigned a client code which is unique
across all members. The unique client code shall be assigned with the use of PAN
number.
1.3.2 Position Limits
1.3.2.1 Market Level
There are no market wide position limits specified for index futures contracts.
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1.3.2.2 Client Level/ NRI/Sub Accounts
A self-disclosure requirement similar to that in the take-over regulations is
prescribed as under:
Any person or persons acting in concert who together own 15% or more of the open
interest shall be required to report this fact to the exchange and failure to do so shall
attract a penalty as laid down by the exchange / clearing corporation / SEBI.
1.3.2.3 Trading Member/FII/Mutual Fund
The trading member/FII/mutual fund position limits in equity index futures
contracts shall be higher of:
• Rs.500 Crore
or
• 15% of the total open interest in the market in equity index futures contracts.
This limit would be applicable on open positions in all futures contracts on a
particular underlying index.
In addition to the position limits above, Mutual Funds/FIIs may take exposure in
equity index derivatives subject to the following limits:
a. Short positions in index derivatives (short futures, short calls and long puts)
shall not exceed (in notional value) the Mutual Fund’s/FIIs holding of
stocks.
b. Long positions in index derivatives (long futures, long calls and short puts)
shall not exceed (in notional value) the Mutual Fund’s/FIIs holding of cash,
government securities, T-Bills and similar instruments.
1.3.3 Monitoring of Position Limits
1.3.3.1 NRI/Clients
The Exchange shall monitor the NRI position limits. The NRI would be required to
notify the names of the Clearing Member/s through whom it would clear its
derivative trades to the Exchange. The Exchange would then assign a unique client
code to the NRI. The Exchange shall monitor the NRI position limits in the manner
similar to that specified for FIIs and sub-accounts.
1.3.3.2 FII /Sub Accounts
The FII shall report to the Clearing Member (Custodian) the extent of FII’s holding of
stocks, cash, government securities, T-Bills and similar instruments before the end of the
day. The Clearing Member (Custodian) in turn shall report the same to the Exchange.
The Exchange shall then monitor the FII and sub accounts position limits in equity index
derivative contracts in the manner specified below:
a. The FII would be required to notify the names of the Clearing Member/s and
Custodian through whom it would clear its derivative trades to exchanges and their
Clearing House / Clearing Corporation.
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b. A unique code would be assigned by the exchanges and / or the Clearing
House/Clearing Corporation to each registered FII intending to trade in derivative
contracts.
c. The FII would be required to confirm all its positions and the positions of all its
sub-accounts to the designated Clearing Members online but before the end of each
trading day.
d. The designated Clearing Member/s would at the end of each trading day submit the
details of all the confirmed FII trades to the derivative Segment of the exchange and
their Clearing House / Clearing Corporation.
e. The exchanges and their Clearing House / Clearing Corporation would then
compute the total FII trading exposure and would monitor the position limits at the
end of each trading day. The cumulative FII position may be disclosed to the market
on a T + 1 basis, before the commencement of trading on the next day.
f. In the event of an FII breaching the position limits on any derivative contract on an
underlying, the FII would not be permitted by the exchanges and their Clearing
House / Clearing Corporation / Clearing Member/s to take any fresh positions in
any derivative contracts in that underlying. However, they would be permitted to
execute off-setting transactions so as to reduce their open position.
g. The FIIs while trading for each sub-account would also assign a unique client code
with a prefix or suffix of the code assigned by the exchange and their Clearing
House / Clearing Corporation to the FII. The FII would be required to enter the
unique sub-account code before executing a trade on behalf of the sub-account.
The sub-account position limits would be monitored by the FII itself, on the same lines as
the trading member monitors the position limits of its client / customer. The FIIs would
report any breach on position limits by the sub-account, to the derivative segment of the
exchange and their Clearing House / Clearing Corporation and the FII / Custodian /
Clearing Member/s would ensure that the sub-account does not take any fresh positions in
any derivative contracts in that underlying. However the sub-account would be permitted to
execute off-setting transactions so as to reduce its open position.
The exchanges may assign unique sub-account codes on the lines of unique client codes to
each sub-account of a FII, which would enable the derivative segment of the exchange and
their Clearing House/Clearing Corporation to monitor the position limits specified for sub-
accounts.
The position limits would be computed on a gross basis at the level of a FII and on a net
basis at the level of sub-accounts and proprietary positions.
The open position for all derivative contracts would be valued as the open interest
multiplied with the closing price of the respective underlying in the cash market.
1.3.3.3 Mutual Funds
The Mutual Fund shall notify the names of the Clearing Member/s for each scheme
through whom it would clear its derivative contracts to the Stock Exchange. The
Stock Exchange would then assign a unique client code to each scheme of the
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Mutual Fund. The Stock Exchange shall monitor the scheme-wise position limits in
the manner similar to that prescribed for FIIs and their sub-accounts as mentioned
above. The Mutual Funds will be considered as trading members like registered FIIs
and the schemes of Mutual Funds will be treated as clients like sub-accounts of
FIIs.
1.3.4 Surveillance System
The surveillance systems of the exchanges should be designed keeping in view all
the relevant aspects including the following -
a. The alerts in the online surveillance system should be so designed that
indications of material aberrations from normal activity are automatically
generated and thrown up by the system.
b. The parameters which need to be monitored either through the online
system or otherwise should inter-alia include the following parameters as
suggested by the Advisory Committee on Derivatives:
I. Monitoring of open interest, cost of carry/impact cost and
volatility.
II. Monitoring of closing prices.
III. The open positions in the derivative market should be seen in
conjunction with the open positions in the cash market. i.e the
position deltas should be monitored.
IV. The timing of disclosure by corporates should be monitored as this
could influence the prices of the contract at the time of
introduction and expiry.
V. Strike prices with large open positions should be monitored as this
could influence the prices of the contract at the time of
introduction and expiry.
VI. Strike prices with large open positions should be monitored, as
such strike prices could be a target price to be achieved in the cash
market to derive maximum benefit from the derivative position.
c. The surveillance systems and processes should be able to
I. capture and process client level details.
II. develop databases of trading activity by brokers as well as clients.
III. generate trading pattern in individual products or group of products
by a broker over a period of time or by a client / group of clients
over a period of time.
IV. generate the pattern of trading in a product over a period of time
giving such details as the purchases/sales/positions/open interest
held by different brokers or clients/group of clients.
V. Monitor proportion of trading in derivatives market vis-à-vis
trading in the underlying in the cash market and aberrations as
compared to historical data and as compared to market average
VI. Monitor large trades, call put ratio’s and exercise patterns
d. For integration of surveillance in cash and derivatives markets, the persons
who carry out monitoring/analysis in the derivatives market should have
access to data of the underlying security in cash market and vice versa. The
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co-ordination between surveillance and derivatives segment should ensure
monitoring of positions at broker/client level across cash and derivatives
market with a view to identifying possible fraudulent or manipulative
activity.
e. Examination of derivatives trading details should be taken up on the basis of
cash market surveillance also, and vice versa.
f. While the surveillance system may be able to generate a large amount of
information, it is only the first step towards analysing market behaviour to
identify potential problems. The exchange surveillance staff should be able
to carry out quick and effective analysis of information generated by the
surveillance system, and should document this analysis properly. The
documentation should be properly authenticated and verified by a
designated authority of the stock exchange.
g. The information and feedback received from broker inspections is vital
input for effective surveillance. For this it is necessary that broker
inspections are taken up in a rational manner keeping in view the level of
trading activity, client profile, number and nature of complaints received
against the broker, history of risk management related defaults and
regulatory violations etc. Information obtained through broker inspections
should also be made available to the monitoring/surveillance departments of
stock exchanges.
h. The information gathered by the risk management departments/clearing
corporations while enforcing the risk management measures and settlement
processes are critical inputs. Such information could include pattern of
defaults related to specific scrips/contracts and special risk management
measures taken keeping in view the market conditions.
i. The exchanges should call for information from brokers in a standard form,
and preferably in electronic form, to facilitate faster analysis as well as
building up of databases. It may also be ensured that duly authenticated
information is submitted by the broker or his designated agent.
j. While implementing a stock watch type of system for derivatives, the
system should be designed to provide online access to relevant historical
data on derivatives trading for at least a year.
k. The underlying securities in the derivatives market may be listed on more
than one exchange and brokers dealing in such securities/derivatives may
have membership in more than one exchange. In the interest of better
surveillance, it is therefore necessary that relevant information obtained
through surveillance at one exchange should be shared with other
exchanges. Exchanges are, therefore, advised to share information on
positions in underlying stocks and their derivatives and any extraordinary
movement in price/volume or concentration periodically or upon specific
request by any stock exchange.
l. Exchanges should study surveillance practices in various Global Equity
Derivative Markets. Surveillance practices in commodities and bullion
markets could also be studied where appropriate. Case studies on some
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market manipulations in various derivatives markets could be looked at in
order to see what lessons could be drawn.
Compliance with the above requirements may be indicated in the monthly reports
on surveillance and investigations submitted by exchanges to SEBI.
1.4 Eligibility Criteria for Derivative Exchange / Derivative Segment of
the Exchange, Trading Members, Clearing Corporation/House for
Equity Derivatives
The exchanges fulfilling the eligibility criteria as prescribed in the Dr. L.C. Gupta
Committee Report (Chapter 3 of the suggestive Byelaws) may apply to SEBI for
grant of recognition under Section 4 of the Securities Contract Regulation Act,
1956. The derivatives exchange/segment should have a separate governing council
and representation of trading/clearing members shall be limited to maximum of
40% of the total members of the Governing Council. The exchange shall regulate
the sales practices of its members and will obtain prior approval of SEBI before
start of trading in any derivatives contract.
The Clearing and settlement of derivatives trades shall be through a SEBI approved
Clearing Corporation/House. Clearing Corporations / Houses complying with the
eligibility conditions as laid down by the Dr. L.C. Gupta Committee (Chapter 5 of
the Suggestive Bye- laws) may apply to SEBI for approval.
Derivative Brokers/Dealers and clearing members are required to seek registration
from SEBI. This shall be in addition to their registration as brokers of existing
stock exchanges. Derivative brokers/dealers shall be granted registration under
SEBI (Stock Brokers and Sub Brokers) Rules and Regulations, 1992 read with
SEBI (Intermediaries) Regulations, 2008. The minimum net worth for clearing
members of the derivatives clearing corporation / house shall be Rs. 300 lacs. The
net worth of a member shall be computed as follows:
 Capital + free Reserves
 Less non-allowable assets viz.
a) Fixed assets
b) Pledged securities
c) Member’s card
d) Non-allowable securities (unlisted securities)
e) Bad deliveries
f) Doubtful debts and advances*
g) Prepaid expenses, losses
h) Intangible assets
i) 30% of marketable securities
* Explanation – Includes debts/ advances overdue for more than three months or
given to associates.
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The trading members shall be required to have qualified approved user and sales
person who have passed a Certification Programme approved by SEBI.
The Dr. L.C Gupta Committee on Derivatives had permitted existing stock
exchanges having cash trading to trade in derivative contracts through a separate
segment with separate membership.
The derivative segment of an exchange and its Clearing House/Corporation shall be
separate from the cash segment in the following areas –
a. The legal framework governing trading, clearing and settlement of the
derivative segment should be separate from the cash market segment. In
other words, the Regulations and / or Bye-laws of derivative segment, as the
case may be for specific exchanges, shall be separate from the cash market.
b. Trade Guarantee Fund (TGF)/Settlement Guarantee Fund (SGF) of the
derivative segment shall be separate from the TGF/SGF of cash market
segment.
c. Membership of the derivative segment shall be separate from the cash
market segment.
d. The Governing Council/Clearing Council/Executive Committees of the
derivative segments shall be separate from the cash market segment.
The separation, if any, as regard the functional, operational and administrative
modalities shall be at the discretion of the Exchange. The cash and derivative
segment of an Exchange may have common personnel, trading terminal and
infrastructure.
The quantum of members to be inspected may be linked to the cost and benefit of
inspections and the level of activity of members. The Derivative Exchange/Segment
shall work out an appropriate policy and plan for selecting members to be
inspected. The inspection strategy should lay down:
a. The criteria for identifying the top members (in terms of level of activity) to
be taken up for compulsory inspection.
b. The percentage of remaining members to be inspected selected on a
sampling basis.
c. Mechanisms should ensure that active members do not go un-inspected for
several years in succession.
The inspection policy and plan for the year shall be submitted to SEBI for
approval.
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2 INDEX OPTIONS
2.1 Product Design
2.1.1 Underlying
The benchmark indices and the various sectoral indices are permitted as per the
eligibility criteria.
2.1.2 Eligibility Criteria
The eligibility criteria for an index to qualify for introduction of options, as
specified in Section 1.1.2.
2.1.3 Trading Hours
Same as that for index future contracts as specified in Section 1.1.3.
2.1.4 Size of the Contract
Same as that for index future contracts as specified in Section 1.1.4.
2.1.5 Quotation
Same as that for index future contracts as specified in Section 1.1.5.
2.1.6 Tenor of the contract
Same as that for index futures contracts as specified in Section 1.1.6. The index
option contracts on Nifty and SENSEX shall have a maximum maturity up to 5
years.
2.1.7 Available Contracts
The exchange should ensure that for index options contracts on Nifty and Sensex
there are 8 semi annual contracts of the cycle June/December in sequence to 3 serial
monthly contracts and 3 quarterly contracts of the cycle
March/June/September/December. Each maturity shall have a minimum of three
strikes (in the money, at the money and out of the money).
2.1.8 Settlement Mechanism
Same as that for index future contracts as specified in Section 1.1.8. Initially, the
Exchanges shall introduce premium style index options.
2.1.9 Settlement Price
Same as that for index future contracts as specified in Section 1.1.9.
2.1.10 Final Settlement Day
Same as that for index future contracts as specified in Section 1.1.10.
2.1.11 Application
The Derivative Exchange/Segment shall submit their proposal for approval of the
index option contract to SEBI which shall include:
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g. the details of proposed derivative contract to be traded on the exchange which
would include:
i. Symbol
ii. Underlying
iii. Multiplier
iv. Strike Price Intervals
v. Premium Quotation
vi. Last Trading Day
vii. Expiration day/month
viii. Exercise Style
ix. Settlement of Option Exercise
x. Position and Exercise Limits
xi. Margin
xii. Trading Hours
h. the economic purpose it is intended to serve,
i. likely contribution to market development,
j. the safeguards and the risk protection mechanism adopted by the exchange to
ensure market integrity, protection of investors and smooth and orderly trading,
k. the infrastructure of the exchange and the surveillance system to effectively
monitor trading in such contracts, and
l. details of settlement procedures & systems with regard to Index Options.
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2.2 Risk Management
2.2.1 Initial Margin Computation
The Initial Margin requirements shall be based on worst case loss of a portfolio of
an individual client to cover a 99% VaR over a one day horizon. For Index
products, the price scan range is specified at three standard deviation (3 sigma) and
the volatility scan range is specified at 4%. There is also a minimum margin
requirement. For index options a short option minimum charge (as explained
below) of 3% of the notional value of all short index option has been prescribed.
The Initial Margin requirement shall be netted at level of individual client and it
shall be on gross basis at the level of Trading/Clearing Member. The Initial margin
requirement for the proprietary position of Trading/Clearing member shall also be
on net basis.
2.2.2 Portfolio Based Margining
A portfolio based margining approach shall be adopted which will takes an
integrated view of the risk involved in the portfolio of each individual client
comprising of his positions in index futures and index options contracts. The
parameters for such a model should include-
1. Worst Scenario Loss
The worst case loss of a portfolio would be calculated by valuing the portfolio
under several scenarios of changes in the index and changes in the volatility of the
index. The scenarios to be used for this purpose would be:
Risk Price Move in Volatility Move in Fraction of Loss
Scenario Multiples of Price Multiples of to be Considered
Number Range Volatility Range
1. 0 +1 100%
2. 0 -1 100%
3. +1/3 +1 100%
4. +1/3 -1 100%
5. -1/3 +1 100%
6. -1/3 -1 100%
7. +2/3 +1 100%
8. +2/3 -1 100%
9. -2/3 +1 100%
10. -2/3 -1 100%
11. +1 +1 100%
12. +1 -1 100%
13. -1 +1 100%
14. -1 -1 100%
15. +2 0 35%
16. -2 0 35%
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The price range is defined to be three standard deviations as calculated for VaR
purposes in the index futures market for the near month contract. The volatility
range would be taken at 4%.
While computing the worst scenario loss, it shall be assumed that the prices of
futures of all maturities on the same underlying index move up or down by the same
amount.
For the purpose of the calculation of option values, the exchanges may use any of
the following standard Option Pricing Models – Black-Scholes, Binomial, Merton,
Adesi-Whaley.
The maximum loss under any of the scenario (considering only 35% of the loss in
case of scenarios 15 and 16) is referred to in this circular as the Worst Scenario
Loss. Subject to the additions and adjustments mentioned below, the Worst
Scenario Loss is the margin requirement for the portfolio.
2. Real Time Computation
The computation of Worst Scenario Loss has two components. The first is the
valuation of each option contract under sixteen scenarios using an appropriate
option pricing model. The second is the application of these Scenario Contract
Values to the actual positions in a portfolio to compute the portfolio values and the
Worst Scenario Loss. For computational ease, exchanges are permitted to update
the Scenario Contract Values only at discrete time points each day. However, the
latest available Scenario Contract Values would be applied to member/client
portfolios on a real time basis.
3. Calendar Spread
The margin for calendar spread would be the same as specified for the index futures
contracts. However, the margin shall be calculated on the basis of delta of the
portfolio in each month. Thus, a portfolio consisting of a near month option with a
delta of 100 and a far month option with a delta of –100 would bear a spread charge
equal to the spread charge for a portfolio which is long 100 near month futures and
short 100 far month futures. The Calendar Spread Margin would be charged in
addition to the Worst Scenario Loss of the portfolio.
4. Short Option Minimum Margin
The Short Option Minimum Margin equal to 3% of the Notional Value of all short
index options shall be charged, if sum of the Worst Scenario Loss and the Calendar
Spread Margin is lower than the Short Option Minimum Margin. In this circular,
Notional Value of option positions is calculated by applying the last closing price of
the index futures contract.
5. Net Option Value
The Net Option Value shall be calculated as the current market value of the option
times the number of options (positive for long options and negative for short
options) in the portfolio. This Net Option Value shall be added to the Liquid Net
Worth of the clearing member. This means that the current market value of short
options will be deducted from the Liquid Net Worth and the market value of long
options will be added thereto. Thus, market to market gains and losses on option
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positions will get adjusted against the available Liquid Net Worth. Since the options
are premium style, mark to market gains and losses will not be settled in cash for
option positions.
6. Cash Settlement of Premium
For option positions, the premium shall be paid in by the buyers in cash and paid
out to the sellers in cash on T+1 day.
7. Unpaid Premium
Until the buyer pays in the premium, the premium due shall be deducted from the
available Liquid Net Worth on a real time basis.
2.2.3 Exposure Limits
The notional value of gross open positions at any point in time in the case of all
Short Index Option Contracts shall not exceed 33 1/3 (thirty three one by three)
times the liquid net worth of a member.
2.2.4 Real Time Computation
Same as that for index future contracts as specified in Section 1.2.3.
2.2.5 Margin Collection and Enforcement
Same as that for index future contracts as specified in Section 1.2.4.
2.2.6 Liquid Net Worth and Exposure Limits of a Clearing Member:
Same as that for index future contracts as specified in Section 1.2.5.
2.2.7 Liquid Assets:
Same as that for index future contracts as specified in Section 1.2.6.
2.2.8 Bank Guarantees:
Same as that for index future contracts as specified in Section 1.2.7.
2.2.9 Securities
Same as that for index future contracts as specified in Section 1.2.8.
2.2.10 Reporting and Disclosure:
Same as that for index future contracts as specified in Section 1.2.9.
2.3 Surveillance and Disclosures
2.3.1 Unique client code
Same as that for index future contracts as specified in Section 1.3.1.
2.3.2 Position Limits
2.3.2.1 Market Level
There are no market wide position limits specified for index option contracts.
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2.3.2.2 Customer Level/ NRI/Sub Accounts
Same as that for index future contracts as specified in Section 1.3.2.2.
2.3.2.3 Trading Member/FII/Mutual Fund
Same as that for index future contracts as specified in Section 1.3.2.2. This limit
would be applicable on open positions in all option contracts on a particular
underlying index.
2.3.3 Monitoring of Position Limits
2.3.3.1 NRI
Same as that for index future contracts as specified in section 1.3.3.1.
2.3.3.2 FII /Sub Accounts
Same as that for index future contracts as specified in section 1.3.3.2.
2.3.3.3 Mutual Funds
Same as that for index future contracts as specified in section 1.3.3.3.
2.3.4 Surveillance System
Same as that of index future contracts as specified in section 1.3.4.
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3 STOCK FUTURES
3.1 Product Design
3.1.1 Underlying
The stocks listed on exchanges which conform to the eligibility criteria are
permitted.
3.1.2 Eligibility Criteria
A stock on which stock option and single stock future contracts are proposed to be
introduced shall conform to the following broad eligibility criteria:-
a. The stock shall be chosen from amongst the top 500 stock in terms of
average daily market capitalization and average daily traded value in the
previous six months on a rolling basis.
b. The stock’s median quarter-sigma order size over the last six months shall
be not less than Rupees10 Lakh. For this purpose, a stock’s quarter-sigma
order size shall mean the order size (in value terms) required to cause a
change in the stock price equal to one-quarter of a standard deviation.
c. The market wide position limit (explained later in the circular) in the stock
shall not be less than Rupees300 crores. Since market wide position limit for
a stock is computed at the end of every month, the Exchange shall ensure
that stocks comply with this criterion before introduction of new contracts.
Further, the market wide position limit (which is in number of shares) shall
be valued taking the closing prices of stocks in the underlying cash market
on the date of expiry of contract in the month.
In case circuit filter on a stock is reduced even once during the past six months, on
account of surveillance action, then that stock should undergo a cooling off period
of six months before the exchange decides to introduce derivatives on it.
The Exchange shall be guided by the following for the purpose of calculating
quarter sigma order size in a stock:-
a. Quarter sigma order size shall be calculated by taking four snapshots in a
day from the order book of the stock in the past six months. These four
snapshots shall be randomly chosen from within four fixed ten-minutes
windows spread through the day.
b. The sigma (standard deviation) or volatility estimate shall be the daily
closing volatility estimate which is also used for day end initial margin
calculation in derivative contracts on a stock. For stocks on which derivative
contracts are not traded, the daily closing volatility estimate shall be
computed in the manner specified by Prof. J.R Varma Committee on risk
containment measures for Index Futures. The daily closing volatility
estimate value shall be applied to the day’s order book snapshots to compute
quarter sigma order size.
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c. The quarter sigma percentage shall be applied to the average of the best bid
and offer price in the order book snapshot to compute the order size to move
price of the stock by quarter sigma.
a. The median order size to cause quarter sigma price movement shall be
determined separately for the buy side and the sell side. The average of the
median order size for the buy and the sell side shall be taken as the median
quarter sigma order size.
The details of calculation methodology and relevant data shall be made available to
the public at large on the website of the exchange.
The quarter sigma order size in a stock shall be calculated on the 15th of each
month, on a rolling basis, considering the order book snapshots in the previous six
months. Similarly, the average daily market capitalization and the average daily
traded value shall also be computed on the 15th of each month, on a rolling basis, to
arrive at the list of top 500 stocks.
The number of eligible stocks may vary from month to month depending upon the
changes in quarter sigma order sizes, average daily market capitalization & average
daily traded value calculated every month on a rolling basis for the past six months.
Options and futures may be introduced on new stocks when they meet the eligibility
criteria subject to SEBI approval.
Exit criteria for stocks in equity derivatives
The criteria for retention of stock in equity derivatives segment are as under:
a. The stock’s median quarter-sigma order size over last six months shall not
be less than Rupees 5 lakh.
b. MWPL of the stock shall not be less than Rupees 200 crore.
c. The stock’s average monthly turnover in derivatives segment over last three
months shall not be less than Rupees 100 crores.
If a stock fails to meet these retention criteria for three months consecutively, then
no fresh month contract shall be issued on that stock. However, the existing
unexpired contracts may be permitted to trade till expiry and new strikes may also
be introduced in the existing contract months.
Further, once the stock is excluded from the F&O list, it shall not be considered for
re-inclusion for a period of one year.
A stock which is dropped from derivatives trading may become eligible once again.
In such instances, the stock is required to fulfill the eligibility criteria for three
consecutive months (instead of one month as specified earlier) to be re-introduced
for derivatives trading. Derivative contracts on such stocks may be re-introduced by
the exchange subject to SEBI approval.
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The Exchange may compulsorily close out all derivative contract positions in a
particular underlying when that underlying has ceased to satisfy the eligibility
criteria or the exchange is of the view that the continuance of derivative contracts
on such underlying is detrimental to the interest of the market keeping in view the
market integrity and safety. The decision of such forced closure of derivative
contracts shall be taken in consultation with other exchanges where such derivative
contracts are also traded and shall be applied uniformly across all exchanges.
3.1.3 Trading Hours
Same as that for index future contracts as specified in section 1.1.3.
3.1.4 Size of the Contract
It is specified that a derivative contract shall have a value of not less than Rs. 2
Lakhs at the time of its introduction in the market. The lot sizes for stock derivative
contracts have been standardized as given under:
Contract Size
Price Bands (Rs.)
Lot Size/ Multiplier Value (in Rs. lakh)
1,601 and above 125 Greater than 2 lakhs
801 to 1600 250
401 to 800 500
201 to 400 1,000
Between 2 lakhs and 4
101 to 200 2,000
lakhs
51 to 100 4,000
25 to 50 8,000
Less than 25 A multiple of 1000
Explanation: The lot size for an underlying with a price of Rs. 250, i.e., in the price
band of Rs. 201-400, shall be 1000 units.
The Stock Exchanges shall review the lot size once in every 6 months based on the
average of the closing price of the underlying for last one month and wherever
warranted, revise the lot size by giving an advance notice of at least 2 weeks to the
market. If the revised lot size is higher than the existing one, it will be effective for
only new contracts. In case of corporate action, the revision in lot size of existing
contracts shall be carried out as given in the Chapter 8.
The Stock Exchanges shall ensure that the lot size is same for an underlying traded
across Exchanges.
3.1.5 Quotation
Same as that for index future contracts as specified in section 1.1.5.
3.1.6 Tenor of the contract
Same as that for index future contracts as specified in section 1.1.6.
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3.1.7 Available Contracts
Single Stock Futures contract shall have maturity of three months and three
contracts of maturity of one-month, two-month and three-month would be
introduced simultaneously. Therefore, at any point in time at least three Single
Stock Futures contracts on a particular underlying would be available for trading.
3.1.8 Settlement Mechanism
The Stock Exchanges have the flexibility to offer:
a. Cash settlement (settlement by payment of differences) for both stock
options and stock futures; or
b. Physical settlement (settlement by delivery of underlying stock) for both
stock options and stock futures; or
c. Cash settlement for stock options and physical settlement for stock futures;
or
d. Physical settlement for stock options and cash settlement for stock futures.
A Stock Exchange may introduce physical settlement in a phased manner. On
introduction, however, physical settlement for all stock options and/or all stock
futures, as the case may be, must be completed within six months. The settlement
mechanism shall be decided by the Stock Exchanges in consultation with the
Depositories.
On expiry / exercise of physically settled stock derivatives, the risk management
framework (i.e., margins and default) of the cash segment shall be applicable.
Settlements of cash and equity derivative segments shall continue to remain
separate.
The Stock Exchanges interested to introduce physical settlement should:
a. put in place proper systems and procedures for smooth implementation of
physical settlement.
b. make necessary amendments to the relevant bye-laws, rules and regulations
for implementation of physical settlement.
c. bring the provisions of this circular to the notice of all categories of market
participants, including the general public, and also to disseminate the
d. same on their websites.
The Stock Exchanges interested to offer physical settlement should submit to SEBI
for approval, a detailed framework for implementation of physical settlement of
stock derivatives.After opting for a particular mode of settlement for stock
derivatives, a Stock Exchange may change to another mode of settlement after
seeking prior approval of SEBI.
3.1.9 Settlement Price
Same as that for index future contracts as specified in section 1.1.9.
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3.1.10 Final Settlement Day
Same as that for index future contracts as specified in section 1.1.10.
3.1.11 Application
The Derivative Exchange/Segment shall submit their proposal for approval of the
Single Stock Futures Contracts to SEBI which shall include:
a. the details of proposed derivative contract to be traded on the exchange
which would include:
1. Symbol
2. Underlying
3. Multiplier
4. Last Trading Day
5. Margins
6. Methodology for calculating closing price for mark to market
settlement.
7. Methodology for calculating closing price at time of expiry
8. Trading Hours
b. the economic purpose it is intended to serve,
c. likely contribution to market development,
d. the safeguards and the risk protection mechanism adopted by the exchange
to ensure market integrity, protection of investors and smooth and orderly
trading,
e. the infrastructure of the exchange and the surveillance system to effectively
monitor trading in Single Stock Futures contracts,
f. details of settlement procedures & systems with regard to Single Stock
Futures.
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3.2 Risk Management
3.2.1 Initial margin or worst scenario loss
The Initial Margin requirements are based on worst scenario loss of a portfolio of
an individual client to cover 99% VaR over one day horizon across various
scenarios of price changes and volatility shifts.
In the case of Single Stock Futures, the initial margin would be computed as the
worst scenario loss of a portfolio comprising of all the positions of a client in all the
futures and options contracts. For Single Stock Futures, the price scan range would
be 3.5 Standard Deviation (3.5 sigma) and in no case the initial margin for Single
Stock Futures contract shall be less than 7.5% of the value of the Single Stock
Futures contract. The SPAN margining system, which has been adopted by both
BSE & NSE, does not have the provision to provide for charging a minimum
margin of 7.5% for futures contracts. However, in order to achieve the requirement
of minimum margin for the Single Stock Futures contract, the price scan range
would be adjusted so as to ensure that the initial margin for Single Stock Futures
contracts does not fall below 7.5% in any scenario. The standard deviation would be
calculated as per the methodology specified in the index futures.
The Initial Margin requirement shall continue to be netted at level of individual
client and shall be calculated on a gross basis at the level of Trading/Clearing
Member. The Initial margin requirement for the proprietary position of
Trading/Clearing member shall be calculated on a net basis.
3.2.2 Calendar spread
The margin on calendar spread is calculated on the basis of delta of the portfolio
consisting of futures and option contract in each month. Thus, a portfolio consisting
of a near month option with a delta of 100 and a far month option with a delta of –
100 would bear a spread charge equal to the spread charge for a portfolio which is
long 100 near month futures and short 100 far month futures. The Calendar Spread
Margin is charged in addition to the Worst Scenario Loss of the portfolio.
The margin on calendar spreads shall be at a flat rate of 0.5% per month of spread
on the far month contract subject to a minimum margin of 1% and a maximum
margin of 3% on the far side of the spread.
3.2.3 Exposure Limits
The value of gross open positions at any point in time in all the Single Stock
Futures contracts shall not exceed 20 (twenty) times the available liquid net worth
of a member. Therefore, the exchanges would be required to ensure that higher of
5% or 1.5 (standard deviation) of the notional value of gross open position in Single
Stock Futures contracts is collected /adjusted from the liquid net worth of a member
on a real time basis. Exposure limits are in addition to the initial margin
requirements. For the purpose of computing 1.5 standard deviations, the standard
deviation of daily logarithmic returns of prices in the underlying stock in the cash
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market in the last six months shall be computed. This value shall be applicable for a
month and shall be re-calculated at the end of the month by once again taking the
price data on a rolling basis for the past six months.
3.2.4 Real Time Computation
The computation of Worst Scenario Loss has two components. The first is the
valuation of the portfolio under sixteen scenarios. At the second stage, these
Scenario Contract Values are applied to the actual portfolio positions to compute
the portfolio values and the initial margin (Worst Scenario Loss). For computational
ease, exchanges are permitted to update the Scenario Contract Values only at
discrete time points each day and the latest available Scenario Contract Values
would is applied to member/client portfolios on a real time basis.
However, in order to ensure that the most recent scenario are applied for
computation of the portfolio values and the initial margin, the scenario contract
values shall be updated at least 5 times in the day, which may be carried out by
taking the closing price of the previous day at the start of trading and the prices at
11:00 a.m., 12:30 p.m., 2:00 p.m., and at the end of the trading session. For the
purpose of computing worst scenario loss on a portfolio, the price scan range for
stock option and single stock future contracts shall be linked to liquidity, measured
in terms of impact cost for an order size of Rs.5 Lakh, calculated on the basis of
order book snapshots in the previous six months. Accordingly, if the mean value of
impact cost exceeds 1%, the price scanning range would be scaled up by square root
of three. This would be in addition to the requirement of scaling up for the look-
ahead period i.e. the time in which mark to market margin is collected. The
guidance for computation of impact cost for an order size of Rs.5 Lakhs is as
under:-
Impact cost shall be calculated by taking four snapshots in a day from the order
book in the past six months. These four snapshots shall be randomly chosen from
within four fixed ten-minutes windows spread through the day.
The impact cost shall be the percentage price movement caused by an order size of
Rs.5 Lakh from the average of the best bid and offer price in the order book
snapshot. The impact cost shall be calculated for both, the buy and the sell side in
each order book snapshot.
The mean of the impact cost for both the buy and the sell side in each order book
snapshot in the past six months shall be computed to determine the applicable price
scan range in the stock. The details of calculation methodology and relevant data
shall be made available to the public at large through the website of the Exchanges.
The mean impact cost shall be calculated at 15th of each month on a rolling basis
considering the order book snapshots of the previous six months. If the mean
impact cost or a stock moves from less than or equal to 1% to more than 1%, the
price scan range in such stock should be scaled up by square root of three and the
scaling should be dropped when the impact cost drops to 1% or less. Such changes
will be applicable on all existing open position within three days from the 15th of
each month.
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3.2.5 Cross Margining
Same as that for index future contracts as specified in section 1.2.9.
3.2.6 Margin Collection and Enforcement
Same as that for index future contracts as specified in section 1.2.10.
It is clarified that for stocks which have a mean value of impact cost greater than
1%, in addition to the price scanning range, the minimum initial margin for single
stock futures contracts shall also be scaled up by square root of three. In the absence
of trading in the last half an hour the theoretical price would be taken for the
collection of MTM margin. The Derivative Exchanges/Segment shall define the
methodology of calculating the ‘theoretical price’ at the time of making an
application for approval of the stock futures contract to SEBI and methodology for
calculating the ‘theoretical price’ would also be disclosed to the market. In addition,
the exchange shall also specify the methodology for arriving at the closing price at
the time of expiry.
3.2.7 Liquid Net Worth and Exposure Limits of a Clearing Member
Same as that for index future contracts as specified in section 1.2.1.
3.2.8 Liquid Assets:
Same as that for index future contracts as specified in section 1.2.2.
3.2.9 Bank Guarantees:
Same as that for index future contracts as specified in section 1.2.3.
3.2.10 Securities
Same as that for index future contracts as specified in section 1.2.4.
3.2.11 Reporting and Disclosure:
Same as that for index future contracts as specified in section 1.2.11.
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3.3 Surveillance and Disclosures
3.3.1 Unique client code
Same as that for index future contracts as specified in Section 1.3.1.
3.3.2 Position Limits
3.3.2.1 Market Level
The market wide position limit for single stock futures and stock option contracts
shall be linked to the free float market capitalization and shall be equal to 20% of
the number of shares held by non-promoters in the relevant underlying security (i.e.,
free-float holding). This limit would be applicable on aggregate open positions in
all futures and all option contracts on a particular underlying stock.
The Exchange is advised to enforce the market wide limits through administrative
measures, in the manner detailed below:
a. At the end of each day the Exchange shall test whether the market wide
open interest for any scrip exceeds 95% of the market wide position limit for
that scrip. If so, the Exchange shall take note of open position of all
client/TMs as at the end of that day in that scrip, and from next day onwards
the members/client shall trade only to decrease their positions through
offsetting positions. While the Exchange will take this action only at end of
day, they shall disclose real time information about the market wide open
interest as a percentage of the market wide position limits.
b. At the end of each day during which the ban on fresh positions is in force
for any scrip, the Exchange shall test whether any member or client has
increased his existing positions or has created a new position in that scrip. If
so, that client shall be subject to a penalty equal to a specified percentage (or
basis points) of the increase in the position (in terms of notional value). The
penalty shall be recovered before trading begins next day. The Exchange
shall specify the percentage or basis points, which shall be set high enough
to deter violations of the ban on increasing positions.
c. The normal trading in the scrip shall be resumed after the open outstanding
position comes down to 80% or below of the market wide position limit.
With a view to operationalise implementation of monitoring of Market Wide
Position Limits across Exchanges, the following procedure shall be followed:
At the latest on Activity
the Trading Day
6.30 PM Each Exchange to disseminate on web the following for
every security:
a. ISIN of the security,
b. Name and symbol of the security,
c. MWPL (in terms of no. of shares) of the security, and
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d. Open Interest (in terms of no. of shares) of the security.
7.00 PM Each Exchange to disseminate on web the following for
every security, after aggregating across Exchanges:
a. ISIN of the security,
b. Name and symbol of the security,
c. MWPL (in terms of no. of shares) of the security,
d. Open Interest (in terms of no. of shares) of the security,
and
e. Permissible limits for next day in terms of SEBI Circular
SEBI/DNPD/Cir-26/2004/07/16 dated July 16, 2004.
7.15 PM Each Exchange to report any discrepancy in the above
data to other Exchanges and after correction, disseminate
the final data on the web.
The above data shall be in a machine readable, open format (preferably XML
format).
Further, the Exchange shall check on a monthly basis, whether a stock has remained
subject to the ban on new position for a significant part of the month consistently
for three months. If so, then the Exchange shall phase out derivative contracts on
that underlying.
3.3.2.2 Customer Level/ NRI/Sub Accounts
The gross open position across all derivative contracts on a particular underlying
stock should not exceed the higher of:
1% of the free float market capitalization (in terms of number of shares).
or
5% of the open interest in the derivative contracts on a particular underlying stock
(in terms of number of contracts).
a. These position limits would be applicable on the combined position in all
derivative contracts on an underlying stock at an exchange.
b. This requirement may not be monitored by the exchange on a real time
basis, but if during any investigation or otherwise, any violation is proved,
penalties can be levied.
3.3.2.3 Trading Member/FII/Mutual Fund
For stocks having applicable market-wise position limit (MWPL) of Rs. 500 crores
or more, the combined futures and options position limit shall be 20% of applicable
MWPL or Rs.300 crores, whichever is lower and within which stock futures
position cannot exceed 10% of applicable MWPL or Rs.150 crores, whichever is
lower.
For stocks having applicable market-wise position limit (MWPL) less than Rs.500
crores, the combined futures and options position limit would be 20% of applicable
MWPL and futures position cannot exceed 20% of applicable MWPL or Rs.50
crore which ever is lower.
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3.3.3 Monitoring of Position Limits
3.3.3.1 NRI
Same as that for index future contracts as specified in section 1.3.3.1.
3.3.3.2 FII /Sub Accounts
Same as that for index future contracts as specified in section 1. 3.3.2.
3.3.3.3 Mutual Funds
Same as that for index future contracts as specified in section 1.3.3.3.
3.3.4 Surveillance System
Same as that of index future contracts as specified in section 1.3.4.
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4 STOCK OPTION
4.1 Product Design
4.1.1 Underlying
The stocks listed on exchanges which conform to the eligibility criteria are
permitted.
4.1.2 Eligibility Criteria
Same as that for stock future contracts as specified in 3.1.2.
4.1.3 Trading Hours
Same as that for index future contracts as specified in 1.1.3.
4.1.4 Size of the Contract
Same as that for stock future contracts as specified in 3.1.4.
4.1.5 Quotation
Same as that for index future contracts as specified in 1.1.5.
4.1.6 Tenor of the contract
Same as that for stock future contracts as specified in 3.1.6.
4.1.7 Available Contracts
Same as that for stock future contracts as specified in 3.1.7. Each maturity shall
have minimum of three strikes (in the money, at the money and out of the money)
4.1.8 Settlement Mechanism
Same as that for index future contracts as specified in 1.1.8. The Exchanges shall
introduce Premium Settled American / European Style Stock Options.
4.1.9 Settlement Price
Same as that for index future contracts as specified in 1.1.9.
4.1.10 Final Settlement Day
Same as that for index future contracts as specified in 1.1.10.
4.1.11 Application
The Derivative Exchange/Segment shall submit their proposal for approval of the
stock option contract to SEBI which shall include:
a. the details of proposed derivative contract to be traded on the exchange
which would include:
1. Symbol
2. Underlying – giving details of the calculations mentioned above and
ensuring that the stock fulfills the eligibility criterion specified.
3. Lot Size / Multiplier
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4. Strike Price Intervals
5. Premium Quotation
6. Last Trading Day
7. Expiration day/month
8. Exercise Style
9. Mode of Assignment
10. Time period of settlement of Option Exercise
11. Position and Exercise Limits
12. Margin
13. Trading Hours
b. the economic purpose it is intended to serve,
c. likely contribution to market development,
d. the safeguards and the risk protection mechanism adopted by the exchange
to ensure market integrity, protection of investors and smooth and orderly
trading,
e. the infrastructure of the exchange and the surveillance system to effectively
monitor trading in such contracts, and
f. details of settlement procedures & systems with regard to Stock Options.
g. details of back testing of the margin calculation for a period of one year
considering a call and a put option on the underlying with a delta of +25 & -
25 and actual price of the underlying security.
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4.2 Risk Management
4.2.1 Initial Margin Computation:
The Initial Margin requirements are based on worst scenario loss of a portfolio of
an individual client to cover 99% VaR over one day horizon across various
scenarios of price changes and volatility shifts. For stock option contracts the price
scan range is specified at three and a half standard deviation (3.5 sigma) and the
volatility scan range is specified at 10%. There is also a minimum margin
requirement. A short option minimum charge of 7.5% of the notional value of all
short stock option contracts has been prescribed.
4.2.2 Portfolio Based Margining
Same as that for index option contacts as given in section 2.2.2.
4.2.3 Exposure Limits
It has been prescribed that the notional value of gross open positions at any point in
time in the case of Stock Option Contracts, the notional value of gross short open
position at any point in time shall not exceed 20 (twenty) times the liquid net worth
of a member. Exposure limits are in addition to the initial margin requirements.
Therefore, the exchanges are required to ensure that 5% of the notional value of
gross open position in the case of stock option contracts is collected /adjusted from
the liquid net worth of a member on a real time basis. It is further clarified that the
notional value of the options contract would be calculated on the basis of the
previous day’s closing value of the underlying.
4.2.4 Real Time Computation
Same as that for stock future contracts as specified in 3.2.3.
4.2.5 Margin Collection and Enforcement
Same as that for index future contracts as specified in section 1.2.10. It is clarified
that for stocks which have a mean value of impact cost greater than 1%, in addition
to the price scanning range, the short option minimum charge for stock option
contracts shall also be scaled up by square root of three.
4.2.6 Liquid Net Worth and Exposure Limits of a Clearing Member
Same as that for index future contracts as specified in section 1.2.1.
4.2.7 Liquid Assets:
Same as that for index future contracts as specified in section 1.2.2.
4.2.8 Bank Guarantees:
Same as that for index future contracts as specified in section 1.2.3.
4.2.9 Securities
Same as that for index future contracts as specified in section 1.2.4.
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4.2.10 Reporting and Disclosure:
Same as that for index future contracts as specified in section 1.2.11.
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4.3 Surveillance and Disclosures
4.3.1 Unique client code
Same as that for index future contracts as specified in Section 1.3.1.
4.3.2 Position Limits
4.3.2.1 Market Level
Same as that for stock future contracts as specified in 3.3.2.1.
4.3.2.2 Customer Level/ NRI/Sub Accounts
Same as that for stock future contracts as specified in 3.3.2.2.
4.3.2.3 Trading Member/FII/Mutual Fund
Same as that for stock future contracts as specified in 3.3.2.2.
4.3.3 Monitoring of Position Limits
4.3.3.1 NRI
Same as that for index future contracts as specified in section 1.3.3.1.
4.3.3.2 FII /Sub Accounts
Same as that for index future contracts as specified in section 1.3.3.2.
4.3.3.3 Mutual Funds
Same as that for index future contracts as specified in section 1.3.3.3.
4.3.4 Surveillance System
Same as that for index future contracts as specified in section 1.3.4.
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5 CURRENCY FUTURES
5.1 Product Design
5.1.1 Underlying
US Dollar – Indian Rupee (US$-INR), Euro-Indian Rupee (EUR-INR), Pound
Sterling – Indian Rupee (GBP-INR) and Japanese Yen – Indian Rupee (JPY-INR).
5.1.2 Trading Hours
The trading on currency futures would be available from 9 a.m. to 5 p.m.
5.1.3 Size of the contract
The minimum contract size of the currency futures contract at the time of
introduction would be US$ 1000, EUR 1000, Pound Sterling 1000 and Japanese
Yen 1,00,000 for the US Dollar – Indian Rupee (US$-INR), Euro-Indian Rupee
(EUR-INR), Pound Sterling – Indian Rupee (GBP-INR) and Japanese Yen – Indian
Rupee (JPY-INR) respectively. The contract size would be periodically aligned to
ensure that the size of the contract remains close to the minimum size.
5.1.4 Quotation
The currency futures contract would be quoted in rupee terms. However, the
outstanding positions would be in Dollar, Euro, Pound Sterling and Japanese Yen
terms for the US Dollar – Indian Rupee (US$-INR), Euro-Indian Rupee (EUR-
INR), Pound Sterling – Indian Rupee (GBP-INR) and Japanese Yen – Indian Rupee
(JPY-INR) contracts respectively.
5.1.5 Tenor of the contract
The currency futures contract shall have a maximum maturity of 12 months.
5.1.6 Available contracts
All monthly maturities from 1 to 12 months would be made available.
5.1.7 Settlement mechanism
The currency futures contract shall be settled in cash in Indian Rupee.
5.1.8 Settlement price
The settlement price would be the Reserve Bank Reference Rate on the date of
expiry for US$ and Euro and Exchange rate published by the Reserve Bank in its
Press Release captioned - RBI Reference Rate for US$ and Euro for Pound Sterling
and Japanese Yen. The methodology of computation and dissemination of the
Reference Rate may be publicly disclosed by RBI.
5.1.9 Final settlement day
The last day for trading of the contract shall be two working days prior to the final
settlement day. The currency futures contract would expire on the last working day
(excluding Saturdays) of the month. The last working day would be taken to be the
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same as that for Interbank Settlements in Mumbai. The rules for Interbank
Settlements, including those for ‘known holidays’ and ‘subsequently declared
holiday’ would be those as laid down by FEDAI.
5.1.10 Participants
To begin with, FIIs and NRIs would not be permitted to participate in currency
futures market. To enable Banks to become Clearing Member and/or Trading
Member of the Currency Derivatives Segment of an Exchange, an Exchange shall
amend its bye-laws, as under:
"Any bank, -included in the Second Schedule to the Reserve Bank of India Act,
1934, and specifically authorized by RBI for this purpose,
a. is eligible to become Clearing Member and/or Trading Member of the
Currency Derivatives Segment of an Exchange, on the recommendation of
the governing body of the Exchange.
b. such bank can act as member for their proprietary dealings, to act on their
own account, in the Currency Derivatives Segment of the Exchange.
c. such bank can also act as member or an agent for any other person, client or
customer in the Currency Derivatives Segment of an Exchange.
d. such bank shall abide by circulars and directions issued by RBI and SEBI in
respect of dealing of such banks in the Exchange."
5.2 Risk Management Measures
In exchange traded derivative contracts, the Clearing Corporation acts as a central
counterparty to all trades and performs full novation. The risk to the clearing
corporation can only be taken care of through a stringent margining framework.
Also, since derivatives are leveraged instruments, margins also act as a cost and
discourage excessive speculation. A robust risk management system should
therefore, not only impose margins on the members of the clearing corporation but
also enforce collection of margins from the clients.
5.2.1 Initial Margin
The Initial Margin requirement shall be based on a worst case loss of a portfolio of
an individual client across various scenarios of price changes. The various scenarios
of price changes would be so computed so as to cover a 99% VaR over a one day
horizon. In order to achieve this, the price scan range may initially be fixed at 3.5
standard deviation. The initial margin so computed would be subject to a minimum
of 1.75% on the first day of currency futures trading and 1 % thereafter for US
Dollar – Indian Rupee (US$-INR) contract, minimum of 2.80% on the first day of
currency futures trading and 2 % thereafter for Euro-Indian Rupee (EUR-INR)
contract, minimum of 3.20% on the first day of trading and 2% thereafter for Pound
Sterling – Indian Rupee (GBP-INR) contract, minimum of 4.50% on the first day of
trading and 2.30% thereafter for Japanese Yen – Indian Rupee (JPY-INR) contract.
The initial margin shall be deducted from the liquid net worth of the clearing
member on an online, real time basis.
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5.2.2 Formula for determining standard deviation
The empirical tests of different risk management models in the Value at Risk (VaR)
framework in the Re/$ exchange rate were examined. Data for the period January 2,
1998 to April 7, 2008 was analyzed. GARCH-GED (Generalized Auto-Regressive
Conditional Heteroscedasticity with Generalized Error Distribution residuals),
GARCH-normal and GARCH-t at 3 and 3.5 sigma levels were found to perform
well even at 1% risk level, while the EWMA(Exponentially Weighted Moving
Average) model used in J.P. Morgan’s Risk Metrics® methodology was found to
work well at 1 % risk level only at 3.5 sigma levels.
Given the computational ease of the EWMA model and given the familiarity of the
Exchanges with this particular model (it is currently being used in the equity
derivatives market), the Committee, after considering the various aspects of the
different models, recommends the following:-
The exponential moving average method would be used to obtain the volatility
estimate every day. The estimate at the end of time period t (σ) is estimated using
t
the volatility estimate at the end of the previous time period. i.e. as at the end of t-1
time period (σ ), and the return (r) observed in the futures market during the time
t-1 t
period t. The formula would be as under:
(σ)2 = λ (σ )2 + (1 - λ ) (r)2
t t-1 t
where
λ is a parameter which determines how rapidly volatility estimates changes.
The value of λ is fixed at 0.94.
i. σ (sigma) means the standard deviation of daily returns in the currency futures
market.
ii. The "return" is defined as the logarithmic return: r = ln(C/C ) where C is
t t t-1 t
the Currency futures price at time t. The plus/minus 3.5 sigma limits for a
99% VAR based on logarithmic returns would have to be converted into
percentage price changes by reversing the logarithmic transformation. The
percentage margin on short positions would be equal to 100(exp (3.5 σ)-1)
t
and the percentage margin on long positions would be equal to 100(1-exp (-
3.5σ)). This implies slightly larger margins on short positions than on long
t
positions. The derivatives exchange/clearing corporation may apply the higher
margin on both the buy and sell side.
iii. During the first time period on the first day of Currency futures trading, the
sigma would be equal to 0.5%.
iv. The volatility estimation and margin fixation methodology should be clearly
made known to all market participants so that they can compute what the
margin would be for any given closing level of the currency futures price.
Further, the trading software itself should provide this information on a real
time basis on the trading workstation screen.
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5.2.3 Portfolio based margining
A portfolio based margining approach shall be adopted to take an integrated view of
the risk involved in the portfolio of each individual client comprising his positions
in futures contracts across different maturities. The client-wise margins would be
grossed across various clients at the Trading/Clearing Member level. The
proprietary positions of the Trading/Clearing Member would be treated as that of a
client.
5.2.4 Real time computation
The computation of worst scenario loss would have two components. The first is
the valuation of the portfolio under the various scenarios of price changes. At the
second stage, these scenario contract values would be applied to the actual portfolio
positions to compute the portfolio values and the initial margin. The exchanges
shall update the scenario contract values at least 5 times in the day, which may be
carried out by taking the closing price of the previous day at the start of trading and
the prices at 11:00 a.m., 12:30 p.m., 2:00 p.m. and at the end of the trading session.
The latest available scenario contract values would be applied to member/client
portfolios on a real time basis.
5.2.5 Calendar spread margins
A currency futures position at one maturity which is hedged by an offsetting
position at a different maturity would be treated as a calendar spread. The calendar
spread margin shall be at a value of Rs. 400 for a spread of 1 month; Rs 500 for a
spread of 2 months, Rs 800 for a spread of 3 months and Rs 1000 for a spread or 4
months or more for the US Dollar – Indian Rupee (US$-INR) contract; the calendar
spread margin shall be at a value of Rs. 700 for a spread of 1 month; Rs 1000 for a
spread of 2 months and Rs 1500 for a spread of 3 months or more for the Euro-
Indian Rupee (EUR-INR) contract; the calendar spread margin shall be at a value of
Rs. 1500 for a spread of 1 month; Rs 1800 for a spread of 2 months and Rs 2000 for
a spread of 3 months or more for the Pound Sterling – Indian Rupee (GBP-INR)
contract; the calendar spread margin shall be at a value of Rs. 600 for a spread of 1
month; Rs 1000 for a spread of 2 months and Rs 1500 for a spread of 3 months or
more for the Japanese Yen – Indian Rupee (JPY-INR) contract. The benefit for a
calendar spread would continue till expiry of the near month contract. For a
calendar spread position, the extreme loss margin shall be charged on one third of
the mark to market value of the far month contract.
5.2.6 Extreme Loss margin
Extreme loss margin of 1% for the US Dollar – Indian Rupee (US$-INR) contract,
0.3% for the Euro-Indian Rupee (EUR-INR) contract, 0.5% for the Pound Sterling –
Indian Rupee (GBP-INR) contract and 0.7% for the Japanese Yen – Indian Rupee
(JPY-INR) contract on the mark to market value of the gross open positions shall be
deducted from the liquid assets of the clearing member on an on line, real time
basis.
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5.2.7 Liquid networth
The initial margin and the extreme loss margin shall be deducted from the liquid
assets of the clearing member. The clearing member’s liquid net worth after
adjusting for the initial margin and extreme loss margin requirements must be at
least Rs. 50 Lakhs at all points in time. The minimum liquid networth shall be
treated as a capital cushion for days of unforeseen market volatility.
5.2.8 Liquid assets
The liquid assets for trading in currency futures would be maintained separately in
the currency futures segment of the clearing corporation. However, the permissible
liquid assets, the applicable haircuts and minimum cash equivalent norms would be
mutatis mutandis applicable from the equity derivatives segment.
5.2.9 Mark to market settlement
The mark to market gains and losses shall be settled in cash before the start of
trading on T+1 day. If mark to market obligations are not collected before start of
the next day’s trading, the clearing corporation shall collect correspondingly higher
initial margin to cover the potential for losses over the time elapsed in the collection
of margins.
The daily closing price of currency futures contract for mark to market settlement
would be calculated on the basis of the last half an hour weighted average price of
the futures contract. In the absence of trading in the last half an hour the theoretical
price would be taken. The eligible exchanges shall define the methodology for
calculating the ‘theoretical price’ at the time of making an application for approval
of the currency futures contract to SEBI. The methodology for calculating the
‘theoretical price’ would also be disclosed to the market.
5.2.10 Margin collection and enforcement
The client margins (initial margin, extreme loss margin, calendar spread margin and
mark to market settlements) have to be compulsorily collected and reported to the
Exchange by the members. The Exchange shall impose stringent penalty on
members who do not collect margins from their clients. The Exchange shall also
conduct regular inspections to ensure margin collection from clients.
5.2.11 Safeguarding client’s money
The Clearing Corporation should segregate the margins deposited by the Clearing
Members for trades on their own account from the margins deposited with it on
client account. The margins deposited on client account shall not be utilized for
fulfilling the dues which a Clearing Member may owe the Clearing Corporation in
respect of trades on the member’s own account. The client’s money is to be held in
trust for client purpose only. The following process is to be adopted for segregating
the client’s money vis-à-vis the clearing member’s money:
i At the time of opening a position, the member should indicate whether it is a
client or proprietary position.
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ii Margins across the various clients of a member should be collected on a gross
basis and should not be netted off.
iii When a position is closed, the member should indicate whether it was a client
or his own position which is being closed.
iv In the case of default, the margins paid on the proprietary position would only
be used by the Clearing Corporation for realising its dues from the member.
5.2.12 Periodic risk evaluation report
The Clearing Corporation of the Exchange shall on an ongoing basis and atleast
once in every six months, conduct back testing of the margins collected vis-à-vis
the actual price changes. A copy of the study shall be submitted to SEBI along with
suggestions on changes to the risk containment measures, if any.
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5.3 Surveillance and Disclosures
The exchanges as first level regulators should have an online surveillance capability
which monitors positions, prices and volumes in real time so as to deter market
manipulation.
5.3.1 Unique client code
The Exchange shall ensure that each client is assigned a client code which is unique
across all members. The unique client code shall be assigned with the use of PAN
number.
5.3.2 Position limits
Position limits act as an important surveillance measure designed to prevent large
concentrated positions which may affect market integrity. However, the regulation
of position limits needs to be viewed differently in the currency futures market as
compared to the equity derivatives market. In the equity derivatives market, the
maximum underlying shares available for trading is restricted to the extent of the
free float market capitalization, whereas, there is no such constraint in the foreign
exchange market.
The two markets also differ in terms of participation and the extent of positions held
by each participant. Large transactions are executed by banks and corporates who
wish to hedge their underlying exposure. Therefore, the monitoring of limits has to
be with respect to the overall open interest in the market. Open interest is a dynamic
measure which changes with every executed trade. Further, the objective of the
position limits in the currency futures market would be more to detect market
manipulation in the futures market rather than to address the threat of short squeeze
in the underlying. Therefore, the following is being proposed with respect to
monitoring and enforcement of position limits in the currency futures market:
a. Ideally, position limits have to be monitored on an online, real-time basis.
However, the exchanges have represented that open interest of both the
participant and the market are dynamic and therefore, monitoring on a real-
time basis would be difficult. Therefore, to begin with, positions during the
day shall be monitored based on the total open interest at the end of the
previous day’s trade.
b. The above monitoring should be for both client level positions (based on the
unique client code) and for trading member level positions.
c. The exchange shall treat violation of position limits as an input for further
surveillance action. Upon detecting large open positions, the exchange shall
conduct detailed analysis based on the overall nature of positions, the
trading strategy, positions in the underlying market, the positions of related
entities (concept of persons acting in concert would be applied), etc.
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d. The violators of position limits shall be accountable for their large positions
and should submit detailed information pertaining to their trading activities
whenever the information is sought by the exchange. The clearing member
would be accountable for positions of all trading members and clients of
trading members clearing through him. Similarly, the trading member would
be accountable for the positions of his clients. The exchange may also call
for information directly from the client itself.
The following position limits would be applicable in the currency futures market:
US Dollar – Indian Rupee (US$-INR) Contract
Client Level: The gross open positions of the client across all contracts should not
exceed 6% of the total open interest or 10 million USD whichever is higher. The
Exchange will disseminate alerts whenever the gross open position of the client
exceeds 3% of the total open interest at the end of the previous day’s trade.
Trading Member level: The gross open positions of the trading member across all
contracts should not exceed 15% of the total open interest or 50 million USD
whichever is higher. However, the gross open position of a Trading Member, which
is a bank, across all contracts, shall not exceed 15% of the total open interest or 100
million USD, whichever is lower.
Clearing Member Level: No separate position limit is prescribed at the level of
clearing member. However, the clearing member shall ensure that his own trading
position and the positions of each trading member clearing through him is within
the limits specified above.
Euro-Indian Rupee (EUR-INR) Contract
Client Level: The gross open positions of the client across all contracts shall not
exceed 6% of the total open interest or EUR 5 million whichever is higher. The
Exchange will disseminate alerts whenever the gross open position of the client
exceeds 3% of the total open interest at the end of the previous day’s trade.
Trading Member Level: The gross open positions of the trading member across all
contracts shall not exceed 15% of the total open interest or EUR 25 million
whichever is higher. However, the gross open position of a Trading Member, which
is a bank, across all contracts, shall not exceed 15% of the total open interest or
EUR 50 million, whichever is higher.
Clearing Member Level: No separate position limit is prescribed at the level of
clearing member. However, the clearing member shall ensure that his own trading
position and the positions of each trading member clearing through him is within
the limits specified above.
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Pound Sterling – Indian Rupee (GBP-INR) Contract
Client Level: The gross open positions of the client across all contracts shall not
exceed 6% of the total open interest or GBP 5 million whichever is higher. The
Exchange will disseminate alerts whenever the gross open position of the client
exceeds 3% of the total open interest at the end of the previous day’s trade.
Trading Member Level: The gross open positions of the trading member across all
contracts shall not exceed 15% of the total open interest or GBP 25 million
whichever is higher. However, the gross open position of a Trading Member, which
is a bank, across all contracts, shall not exceed 15% of the total open interest or
GBP 50 million, whichever is higher.
Clearing Member Level: No separate position limit is prescribed at the level of
clearing member. However, the clearing member shall ensure that his own trading
position and the positions of each trading member clearing through him is within
the limits specified above.
Japanese Yen – Indian Rupee (JPY-INR) Contract
Client Level: The gross open positions of the client across all contracts shall not
exceed 6% of the total open interest or JPY 200 million whichever is higher. The
Exchange will disseminate alerts whenever the gross open position of the client
exceeds 3% of the total open interest at the end of the previous day’s trade.
Trading Member Level: The gross open positions of the trading member across all
contracts shall not exceed 15% of the total open interest or JPY 1000 million
whichever is higher. However, the gross open position of a Trading Member, which
is a bank, across all contracts, shall not exceed 15% of the total open interest or JPY
2000 million, whichever is higher.
Clearing Member Level: No separate position limit is prescribed at the level of
clearing member. However, the clearing member shall ensure that his own trading
position and the positions of each trading member clearing through him is within
the limits specified above.
5.3.3 Surveillance system
The surveillance systems of the exchanges should be designed keeping in view all
the relevant aspects including the following -
a. The alerts in the online surveillance system should automatically generate
material aberrations from normal activity.
b. The surveillance systems and processes should be able to
1. monitor open interest, cost of carry and volatility
2. monitor closing prices
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3. capture and process client level details
4. develop databases of trading activity by brokers as well as clients.
5. generate trading pattern by a broker over a period of time or by a
client/ group of clients over a period of time
c. The information and feedback received from member inspections is vital
input for effective surveillance. For this, it is necessary that member
inspections are taken up in a rational manner keeping in view the level of
trading activity, client profile, number and nature of complaints received
against the member, history of risk management related defaults and
regulatory violations etc. Information obtained through member inspections
should also be made available to the monitoring/surveillance departments of
stock exchanges.
d. The information gathered by the risk management departments/clearing
corporations while enforcing the risk management measures and settlement
processes are critical inputs. Such information could include pattern of
defaults related to specified contracts and special risk management measures
taken keeping in view the market conditions.
e. The exchanges should call for information from members in a standard
form, and preferably in electronic form, to facilitate faster analysis as well
as building up of databases. It may also be ensured that duly authenticated
information is submitted by the member or his designated agent.
f. While implementing a stock watch type of system for currency futures, the
system should be designed to provide online access to relevant historical
data on derivatives trading for at least a year.
g. In the interest of better surveillance, it is necessary that relevant information
obtained through surveillance at one exchange should be shared with other
exchanges. Exchanges are, therefore, advised to share information on
positions in currency futures and any extraordinary movement in price /
volume or concentration periodically or upon specific request by any stock
exchange. The Clearing Corporations of the various eligible exchanges must
meet periodically, say once a week, to discuss market integrity and other
surveillance issues.
h. Exchanges should study surveillance practices in various Global Forex
Derivative Markets. Surveillance practices in commodities and bullion
markets could also be studied where appropriate. Case studies on some
market manipulations in various derivatives markets could be looked at to
see what lessons could be drawn. Periodical benchmarking, at least once in
every six months, against international practices, systems performance etc.,
must be performed and documented.
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The reporting of currency derivative transactions to the media and the newspapers
should be in a uniform format. Accordingly, the Currency Derivative Exchanges/
Segments and their Clearing Corporations may be asked to report the following
details for the transactions in derivative contracts, to the media/newspapers, on a daily
basis:
a. Contracts Description
b. Number of contracts traded
c. Notional Value
d. Open
e. High
f. Low
g. Close
h. Open Interest (in number of contracts)
5.4 Eligibility Criteria of the Segment, Exchanges and Trading
Members
5.4.1 Eligibility criteria of currency futures segment
Recognized stock exchanges and their respective Clearing Corporations/Clearing
Houses shall not deal in or otherwise undertake the business relating to currency
futures unless they hold an authorization issued by the Reserve Bank under section
10 (1) of the Foreign Exchange Management Act, 1999.
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:
a. The trading should take place through an online screen-based trading
system, which also has a disaster recovery site.
b. The clearing of the currency derivatives market should be done by an
independent Clearing Corporation, which satisfies the conditions listed
under 5.4.2.
c. The exchange must have an online surveillance capability which monitors
positions, prices and volumes in real time so as to deter market
manipulation.
d. The exchange shall have a balance sheet net worth of at least Rs. 100 crores.
e. 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.
f. The per-half-hour capacity of the computers and the network should be at
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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.
g. The segment should have at least 50 members to start currency derivatives
trading.
h. The exchange should have arbitration and investor grievances redressal
mechanism operative from all the four areas/regions of the country.
i. The exchange should have adequate inspection capability.
j. If already existing, the exchange should have a satisfactory record of
monitoring its members, handling investor complaints and preventing
irregularities in trading.
A recognized stock exchange where other securities are also being traded may set
up a separate currency futures segment in the following manner:
a. The trading and the order driven platform of currency futures should be
separate from the trading platforms of the other segments.
b. The membership of the currency futures segment should be separate from
the membership of the other segments.
c. The currency futures segment should have a separate Governing Council on
which the representation of Trading/Clearing Members of the currency
futures segment should not exceed 25%. Further, 50% of the public
representatives on the Governing Council of the currency futures segment
can be common with the Governing Council of the cash/equity derivatives
segments of the Exchange.
d. The Chairman of the Governing Council of the currency futures segment
shall be a member of the Governing Council. If the Chairman is a Trading
Member/Clearing Member, then he shall not carry on any trading/clearing
business on any Exchange during his tenure as Chairman.
e. No trading/clearing member should be allowed simultaneously to be on the
Governing Council of the currency futures segment and the cash/equity
derivatives segment.
5.4.2 Eligibility criteria for the Clearing Corporation of the currency futures segment
A Clearing Corporation in the currency futures segment can function only after
obtaining SEBI approval. To be eligible for such approval, it should satisfy the
following conditions:
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a. The Clearing Corporation should be a company incorporated under the
Companies Act, 1956 and should be distinct from the exchange. However,
in case of an exchange operating through a Clearing House, a maximum
time period of 6 months may be granted from the date of approval by SEBI,
to the exchange, for fulfilling this condition.
b. The Clearing Corporation must perform full novation, i.e. the clearing
corporation should interpose itself between both legs of every trade,
becoming the legal counterparty to both or alternatively should provide an
unconditional guarantee for settlement of all trades.
c. The clearing corporation should enforce the margin requirements and the
mark to market settlement as outlined above.
d. In the event of unusual positions of a member, the clearing corporation
should charge special margin over and above the normal margins.
e. The clearing corporation must establish facilities for electronic funds
transfer (EFT) for swift movement of margin payments. In situations where
EFT is unavailable, the clearing corporation should collect correspondingly
larger initial margin to cover the potential for losses over the time elapsed in
collection of mark to market margin. For example, if two days lapse in
moving funds, then the value at risk should be calculated based on the
prospective two-day loss.
f. In the event of a member’s default in meeting his liabilities, the Clearing
Corporation should have processing capability to require either the prompt
transfer of client positions and assets to another member or to close-out all
open positions.
The currency futures segment of the Clearing Corporation should be governed by a
separate Clearing Council which should not have any member representation. A
separate settlement guarantee fund should be created and maintained for meeting
the obligations arising out of the currency futures segment. A separate investor
protection fund should also be created and maintained for the currency futures
market.
5.4.3 Eligibility criteria for members in the currency futures segment
The membership of the currency futures segment shall be separate from the
membership of the equity derivative segment or the cash segment of a recognized
stock exchange.
The trading member will be subject to a balance sheet net worth requirement of Rs.
1 crore while the clearing member would be subject to a balance sheet net worth
requirement of Rs 10 crores. Self clearing member shall have a minimum net worth
of Rs. 5 crore. The definition of balance sheet net worth would be the same as that
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in the equity derivatives market. The clearing member would also be subject to a
liquid net worth requirement of Rs. 50 lakhs as detailed above.
The trading members and sales persons in the currency futures market must have
passed a certification programme which is considered adequate by SEBI. The
approved users and sales personnel of the trading member should have passed the
certification programme. This requirement shall not be applicable in respect of a
trading member in the currency derivatives segment, which is a bank, for a period
of one year from August 06, 2008.
5.4.4 Regulatory and legal aspects
Before the start of the currency futures segment, the exchange shall obtain prior
approval of SEBI. In the case of existing exchanges, where equity derivatives are
permitted for trading, the rules, regulations and bye-laws of the derivatives segment
of the exchange/clearing corporation may be made applicable for the currency
futures segment also. The exchange/clearing corporation shall make suitable
changes to that effect. Any requirement which is specific to the currency futures
segment shall be provided for after seeking SEBI’s approval. Further, any
amendments to the rules, regulations and byelaws shall be made after seeking SEBI
approval.
The currency futures segment shall also prescribe a model risk disclosure
document, model member-constituent agreement and know your client agreement.
The model documents should be framed in a manner similar to that applicable in the
equity derivatives market.
Before the start of trading, the currency futures segment shall submit the proposal
for approval of the contract to SEBI giving:
a. The details of the proposed currency futures contract to be traded in the
exchange;
b. The economic purposes it is intended to serve;
c. Its likely contribution to market development;
d. The safeguards and the risk protection mechanisms adopted by the exchange
to ensure market integrity, protection of investors and smooth and orderly
trading;
e. The infrastructure of the exchange and surveillance system to effectively
monitor trading in such contracts.
The trading members and clearing members of the currency futures segment should be
registered as such with SEBI. This would be in addition to their registration as members
of a segment of a stock exchange.
A SEBI-RBI constituted committee would meet periodically to sort out issues, if any,
arising out of overlapping jurisdiction of the currency futures market.
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6 CURRENCY OPTIONS
6.1 Product Design
6.1.1 Underlying
US Dollar – Indian Rupee (US$-INR) spot rate.
6.1.2 Trading Hours
Same as that for currency future contracts as specified in Section 5.1.2.
6.1.3 Size of the contract
US$ 1000
6.1.4 Quotation
The premium would be quoted in rupee terms. However, the outstanding positions
would be in USD terms.
6.1.5 Tenor of the contract
Same as that for currency future contracts as specified in Section 5.1.5.
6.1.6 Available contracts
Three serial monthly contracts followed by three quarterly contracts of the cycle
March/June/September/December. Minimum of three in-the-money, three out-of
the-money and one near-the-money strikes would be provided for all available
contracts.
6.1.7 Settlement mechanism
Same as that for currency future contracts as specified in Section 5.1.7.
6.1.8 Settlement price
Same as that for currency future contracts as specified in Section 5.1.8.
6.1.9 Final settlement day
Same as that for currency future contracts as specified in Section 5.1.9.
6.1.10 Participants
Same as that for currency future contracts as specified in Section 5.1.10.
6.1.11 Exercise at Expiry
On expiry date, all open long in-the-money contracts, on a particular strike of a
series, at the close of trading hours would be automatically exercised at the final
settlement price and assigned on a random basis to the open short positions of the
same strike and series.
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6.2 Risk Management Measures
In exchange traded derivative contracts, the Clearing Corporation acts as a central
counterparty to all trades and performs full novation. The risk to the clearing
corporation can only be taken care of through a stringent margining framework.
Also, since derivatives are leveraged instruments, margins also act as a cost and
discourage excessive speculation. A robust risk management system should
therefore, not only impose margins on the members of the clearing corporation but
also enforce collection of margins from the clients.
6.2.1 Initial Margin
The Initial Margin requirement would be based on a worst scenario loss of a
portfolio of an individual client comprising his positions in options and futures
contracts on the same underlying across different maturities and across various
scenarios of price and volatility changes as given in table (below).
Volatility Move
Price Move in
Risk Scenario in Multiples of Fraction of Loss to be
Multiples of
Number: Volatility Considered
Price Range
Range
1 0 1 100%
2 0 -1 100%
3 +1/3 1 100%
4 +1/3 -1 100%
5 -1/3 1 100%
6 -1/3 -1 100%
7 +2/3 1 100%
8 +2/3 -1 100%
9 -2/3 1 100%
10 -2/3 -1 100%
11 1 1 100%
12 1 -1 100%
13 -1 1 100%
14 -1 -1 100%
15 2 0 35%
16 -2 0 35%
The price range for generating the scenarios would be 3.5 standard deviation and
volatility range for generating the scenarios would be 3%. While computing the
worst scenario loss, it shall be assumed that the prices of futures of all maturities on
the underlying move up or down by the same amount.
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The maximum loss under any of the scenario (considering only 35% of the loss in
case of scenarios 15 and 16) is referred to in this circular as the Worst Scenario
Loss.
The sigma would be calculated using the methodology specified for currency
futures in Para 5.2.2 and would be the standard deviation of daily logarithmic
returns of USD-INR futures price.
For the purpose of calculation of option values, the following standard option
pricing models - Black-Scholes, Binomial, Merton - would be used.
The initial margin would be deducted from the liquid networth of the clearing
member on an online, real time basis.
6.2.2 Portfolio based margining
A portfolio based margining approach shall be adopted to take an integrated view of
the risk involved in the portfolio of each individual client comprising his positions
in options and futures contracts across different maturities. The client-wise margins
would be grossed across various clients at the Trading/Clearing Member level. The
proprietary positions of the Trading/Clearing Member would be treated as that of a
client.
6.2.3 Real time computation
Same as that for currency future contracts as specified in Section 5.2.4.
6.2.4 Calendar spread margins
A long currency option position at one maturity and a short option position at a
different maturity in the same series, both having the same strike price would be
treated as a calendar spread. The margin for options calendar spread would be the
same as specified for USD-INR currency futures calendar spread.
The margin would be calculated on the basis of delta of the portfolio in each month.
A portfolio consisting of a near month option with a delta of 100 and a far month
option with a delta of –100 would bear a spread charge equal to the spread charge
for a portfolio which is long 100 near month currency futures and short 100 far
month currency futures. Portfolio would mean portfolio consisting of futures and
/or options contract on a particular underlying. Option positions of different expiry,
irrespective of their strike prices, shall also attract calendar spread margin.
6.2.5 Settlement of Premium
Premium would be paid in by the buyer in cash and paid out to the seller in cash on
T+1 day.
Until the buyer pays in the premium, the premium due shall be deducted from the
available Liquid Net Worth on a real time basis.
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6.2.6 Extreme Loss margin
Extreme loss margin equal to 1.5% of the Notional Value of the open short option
position would be deducted from the liquid assets of the clearing member on an on
line, real time basis. Notional Value would be calculated on the basis of the latest
available Reserve Bank Reference Rate for USD-INR.
6.2.7 Net Option Value
The Net Option Value is the current market value of the option times the number of
options (positive for long options and negative for short options) in the portfolio.
The Net Option Value would be added to the Liquid Net Worth of the clearing
member. Thus, mark to market gains and losses would not be settled in cash for
options positions.
6.2.8 Liquid net worth
Same as that for currency future contracts as specified in Section 5.2.7.
6.2.9 Liquid assets
Same as that for currency future contracts as specified in Section 5.2.8.
6.2.10 Margin collection and enforcement
Same as that for currency future contracts as specified in Section 5.2.10.
6.2.11 Safeguarding client’s money
Same as that for currency future contracts as specified in Section 5.2.11.
6.2.12 Periodic risk evaluation report
Same as that for currency future contracts as specified in Section 5.2.12.
6.3 Surveillance and Disclosures
Same as that for currency future contracts as specified in Section 5.3
6.3.1 Unique client code
Same as that for currency future contracts as specified in Section 5.3.1
6.3.2 Position limits
Same as that for currency future contracts as specified in Section 5.3.2
The following position limits would be applicable in the currency options market:
Client Level: The gross open positions of the client across all contracts (both
futures and options contracts) shall not exceed 6% of the total open interest or USD
10 million whichever is higher. The Exchange will disseminate alerts whenever the
gross open position of the client exceeds 3% of the total open interest at the end of
the previous day’s trade.
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Trading Member Level: The gross open positions of the trading member across all
contracts (both futures and options contracts) shall not exceed 15% of the total open
interest or USD 50 million whichever is higher.
Bank: The gross open positions of the bank across all contracts (both futures and
options contracts) shall not exceed 15% of the total open interest or USD 100
million whichever is lower.
Clearing Member Level: No separate position limit is prescribed at the level of
clearing member. However, the clearing member shall ensure that his own trading
position and the positions of each trading member clearing through him is within
the limits specified above.
6.3.3 Surveillance system
Same as that for currency future contracts as specified in Section 5.3.3 and 5.3.4.
6.4 Eligibility Criteria of the Segment, Exchanges and Trading
Members
6.4.1 Eligibility criteria of currency options segment
Same as that for currency future contracts as specified in Section 5.4.1.
6.4.2 Eligibility criteria for the Clearing Corporation of the currency options segment
Same as that for currency future contracts as specified in Section 5.4.2.
6.4.3 Eligibility criteria for members in the currency futures segment
Same as that for currency future contracts as specified in Section 5.4.3.
6.4.4 Regulatory and legal aspects
Same as that for currency future contracts as specified in Section 5.4.4.
A SEBI-RBI constituted committee would meet periodically to sort out issues, if
any, arising out of overlapping jurisdiction of the currency options market.
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7 INTEREST RATE FUTURES ON 10-YEAR GOI
SECURITY
7.1 Product Design, Margins and Position Limits
7.1.1 Underlying
10-Year Notional Coupon-bearing Government of India (GoI) security
7.1.2 Coupon
The notional coupon would be 7% with semi-annual compounding.
7.1.3 Trading Hours
The Trading Hours would be from 9 a.m. to 5.00 p.m on all working days from
Monday to Friday.
7.1.4 Size of the Contract
The Contract Size would be Rs. 2 lakh.
7.1.5 Quotation
The Quotation would be similar to the quoted price of the GoI security. The day
count convention for interest payments would be on the basis of a 360-day year,
consisting of 12 months of 30 days each and half yearly coupon payment.
7.1.6 Tenor of the Contract
The maximum maturity of the contract would be 12 months.
7.1.7 Available Contracts
The Contract Cycle would consist of four fixed quarterly contracts for entire year,
expiring in March, June, September and December.
7.1.8 Delivery Month and Delivery Period
The delivery month shall be the last month of the expiring contract, i.e., March,
June, September and December Exchanges to set any period of time during the
delivery month as the delivery period for the deliverable grade securities.
7.1.9 Daily Settlement Price
The Daily Settlement Price would be the closing price of the 10-year Notional
Coupon-bearing GoI security futures contract on the trading day. (Closing price =
Weighted Average price of the futures for last half an hour). In the absence of last
half an hour trading the theoretical price, to be determined by the exchanges, would
be considered as Daily Settlement Price. The daily settlement price (DSP) shall be
determined in the following manner:
Step 1: The DSP is the volume weighted average price (VWAP) of the trades in
the last 30 minute of trading, provided there are at least 5 trades for a minimum
aggregate notional value of Rs. 10 crore. Failing which, trades during the last 60
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minutes shall be used for the calculation of VWAP, subject to at least 5 trades for
Rs.10 crore. Failing which trades during the last 120 minutes shall be used for the
calculation of VWAP, subject to at least 5 trades for Rs.10 crore.
Step 2: If the DSP cannot be calculated as above, a theoretical price shall be used.
This theoretical price shall be the minimum of the theoretical futures prices of all
the securities in the delivery basket chosen by the Exchange. The theoretical
futures price of each security is the weighted average cash price of outright trades
of that security during the day on the NDS Order Matching platform, adjusted for
cost of carry, subject to at least 5 trades for Rs.10 crore. If there are not enough
trades as required above or there is a material market event during the trading
hours, the theoretical futures price of each security shall be the FIMMDA / PDAI
/ Bloomberg revaluation price(s) (published on the FIMMDA website on a daily
basis: URL http://www.fimmda.org/default.asp?access=na), adjusted for cost of
carry. The cost of carry shall be computed for the period upto the last business
day of the delivery month.
If, however, the near quarter contract is liquid (5 trades for Rs. 10 crore during the
last 30 minutes, 60 minutes or 120 minutes, as the case may be), the VWAP of the
near quarter contract shall be adjusted for cost of carry to arrive at the theoretical
price for subsequent quarter contracts. Further, if near quarter contract is illiquid
while the next quarter contract is liquid, then the VWAP of the nearest liquid
quarter contract shall be used to derive the prices of the illiquid previous as well
as the subsequent quarter contracts.
The cost of carry for the above purpose shall include the financing cost @ 91-day
treasury bill rate and the coupon of the particular security. The exchanges will be
required to disclose the model/methodology used for arriving at the theoretical
price.
7.1.10 Settlement Mechanism
The contract would be settled by physical delivery of deliverable grade securities
using the electronic book entry system of the existing Depositories (NSDL and
CDSL) and Public Debt Office (PDO) of the RBI. The delivery of the deliverable
grade securities shall take place from the first business day of the delivery month
till the last business day of the delivery month. The owner of a short position in an
expiring futures contract shall hold the right to decide when to initiate delivery.
However, the short position holder shall have to give intimation, to the Clearing
Corporation, of his intention to deliver two business days prior to the actual
delivery date.
7.1.11 Deliverable Grade Securities
Exchanges shall select their own basket of securities from the eligible Deliverable
Grade Securities, viz., GoI securities maturing at least 7.5 years but not more than
15 years from the first day of the delivery month with a minimum total outstanding
stock of Rs 10,000 crore. Exchanges shall disclose upfront to the market
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participants the composition of the basket of deliverable grade securities and the
associated conversion factors for each of the quarterly contracts. To the basket of
deliverable grade securities disclosed upfront by the Exchange for each of the
quarterly contracts, additions, if any, shall be made not later than 10 business days
before the first business day of the delivery month.
7.1.12 Conversion Factor
The Conversion Factor for deliverable grade security would be equal to the price of
the deliverable security (per rupee of the principal), on the first day (calendar day)
of the delivery month, to yield 7% with semiannual compounding.
For deliveries into 10-Year Notional Coupon-bearing GoI security futures, the
deliverable security’s remaining term to maturity shall be calculated in complete
three-month quarters, always rounded down to the nearest quarter. If, after
rounding, the deliverable security lasts for an exact number of 6-month periods, the
first coupon shall be assumed to be paid after 6 months. If, after rounding, the
deliverable security does not last for an exact number of 6-month periods (i.e. there
are an extra 3 months), the first coupon would be assumed to be paid after 3 months
and accrued interest would be subtracted.
7.1.13 Invoice Price
Invoice Price of the respective deliverable grade security would be the futures
settlement price times a conversion factor plus accrued interest.
7.1.14 Delivery Schedule and Delivery Process/Mechanism
Buyer and seller in Interest rate Futures on 10-year Notional Coupon bearing GoI
security shall take and give securities respectively in the demat or PDO mode. The
delivery schedule shall be as follows:
T +0 day
Delivery notice: It is the day when the selling Clearing Member (CM) sends a
notice to the Clearing Corporation (CC) expressing his intention to deliver along
with details of the security to be delivered. CM shall send the notice before 6:00
pm IST on the second business day prior to the day he wishes to deliver. For
example, if he wishes to deliver on 4th September 2009 and 2nd and 3rd are business
days, he shall give notice before 6 PM on 2nd September 2009. Along with the
notice, he shall provide the notional face value (equal to its short position in the
expiring contract), security ISIN, coupon, maturity date, issuance date, coupon
convention, and other details as may be sought by the CC. Based on these details,
the CC shall calculate the invoice price.
Allocation: The CC shall identify the eligible long positions for allocation and
assign the deliveries to long position holders at client level starting with the highest
vintage till the allocation is over. Vintage data shall be computed and maintained at
client level for every contract and shall be tracked by the CC on end of day basis.
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For a given vintage, if the contracts to be allocated (Short) are less than the total
long positions, the allocation to such long position holders shall be done on a
‘random’ basis.
Based on the client level allocations as above, CC shall compute CM level
deliverable/receivable obligations using multilateral netting and intimate the
identified long position holders, by 8 pm IST on the date of receipt of notice, the
details of the securities that they would be receiving and the invoice price.
The seller CM shall not be permitted to fulfill an individual futures contract by
delivering a mixed portfolio of deliverable security (for example, Rs.1,20,000 face
value of one issue and Rs. 80,000 face value of another issue is not permissible).
However, a selling CM making delivery for more than one futures contract, say two
contracts, may deliver two deliverable securities for two different contracts
(Rs.2,00,000 face value of one issue for one contract and Rs.2,00,000 face value of
another issue for the other contract).
T + 2 day
On the second business day following the receipt of the delivery notice, the CMs
shall discharge their obligations and the CC shall complete the settlement
accordingly.
7.1.15 Last Trading Day
Exchange to set any day of the delivery month as last trading day.
7.1.16 Last Delivery Day
Last business day of the delivery month.
7.1.17 Initial Margin
Initial Margin requirement shall be based on a worst case loss of a portfolio of an
individual client across various scenarios of price changes. The various scenarios of
price changes would be so computed so as to cover a more than 99% VaR over a
one day horizon. In order to achieve this, the price scan range may initially be fixed
at 3.5 standard deviation1. Methodology A, as specified in 7.1.21, shall be adopted
for computation of initial margin. For this purpose, the yield for 10-Year
benchmark GoI security, as published by FIMMDA, shall be used.
For the purpose of intra-day updation of VaR, the Exchanges shall use the yield of
the benchmark 10-Year bond, from the NDS Order Matching platform. The initial
margin so computed would be subject to a minimum of 2.33% of the value of the
futures contract on the first day of trading in 10-year Notional Coupon-bearing GoI
security futures and 1.6% of the value of the futures contract thereafter. The initial
1 One tailed standard normal variate corresponding to 99 % confidence interval is 2.33. However, simulation
on the historical data showed that 99 % of data could be covered only with 3.5 times standard.deviation.
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margin shall be deducted from the liquid net worth of the clearing member on an
online, real time basis.
7.1.18 Extreme Loss Margin
Extreme loss margin of 0.3% of the value of the gross open positions of the futures
contract shall be deducted from the liquid assets of the clearing member on an on
line, real time basis.
7.1.19 Calendar Spread Margin
Interest rate futures position at one maturity hedged by an offsetting position at a
different maturity would be treated as a calendar spread. The calendar spread
margin shall be at a value of Rs.2000/- per month of spread. The benefit for a
calendar spread would continue till expiry of the near month contract.
7.1.20 Model for Determining Standard Deviation
The Committee examined the results of empirical tests carried out using different
risk management models in the Value at Risk (VaR) framework in the 10-year GoI
security yields. Data for the period January 3, 2000 to September 16, 2008 was
analyzed. GARCH (1,1)-normal and GARCH (1,1)-GED (Generalized Auto-
Regressive Conditional Heteroskedasticity) at 3 and 3.5 sigma levels were not
found to perform well at 1% risk level, as the actual number of violations were
found to be statistically much higher than the expected number of violations. The
EWMA (Exponentially weighted moving average) model used by J.P.Morgan’s
Risk Metrics methodology was found to work well at 3 and 3.5 sigma levels at 5%
risk level and not at 1% risk level.
Given the computational ease of the EWMA model and given the familiarity of the
Exchanges with this particular model (it is currently being used in the equity
derivatives market), the Committee, after considering the various aspects of the
different models, decided that EWMA method would be used to obtain the volatility
estimate every day fixing the price scan range at 3.5 standard deviation. During the
first time-period on the first day of trading in 10-year Notional Coupon-bearing GoI
security futures, the sigma would be equal to 0.8 %.
7.1.21 Formula for Determining Standard Deviation
The EWMA method would be used to obtain the volatility estimate every day. The
estimate at the end of time period t (σ ) is arrived at using the volatility estimate at
yt
the end of the previous time period i.e. as at the end of t-1 time period (σ ), and
yt-1
the return (r ) observed in the futures market during the time period t. The formula
yt
would be as under:
(σ )2 = λ (σ )2 + (1 - λ ) (r )2
yt yt-1 yt
Where
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λ(lambda) is a parameter which determines how rapidly volatility estimates
changes. The value of λ is fixed at 0.94.
i. σ (sigma) is the standard deviation of daily logarithmic returns of yield of
yt
10-year Notional Coupon-bearing GoI security futures at time t.
ii. The "return" is defined as the logarithmic return: r = ln(Y/Y ) where Y is
t t t-1 t
the yield of 10-year Notional Coupon-bearing GoI security futures at time t.
For computing the margin, two methodologies can be considered.
Methodology A. The plus/minus 3.5 sigma limits2 for a 99% VAR based on
logarithmic returns on yield of 10-year Notional Coupon-bearing GoI security
futures would have to be converted into price volatility through the following
formula :
σ =D*σ * Y
pt yt t
where
σ is the standard deviation of percentage change in price at time t;
pt
D is Modified Duration3;
Y4 is the yield of 10-year Notional Coupon-bearing GoI security futures at time
t
t; and
σ (sigma) is the standard deviation of daily logarithmic returns of yield of 10-
yt
year Notional Coupon-bearing GoI security futures at time t.
The percentage margin on long position would be equal to 100 (D*3.5σ * Y)
yt t
and the percentage margin on short position would be equal to 100 (D*(-3.5σ *
yt)
Y). The Modified Duration for 10-Year Notional Coupon-bearing GoI security
t
futures shall be 10.
2 The one-tailed standard normal variate corresponding to 99% confidence interval is 2.33. However, since
3.5 standard deviations cover 99 % of the historical data, σ has been taken as 3.5 in all computations. .
n
t c /(1 y/m)i
D* i i
3 Modified Duration = , where D* (Macaulay's duration) = i1
1 y/m B
C is coupon at time t, y is the annually compounded yield, m is the frequency of coupon payments, B is the
i i
price of the bond. Modified duration essentially measures percentage change in price due to change in yield
by 100 bps.
n C P
4 Yield of security is its YTM (Yield to maturity) calculated asB ( t )
(1Y /m)t (1Y /m)n
t1
where Y is the YTM of the security, B is the price of the security, P is the par value of the bond, n is the
number of periods for coupon payment, m is the frequency of coupon payments and C is the coupon payment
per period.
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Methodology B. The potential price change corresponding to 99% VAR can be
computed by multiplying the appropriate yield change by the modified duration.
That is,
P  D*Y ,
Y Y Y , and
t 0
Y Y e y * t/252*z
t 0
Where,
P = Percentage change in price
Y = Change in yield
Y =Yield of 10-year Notional Coupon-bearing GoI security futures at time
t
t; and
= Annualized yield volatility5 of 10-year Notional Coupon-bearing GoI

y
security futures
z = One-tailed standard normal variate (value 3.5 as mentioned in footnote 5)
Thus, the percentage margin on long positions would be equal to
P  D*Y *(e y * t/252*3.5 1)
Long 0
and the percentage margin on short positions would be equal to
P  D*Y *(e y * t/252*3.5 1)
Short 0
Alternatively, the exchanges can adopt uniform margins for both short and long
positions, equivalent to the higher of the two values derived above.
An illustration of the two methodologies discussed above is enclosed at Annex
A.
5 Annualized yield volatility is obtained by multiplying the standard deviation of daily logarithmic return by
square root of the number of trading days, usually taken as 252.
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iii. The volatility estimation and margin fixation methodology should be clearly
made known to all market participants so that they can compute the margin
for any given closing level of the interest rate futures price. Further, the
trading software itself should provide this information on a real time basis on
the trading workstation screen.
7.1.22 Position Limits
i. Client level: The gross open positions of the client across all contracts should
not exceed 6% of the total open interest or Rs 300 crores whichever is higher.
The Exchange will disseminate alerts whenever the gross open position of the
client exceeds 3% of the total open interest at the end of the previous day’s
trade.
ii. Trading Member level: The gross open positions of the trading member across
all contracts should not exceed 15% of the total open interest or Rs. 1000 crores
whichever is higher.
iii. Clearing Member level: No separate position limit is prescribed at the level of
clearing member. However, the clearing member shall ensure that his own
trading position and the positions of each trading member clearing through him
is within the limits specified above.
iv. FIIs: In case of Foreign Institutional Investors registered with Securities and
Exchange Board of India the total gross long (bought) position in cash and
Interest Rate Futures markets taken together should not exceed their individual
permissible limit for investment in government securities and the total gross
short (sold) position, for the purpose of hedging only, should not exceed their
long position in the government securities and in Interest Rate Futures, at any
point in time.
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7.2 Risk Management Measures
7.2.1 Introduction
In exchange traded derivative contracts, the Clearing Corporation acts as a central
counterparty to all trades and performs full novation. The risk to the Clearing
Corporation can only be taken care of through a stringent margining framework.
Also, since derivatives are leveraged instruments, margins also act as a cost and
discourage excessive speculation. A robust risk management system should
therefore, not only impose margins on the members of the Clearing Corporation but
also enforce collection of margins from the clients.
7.2.2 Portfolio Based Margining
The Standard Portfolio Analysis of Risk (SPAN) methodology shall be adopted to
take an integrated view of the risk involved in the portfolio of each individual client
comprising his positions in futures contracts across different maturities. The client-
wise margins would be grossed across various clients at the Trading / Clearing
Member level. The proprietary positions of the Trading / Clearing Member would
be treated as that of a client.
7.2.3 Real-Time Computation
The computation of worst scenario loss would have two components. The first is
the valuation of the portfolio under the various scenarios of price changes. At the
second stage, these scenario contract values would be applied to the actual portfolio
positions to compute the portfolio values and the initial margin. The exchanges
shall update the scenario contract values at least 6 times in the day, which may be
carried out by taking the closing price of the previous day at the start of trading and
the prices at 11:00 a.m., 12:30 p.m., 2:00 p.m., 3.30 p.m. and at the end of the
trading session. The latest available scenario contract values would be applied to
member/client portfolios on a real time basis.
7.2.4 Liquid Networth
The initial margin and the extreme loss margin shall be deducted from the liquid
assets of the clearing member. The clearing member’s liquid net worth after
adjusting for the initial margin and extreme loss margin requirements must be at
least Rs. 50 Lakhs at all points in time. The minimum liquid networth shall be
treated as a capital cushion for days of unforeseen market volatility.
7.2.5 Liquid Assets
The liquid assets for trading in Interest Rate Futures would have to be provided
separately and maintained with the Clearing Corporation. However, the permissible
liquid assets, the applicable haircuts and minimum cash equivalent norms would be
mutatis mutandis applicable from the equity/currency derivatives segment.
7.2.6 Mark-to-Market (MTM) Settlement
The MTM gains and losses shall be settled in cash before the start of trading on T+1
day. If MTM obligations are not collected before start of the next day’s trading, the
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Clearing Corporation shall collect correspondingly higher initial margin to cover
the potential for losses over the time elapsed in the collection of margins.
The daily closing price of interest rate futures contract for mark to market
settlement would be calculated on the basis of the last half an hour weighted
average price of the futures contract. In the absence of trading in the last half an
hour the theoretical price would be taken. The eligible exchanges shall define the
methodology for calculating the ‘theoretical price’ at the time of making an
application for approval of the interest rate futures contract to SEBI. The
methodology for calculating the ‘theoretical price’ would also be disclosed to the
market.
7.2.7 Margin Collection and Enforcement
The client margins (initial margin, extreme loss margin, calendar spread margin and
mark to market settlements) have to be compulsorily collected and reported to the
Exchange by the members. The Exchange shall impose stringent penalty on
members who do not collect margins from their clients. The Exchange shall also
conduct regular inspections to ensure margin collection from clients.
7.2.8 Safeguarding Client’s Money
The Clearing Corporation should segregate the margins deposited by the Clearing
Members for trades on their own account from the margins deposited with it on
client account. The margins deposited on client account shall not be utilized for
fulfilling the dues which a Clearing Member may owe the Clearing Corporation in
respect of trades on the member’s own account. The client’s money is to be held in
trust for client purpose only. The following process is to be adopted for segregating
the client’s money vis-à-vis the clearing member’s money:
i At the time of opening a position, the member should indicate whether it is a
client or proprietary position.
ii Margins across the various clients of a member should be collected on a
gross basis and should not be netted off.
iii When a position is closed, the member should indicate whether it was a
client or his own position which is being closed.
iv In the case of default, the margins paid on the proprietary position would
only be used by the Clearing Corporation for realizing its dues from the
member.
7.2.9 Periodic Risk Evaluation Report
The Clearing Corporation of the Exchange shall on an ongoing basis and atleast
once in every six months, conduct back testing of the margins collected vis-à-vis
the actual price changes. A copy of the study shall be submitted to SEBI along with
suggestions on changes to the risk containment measures, if any.
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7.3 Regulatory and Legal aspects
7.3.1 Exchange:
The Interest Rate Derivative contracts shall be traded on the Currency Derivative
Segment of a recognized Stock Exchange. The members registered by SEBI for
trading in Currency/Equity Derivative Segment shall be eligible to trade in Interest
Rate Derivatives also, subject to meeting the Balance Sheet networth requirement
of Rs 1 crore for a trading member and Rs 10 crores for a clearing member. Before
the start of trading, the Exchange shall submit the proposal for approval of the
contract to SEBI giving:
i. The details of the proposed interest rate futures contract to be traded in the
exchange;
ii. The economic purposes it is intended to serve;
iii. Its likely contribution to market development;
iv. The safeguards and the risk protection mechanisms adopted by the exchange
to ensure market integrity, protection of investors and smooth and orderly
trading;
v. The infrastructure of the exchange and surveillance system to effectively
monitor trading in such contracts.
vi. the proposed amendments to the Bye-laws of the Exchange/ Clearing
Corporation / Clearing House.
vii. Product design, margins and position limits as laid down in 7.1 are complied
with.
viii. Risk management measures as mentioned in 7.1 and 7.2 are complied with.
7.3.2 Clearing Corporation / Clearing House
The Clearing Corporation / Clearing House of Interest Rate Futures shall be the
same as for currency derivatives segment.
7.3.3 Clearing Member and Trading Member
The members registered by SEBI for trading in Currency/Equity Derivative
Segment shall be eligible to trade in Interest Rate Derivatives also, subject to
fulfilling the requirements mentioned in 6.4.1.
7.3.4 SEBI-RBI Coordination Mechanism
A SEBI-RBI constituted committee would meet periodically to sort out issues, if
any, arising out of overlapping jurisdiction of the interest rate futures market.
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7.4 Miscellaneous Issues
7.4.1 Banks Participation in Interest Rate Futures
It is stated in the RBI Report on Interest Rate Futures that “…the current approval
for banks’ participation in IRF for hedging risk in their underlying investment
portfolio of government securities classified under the Available for Sale (AFS) and
Held for Trading (HFT) categories should be extended to the interest rate risk
inherent in their entire balance sheet – including both on, and off, balance sheet
items – synchronously with the re-introduction of the IRF.”
7.4.2 Extending the Tenor of Short Sales
In the RBI Report on Interest Rate Futures, it has been recommended that the time
limit on short selling be extended so that term / tenor / maturity of the short sale is
co-terminus with that of the futures contract and a system of transparent and rule-
based pecuniary penalty for SGL bouncing be put in place, in lieu of the regulatory
penalty currently in force.
7.4.3 Penalties
In case there is a failure to honour the settlement obligation by the CM, the
following action shall be followed:
7.4.3.1 Selling CM fails to deliver the securities
T +0 day: Selling CM gives intention to deliver the securities
T+2 day: Buying CM pays-in funds and the selling CM fails to deliver the
securities
T+2 or T+3 day: CC shall conduct buy-in auction of the securities.
In case of successful auction, the defaulting CM shall be debited by:
the actual auction price,
difference in invoice price and auction price, if the auction price is less than the
invoice price, and
a penalty of 2% of the face value of security short delivered.
In case of unsuccessful auction, transaction shall be closed out wherein the
defaulting CM shall be debited by:
invoice price, and
a penalty of 5% of the face value of security short delivered.
In respect of the seller in an auction failing to honour the auction obligations, he
shall be debited by:
invoice price, and
a penalty of 3% of the face value of security short delivered
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These penalties shall be passed on to the buying CM, who shall pass it on to the
buying client.
7.4.3.2 Buying CM fails to pay-in funds
T +0 day: Selling CM gives intention to deliver the securities
T+2 day: Selling CM delivers securities and the buying CM fails to pay-in funds.
The CC shall pay-out funds to the selling CM on T+2 day
Further,
 In case of a settlement shortage of Rs. 5 lakh or more, the trading facility of all
trading members clearing through the buying CM shall be withdrawn in the
Currency Derivatives Segment and the securities pay-out to the buying CM shall
be withheld.
 If the buying CM is short for an amount of Rs. 2 lakh or more on six or more
occasions in the preceding three months, the trading facility of all the trading
members clearing through the buying CM shall be withdrawn in the Currency
Derivatives Segment and the securities pay-out to the buying CM shall be
withheld.
 A penalty of 0.07% per day shall be levied on the amount of the shortage.
The trading facility shall be restored and securities withheld shall be released on
the buying CM making good the shortage amount in all the above cases.
Regulatory Penalty: In case a selling CM defaults in delivering securities 5 times
during a period of preceding 6 months, the trading facility of all the trading
members clearing through the CM shall be withdrawn for 7 days.
7.4.3.3 Margins and action on deliverable positions
i Margins on physical delivery positions: For positions marked for delivery, a
margin equal to VaR of the futures on the invoice price plus 5% of face value
along with mark to market adjustments shall be charged both to the buying
client and selling client. The margins shall be levied from the intention day and
shall be released on the completion of the settlement.
ii Margins from last trading day to last intention day: For positions from last
trading date till date of intention in cases where no intention is provided, a
margin amount equal to VaR of the futures on the invoice price of the costliest
security from the deliverable basket plus 5% of face value along with mark to
market adjustments based on the underlying closing prices of the costliest
security from the deliverable basket shall be charged on both buying client and
selling client. The margins shall be levied from the last trading day till the day
of receipt of intention to deliver.
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Action in case no intent to deliver is provided: In case no intent is provided by
the selling CM till two business days prior to the last delivery date, it shall be
presumed that selling CM has failed to deliver the security and the auction
mechanism, as specified for security shortages, shall be activated. The auction shall
take place one business day prior to the last delivery date.
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8 INTEREST RATE FUTURES ON 91-DAY GOVERNMENT
OF INDIA (GOI) TREASURY-BILL (T-BILL)
8.1 Product Design, Margins and Position Limits
8.1.1 Underlying
91 - day GoI T-bill.
8.1.2 Trading hours
9 a.m. to 5 p.m.
8.1.3 Size of the contract
Rs. 2 lakh.
8.1.4 Quotation
100 minus futures discount yield (i.e. for a yield of 5% the quote would be 100-
5=95). The value of 1 basis point change in the futures discount yield would be Rs.
5.
8.1.5 Tenor of the contract
The maximum maturity of the contract would be 12 months.
8.1.6 Contract months
Three serial monthly contracts followed by three quarterly contracts of the cycle
March/June/September/December.
8.1.7 Settlement mechanism
The 91-day T-Bill future would be settled in cash in Indian Rupees.
8.1.8 Contract value
Rs. 2000 * (100 – 0.25 * y)
where y is the futures discount yield.
For example, for a futures discount yield of 5%, the contract value would be –
2000 * (100 – 0.25*5) = Rs. 197,500
8.1.9 Daily Contract Settlement value
Rs. 2000 * (100 – 0.25 * yw)
(Here yw is weighted average futures yield of last half an hour).
In the absence of last half an hour trading, theoretical futures yield would be
considered for computation of Daily Contract Settlement Value.
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8.1.10 Expiry/Last trading day/Final settlement day
The expiry / last trading day / final settlement day for the contract would be the last
Wednesday of the expiry month. If any expiry day is a trading holiday, then the
expiry/ last trading day/ final settlement day would be the previous trading day.
8.1.11 Final Contract Settlement value
Rs. 2000 * (100 – 0.25 * yf)
(Here yf is weighted average discount yield obtained from weekly auction of 91-
day T-Bill on the day of expiry).
The methodology of computation and dissemination of the weighted average
discount yield would be publicly disclosed by RBI.
8.1.12 Initial margin
The Initial Margin requirement shall be based on a worst case loss of a portfolio of
an individual client across various scenarios of price changes. The various scenarios
of price changes would be so computed so as to cover a 99% VaR over a one day
horizon. In order to achieve this, the price scan range may initially be fixed at 3.5
standard deviation. The initial margin so computed would be subject to a minimum
of 0.1 % of the notional value of the contract on the first day of trading in 91-day T-
bill futures and 0.05 % of the notional value of the contract thereafter (the notional
value of the contract shall be Rs. 2,00,000). The initial margin shall be deducted
from the liquid net worth of the clearing member on an online, real time basis.
8.1.13 Extreme Loss margin
Extreme loss margin of 0.03 % of the notional value of the contract for all gross
open positions shall be deducted from the liquid assets of the clearing member on
an on line, real time basis.
8.1.14 Calendar spread margin
Interest rate futures position at one maturity hedged by an offsetting position at a
different maturity would be treated as a calendar spread. The calendar spread
margin shall be at a value of ` 100/- for spread of one month, ` 150 for spread of
two month, ` 200/- for spread of three month and ` 250/- for spread of four month
and beyond. The benefit for a calendar spread would continue till expiry of the near
month contract. For a calendar spread position, the extreme loss margin shall be
0.01% of the notional value of the far month contract.
8.1.15 Formula for determining standard deviation
The exponential moving average method would be used to obtain the volatility
estimate every day. The estimate at the end of time period t (σ ) is estimated using
ydt
the volatility estimate at the end of the previous time period. i.e. as at the end of t-1
time period (σ ), and the return (r ) observed in the futures market during the
ydt-1 ydt
time period t. The formula would be as under:
(σ )2 = λ (σ )2 + (1 - λ ) (r )2
ydt ydt-1 ydt
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where
λ is a parameter which determines how rapidly volatility estimates change.
The value of λ is fixed at 0.94.
v. σ (sigma) means the standard deviation of daily logarithmic returns of
ydt
discount yield of 91-day T-Bill futures at time t.
vi. The "return" is defined as the logarithmic return: r = ln(Y /Y ) where Y
ydt dt dt-1 dt
is the discount yield of 91-day T-Bill futures at time t. The plus/minus 3.5
sigma limits for a 99% VAR based on logarithmic returns on discount yield of
91-day T-Bill futures would have to be converted into price changes through
the following formula :
σ =D*σ * Y
pt ydt dt
where
σ means the standard deviation of percentage change in price at time t
pt
D means Modified Duration
Y =Discount Yield for 91-day T-Bill futures at time t
dt
σ (sigma) means the standard deviation of daily logarithmic returns of
ydt
discount yield at time t
The margin on long position would be equal to 100 * (D*3.5σ * Y )
ydt dt
percentage of the notional value of the futures contract and the margin on
short position would be equal to 100 (D*-3.5σ * Y ) percentage of the
ydt dt
notional value of the futures contract. The Modified Duration for 91 day T-
Bill Futures shall be -0.25.
vii. The volatility estimation and margin fixation methodology should be clearly
made known to all market participants so that they can compute the margin
for any given closing level of the interest rate futures price. Further, the
trading software itself should provide this information on a real time basis on
the trading workstation screen.
viii. During the first time-period on the first day of trading in 91-day T-bill futures,
the sigma would be equal to 2.7 %.
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8.1.16 Position limits
8.1.16.1 Client Level: The gross open positions of the client across all contracts should not
exceed 6% of the total open interest or Rs. 300 crores whichever is higher. The
Exchange will disseminate alerts whenever the gross open position of the client
exceeds 3% of the total open interest at the end of the previous day’s trade.
8.1.16.2 Trading Member Level: The gross open positions of the trading member across
all contracts should not exceed 15% of the total open interest or Rs. 1000 crores
whichever is higher.
8.1.16.3 Clearing Member Level: No separate position limit is prescribed at the level of
clearing member. However, the clearing member shall ensure that his own trading
position and the positions of each trading member clearing through him is within
the limits specified above.
8.1.16.4 FIIs: In case of Foreign Institutional Investors, registered with Securities and
Exchange Board of India, the total gross long (bought) position in cash and
Interest Rate Futures markets taken together should not exceed their individual
permissible limit for investment in government securities and the total gross short
(sold) position, for the purpose of hedging only, should not exceed their long
position in the government securities and in Interest Rate Futures, at any point in
time.
8.2 Regulatory and Legal aspects
8.2.1 Exchange
The Interest Rate Futures on 91-day T-Bill shall be traded on the Currency
Derivative Segment of a recognized Stock Exchange. Eligible Stock Exchanges
may introduce these contracts after obtaining prior approval from SEBI.
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9 INTEREST RATE FUTURES ON 2 YEAR NOTIONAL
COUPON BEARING GOVERNMENT OF INDIA (GOI)
SECURITY
9.1 Product Design, Margins and Position Limits
9.1.1 Underlying
Notional coupon bearing 2-year GoI security with a notional coupon of 7% paid
semi-annually and face value of Rs. 100.
9.1.2 Trading hours
The trading hours would be from 9 a.m. to 5.00 p.m.
9.1.3 Size of the contract
Rs. 2 lakh.
9.1.4 Quotation
The quotation would be similar to the quoted price of the GoI security.
9.1.5 Tenor of the contract
The maximum maturity of the contract would be 12 months.
9.1.6 Contract months
To begin with, three serial monthly contracts can be introduced.
9.1.7 Settlement mechanism
The futures on notional GoI security would be settled in cash in Indian Rupees. The
settlement price of the notional bond would be determined on the basis of the yields
of a basket of eligible bond(s) selected by the exchange with the yields of the bonds
in the basket to be determined through a polling process carried out by Fixed
Income, Money Market and Derivatives Association (FIMMDA) as detailed in Para
9.1.17.
Exchanges shall disclose upfront to the market participants the composition of the
basket of securities for each of the contracts. Eligible bonds would comprise of GoI
securities maturing at least 1.5 years but not more than 2.5 years from the expiry
day.
9.1.8 Contract Value
The contract value would be: = Quoted price * 2000
9.1.9 Daily Contract Settlement Value
The Daily Contract Settlement Value would be: = 2000 * P
w
(Here P is weighted average futures quote of last half an hour).
w
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In the absence of last half an hour trading, theoretical futures price would be
considered for computation of Daily Contract Settlement Value. Exchanges would
be required to disclose the model/methodology used for arriving at the theoretical
price.
9.1.10 Expiry/Last trading day
The expiry / last trading day for the contract would be the last Thursday of the
expiry month. If any expiry day is a trading holiday, then the expiry/ last trading
day would be the previous trading day.
9.1.11 Final Contract Settlement Value
The Final Contract Settlement Value would be = 2000 * P
f
where P is the settlement price of the notional bond.
f
9.1.12 Initial Margin
The Initial Margin requirement shall be based on a worst case loss of a portfolio of
an individual client across various scenarios of price changes. The various scenarios
of price changes would be so computed so as to cover a 99% VaR over a one day
horizon. In order to achieve this, the price scan range may initially be fixed at 3.5
standard deviation. The initial margin so computed would be subject to a minimum
of 0.35 % of the notional value of the contract on the first day of trading in Futures
on 2 Year Notional Coupon Bearing Government of India (GoI) Security and 0.3 %
of the notional value of the contract thereafter. The initial margin shall be deducted
from the liquid net worth of the clearing member on an online, real time basis.
9.1.13 Extreme Loss margin
Extreme loss margin of 0.1 % of the notional value of the contract for all gross open
positions shall be deducted from the liquid assets of the clearing member on an on
line, real time basis.
9.1.14 Calendar spread margin
2 Year Notional Coupon Bearing Government of India (GoI) Security futures
position at one maturity hedged by an offsetting 2 Year Notional Coupon Bearing
Government of India (GoI) Security futures position at a different maturity would
be treated as a calendar spread. The calendar spread margin shall be at a value of
Rs. 300 for spread of one month and Rs. 450 for spread of two months. The benefit
for a calendar spread would continue till expiry of the near month contract.
9.1.15 Formula for determining standard deviation
The exponential moving average method would be used to obtain the volatility
estimate every day. The estimate of volatility (σ) for the time period t is estimated
t
using the volatility estimate (σ ) for the previous time period and the return (r )
t-1 t-1
observed in the futures market during the previous time period. The formula would
be as under:
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(σ)2 = λ (σ )2 + (1 - λ ) (r )2
t t-1 t-1
where
λ is a parameter which determines how rapidly volatility estimates change.
The value of λ is fixed at 0.94.
ix. σ (sigma) means the standard deviation of daily logarithmic returns of futures
t
price of 2 Year Notional Coupon Bearing Government of India (GoI) Security
at time t.
x. The "return" is defined as the logarithmic return: r = ln(P/P ) where P is the
t t t-1 t
futures price of 2 Year Notional Coupon Bearing Government of India (GoI)
Security at time t. The plus/minus 3.5 sigma limits for a 99% VaR based on
logarithmic returns would have to be converted into percentage price change
by reversing the logarithmic transformation. The percentage margin on short
positions would be equal to 100(exp(3.5σ)-1) and the percentage margin on
long positions would be equal to 100(1-exp(-3.5σ)). This implies slightly
larger margins on short positions than on long positions. The derivatives
exchange/clearing corporation may apply the higher margin on both the buy
and sell side.
xi. The volatility estimation and margin fixation methodology should be clearly
made known to all market participants so that they can compute the margin
for any given closing level of the interest rate futures price. Further, the
trading software itself should provide this information on a real time basis on
the trading workstation screen.
xii. During the first time-period on the first day of trading in 2 Year Notional
Coupon Bearing Government of India (GoI) Security futures, the sigma would
be equal to 0.10 %.
9.1.16 Position Limits
9.1.16.1 Client Level
The gross open positions of the client across all contracts should not exceed 6% of the total
open interest or Rs 300 crores whichever is higher. The Exchange will disseminate alerts
whenever the gross open position of the client exceeds 3% of the total open interest at the
end of the previous day’s trade.
9.1.16.2 Trading Member Level
The gross open positions of the trading member across all contracts should not exceed 15%
of the total open interest or Rs. 1000 crores whichever is higher.
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9.1.16.3 Clearing Member Level
No separate position limit is prescribed at the level of clearing member. However, the
clearing member shall ensure that his own trading position and the positions of each trading
member clearing through him is within the limits specified above.
9.1.16.4 FIIs
In case of Foreign Institutional Investors registered with Securities and Exchange Board of
India the total gross long (bought) position in cash and Interest Rate Futures markets taken
together should not exceed their individual permissible limit for investment in government
securities and the total gross short (sold) position, for the purpose of hedging only, should
not exceed their long position in the government securities and in Interest Rate Futures, at
any point in time.
Page 89 of 156
9.1.17 Settlement Mechanism
a. Polling shall be carried out by the Fixed Income, Money Market and
Derivatives Association, i.e., FIMMDA;
b. The yields (Bid and Ask) of the GoI securities shall be polled from Primary
Dealers (PDs) registered with the Reserve Bank of India;
c. Each poll shall involve ten PDs who would be selected at random from the
universe of PDs;
d. Polling would be conducted at three instances, i.e., 11.00 am, 11.30 am and
12.00 pm daily;
e. At each instance of polling, for each bond, out of the ten buy yields, two
highest and two lowest yields would be treated as outliers and would be
ignored. Similarly outliers from ten sell yields would be identified and
ignored.
f. After rejecting the outliers in above step, there will be [6 * 2 * 3 * Number of
Bonds in Basket] number of remaining yields.
g. Average settlement yield (Ys) is the simple average of the remaining yields.
Ys will be rounded off to 4 decimal digits.
h. Ys determined in above step would be used to calculate present value of
notional underlying bond on the basis of formula given below. This will be
the final settlement price of the contract.
Final settlement price =
   
C
   100 * 
100 4
     2 
 4   k 
 Ys   Ys 
k 1
  1      1   
  2     2  
where,
Ys: Settlement yield
C: The notional coupon of underlying bond = 7%
Worked out example of settlement price calculation described above has been given in Para
9.1.18
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9.1.18 Worked out Example of Settlement price calculation:
Yield Figures Obtained by Polling of Dealers
11:00 AM Bond 1 Bond 2 Bond 3
Dealer Buy Yields Sell Yields Buy Yields Sell Yields Buy Yields Sell Yields
Dealer 1 5.9600 5.9500 (6.0100) (6.0000) (6.0250) (6.0425)
Dealer 2 5.9625 5.9500 6.0025 5.9925 6.0450 6.0300
Dealer 3 5.9650 (5.9550) 6.0050 5.9950 6.0450 6.0350
Dealer 4 (5.9600) (5.9550) (6.0025) 5.9975 (6.0425) 6.0375
Dealer 5 5.9625 5.9500 (6.0025) 5.9900 (6.0550) (6.0275)
Dealer 6 (5.9725) 5.9525 (6.0175) 5.9975 (6.0575) 6.0375
Dealer 7 (5.9700) 5.9500 6.0100 (5.9900) 6.0475 (6.0275)
Dealer 8 (5.9600) 5.9500 6.0100 (6.0000) 6.0500 (6.0400)
Dealer 9 5.9625 (5.9475) 6.0050 5.9950 6.0450 6.0350
Dealer 10 5.9700 (5.9500) 6.0100 (5.9900) 6.0450 6.0350
11:30 AM Bond 1 Bond 2 Bond 3
Dealer Buy Yields Sell Yields Buy Yields Sell Yields Buy Yields Sell Yields
Dealer 1 5.9700 5.9600 6.0150 6.0050 (6.0600) (6.0500)
Dealer 2 (5.9750) 5.9600 6.0150 6.0000 6.0550 6.0375
Dealer 3 5.9750 (5.9650) 6.0175 (6.0075) 6.0575 (6.0475)
Dealer 4 5.9700 (5.9650) 6.0125 (6.0075) 6.0525 6.0475
Dealer 5 (5.9700) (5.9500) (6.0100) (5.9900) (6.0450) (6.0250)
Dealer 6 5.9725 5.9600 6.0125 6.0000 6.0550 6.0400
Dealer 7 (5.9775) 5.9575 (6.0200) 6.0000 (6.0600) 6.0400
Dealer 8 5.9750 5.9550 (6.0200) 6.0000 6.0550 (6.0350)
Dealer 9 5.9750 (5.9550) 6.0150 6.0050 6.0600 6.0400
Dealer 10 (5.9700) 5.9600 (6.0050) (5.9950) (6.0500) 6.0400
12:00 PM Bond 1 Bond 2 Bond 3
Dealer Buy Yields Sell Yields Buy Yields Sell Yields Buy Yields Sell Yields
Dealer 1 5.9750 (5.9650) 6.0200 (6.0100) (6.0650) (6.0550)
Dealer 2 5.9750 5.9600 6.0175 6.0025 6.0575 6.0450
Dealer 3 5.9750 (5.9650) 6.0175 (6.0075) 6.0575 (6.0475)
Dealer 4 (5.9700) (5.9500) 6.0150 (5.9950) 6.0600 6.0400
Dealer 5 (5.9800) 5.9600 (6.0225) 6.0025 (6.0625) 6.0425
Dealer 6 5.9750 (5.9550) 6.0200 6.0000 6.0600 (6.0400)
Dealer 7 (5.9800) 5.9600 6.0200 (6.0000) 6.0600 (6.0400)
Dealer 8 5.9800 5.9600 (6.0250) 6.0050 6.0625 6.0425
Dealer 9 5.9750 5.9650 (6.0150) 6.0050 (6.0550) 6.0450
Dealer 10 (5.9750) 5.9650 (6.0150) 6.0050 (6.0575) 6.0475
 () : Outlier yields, which are two highest and two lowest values on sell and buy side for individual
bond at a particular instant of polling
 Average of all the yields except those in parentheses () = 6.005787
 Settlement Yield = Average yield rounded off to 4 decimal digits = 6.0058
Page 91 of 156
Futures Settlement Price =
   
.07
   100 * 
100 4
 

 2 
  .060058  4    .060058  k 
k 1
 1     1   
  2     2  
= Rs. 101.8476
9.2 Regulatory and Legal aspects
9.2.1 Exchange
The Interest Rate Futures on 2-year GoI Securities shall be traded on the Currency
Derivative Segment of a recognized Stock Exchange. Eligible Stock Exchanges
may introduce these contracts after obtaining prior approval from SEBI.
Page 92 of 156
10 INTEREST RATE FUTURES ON 5 YEAR NOTIONAL
COUPON BEARING GOVERNMENT OF INDIA (GOI)
SECURITY
10.1 Product Design, Margins and Position Limits
10.1.1 Underlying
Notional coupon bearing 5-year GoI security with a notional coupon of 7% paid
semi-annually and face value of Rs. 100.
10.1.2 Trading hours
The trading hours would be from 9 a.m. to 5.00 p.m.
10.1.3 Size of the contract
Rs. 2 lakh.
10.1.4 Quotation
The quotation would be similar to the quoted price of the GoI security.
10.1.5 Tenor of the contract
The maximum maturity of the contract would be 12 months.
10.1.6 Contract months
To begin with, three serial monthly contracts can be introduced.
10.1.7 Settlement mechanism
The futures on notional GoI security would be settled in cash in Indian Rupees. The
settlement price of the notional bond would be determined on the basis of the yields
of a basket of eligible bond(s) selected by the exchange with the yields of the bonds
in the basket to be determined through a polling process carried out by Fixed
Income, Money Market and Derivatives Association (FIMMDA) as detailed in Para
10.1.17.
Exchanges shall disclose upfront to the market participants the composition of the
basket of securities for each of the contracts. Eligible bonds would comprise of GoI
securities maturing at least 4.5 years but not more than 5.5 years from the expiry
day.
10.1.8 Contract Value
The contract value would be: = Quoted price * 2000
10.1.9 Daily Contract Settlement Value
The Daily Contract Settlement Value would be: = 2000 * P
w
(Here P is weighted average futures quote of last half an hour).
w
Page 93 of 156
In the absence of last half an hour trading, theoretical futures price would be
considered for computation of Daily Contract Settlement Value. Exchanges would
be required to disclose the model/methodology used for arriving at the theoretical
price.
10.1.10Expiry/Last trading day
The expiry / last trading day for the contract would be the last Thursday of the
expiry month. If any expiry day is a trading holiday, then the expiry/ last trading
day would be the previous trading day.
10.1.11Final Contract Settlement Value
The Final Contract Settlement Value would be = 2000 * P
f
where P is the settlement price of the notional bond.
f
10.1.12Initial Margin
The Initial Margin requirement shall be based on a worst case loss of a portfolio of
an individual client across various scenarios of price changes. The various scenarios
of price changes would be so computed so as to cover a 99% VaR over a one day
horizon. In order to achieve this, the price scan range may initially be fixed at 3.5
standard deviation. The initial margin so computed would be subject to a minimum
of 0.7 % of the notional value of the contract on the first day of trading in Futures
on 5 Year Notional Coupon Bearing GoI Security and 0.6 % of the notional value
of the contract thereafter. The initial margin shall be deducted from the liquid net
worth of the clearing member on an online, real time basis.
10.1.13Extreme Loss margin
Extreme loss margin of 0.15 % of the notional value of the contract for all gross
open positions shall be deducted from the liquid assets of the clearing member on
an on line, real time basis.
10.1.14Calendar spread margin
5 Year Notional Coupon GoI Security futures position at one maturity hedged by an
offsetting 5 Year Notional Coupon Bearing GoI Security futures position at a
different maturity would be treated as a calendar spread. The calendar spread
margin shall be at a value of Rs. 400 for spread of one month and Rs. 600 for spread
of two months. The benefit for a calendar spread would continue till expiry of the
near month contract.
10.1.15Formula for determining standard deviation
The exponential moving average method would be used to obtain the volatility
estimate every day. The estimate of volatility (σ) for the time period t is estimated
t
using the volatility estimate (σ ) for the previous time period and the return (r )
t-1 t-1
observed in the futures market during the previous time period. The formula would
be as under:
Page 94 of 156
(σ)2 = λ (σ )2 + (1 - λ ) (r )2
t t-1 t-1
where
λ is a parameter which determines how rapidly volatility estimates change.
The value of λ is fixed at 0.94.
i. σ (sigma) means the standard deviation of daily logarithmic returns of futures
t
price of 5 Year Notional Coupon Bearing Government of India (GoI) Security
at time t.
ii. The "return" is defined as the logarithmic return: r = ln(P/P ) where P is the
t t t-1 t
futures price of 5 Year Notional Coupon Bearing GoI Security at time t. The
plus/minus 3.5 sigma limits for a 99% VaR based on logarithmic returns would
have to be converted into percentage price change by reversing the logarithmic
transformation. The percentage margin on short positions would be equal to
100(exp(3.5σ)-1) and the percentage margin on long positions would be equal
to 100(1-exp(-3.5σ)). This implies slightly larger margins on short positions
than on long positions. The derivatives exchange/clearing corporation may
apply the higher margin on both the buy and sell side.
iii. The volatility estimation and margin fixation methodology should be clearly
made known to all market participants so that they can compute the margin for
any given closing level of the interest rate futures price. Further, the trading
software itself should provide this information on a real time basis on the
trading workstation screen.
iv. During the first time-period on the first day of trading in 5 Year Notional
Coupon Bearing GoI Security futures, the sigma would be equal to 0.2 %.
10.1.16Position Limits
10.1.16.1 Client Level
The gross open positions of the client across all contracts should not exceed 6% of the total
open interest or Rs 300 crores whichever is higher. The Exchange will disseminate alerts
whenever the gross open position of the client exceeds 3% of the total open interest at the
end of the previous day’s trade.
10.1.16.2 Trading Member Level
The gross open positions of the trading member across all contracts should not exceed 15%
of the total open interest or Rs. 1000 crores whichever is higher.
Page 95 of 156
10.1.16.3 Clearing Member Level
No separate position limit is prescribed at the level of clearing member. However, the
clearing member shall ensure that his own trading position and the positions of each trading
member clearing through him is within the limits specified above.
10.1.16.4 FIIs
In case of Foreign Institutional Investors registered with Securities and Exchange Board of
India the total gross long (bought) position in cash and Interest Rate Futures markets taken
together should not exceed their individual permissible limit for investment in government
securities and the total gross short (sold) position, for the purpose of hedging only, should
not exceed their long position in the government securities and in Interest Rate Futures, at
any point in time.
Page 96 of 156
10.1.17Settlement Mechanism
a. Polling shall be carried out by the Fixed Income, Money Market and
Derivatives Association, i.e., FIMMDA;
b. The yields (Bid and Ask) of the GoI securities shall be polled from Primary
Dealers (PDs) registered with the Reserve Bank of India;
c. Each poll shall involve ten PDs who would be selected at random from the
universe of PDs;
d. Polling would be conducted at three instances, i.e., 11.00 am, 11.30 am and
12.00 pm daily;
e. At each instance of polling, for each bond, out of the ten buy yields, two
highest and two lowest yields would be treated as outliers and would be
ignored. Similarly outliers from ten sell yields would be identified and
ignored.
f. After rejecting the outliers in above step, there will be [6 * 2 * 3 * Number of
Bonds in Basket] number of remaining yields.
g. Average settlement yield (Ys) is the simple average of the remaining yields.
Ys will be rounded off to 4 decimal digits.
h. Ys determined in above step would be used to calculate present value of
notional underlying bond on the basis of formula given below. This will be
the final settlement price of the contract.
Final settlement price =
   
C
   100 * 
100 10
     2 
 10   k 
 Ys   Ys 
k 1
  1      1   
  2     2  
where,
Ys: Settlement yield
C: The notional coupon of underlying bond = 7%
Worked out example of settlement price calculation described above has been given in Para
10.1.18.
Page 97 of 156
10.1.18 Worked out Example of Settlement price calculation
Yield Figures Obtained by Polling of Dealers
11:00 AM Bond 1 Bond 2 Bond 3
Dealer Buy Yields Sell Yields Buy Yields Sell Yields Buy Yields Sell Yields
Dealer 1 5.9600 5.9500 (6.0100) (6.0000) (6.0250) (6.0425)
Dealer 2 5.9625 5.9500 6.0025 5.9925 6.0450 6.0300
Dealer 3 5.9650 (5.9550) 6.0050 5.9950 6.0450 6.0350
Dealer 4 (5.9600) (5.9550) (6.0025) 5.9975 (6.0425) 6.0375
Dealer 5 5.9625 5.9500 (6.0025) 5.9900 (6.0550) (6.0275)
Dealer 6 (5.9725) 5.9525 (6.0175) 5.9975 (6.0575) 6.0375
Dealer 7 (5.9700) 5.9500 6.0100 (5.9900) 6.0475 (6.0275)
Dealer 8 (5.9600) 5.9500 6.0100 (6.0000) 6.0500 (6.0400)
Dealer 9 5.9625 (5.9475) 6.0050 5.9950 6.0450 6.0350
Dealer 10 5.9700 (5.9500) 6.0100 (5.9900) 6.0450 6.0350
11:30 AM Bond 1 Bond 2 Bond 3
Dealer Buy Yields Sell Yields Buy Yields Sell Yields Buy Yields Sell Yields
Dealer 1 5.9700 5.9600 6.0150 6.0050 (6.0600) (6.0500)
Dealer 2 (5.9750) 5.9600 6.0150 6.0000 6.0550 6.0375
Dealer 3 5.9750 (5.9650) 6.0175 (6.0075) 6.0575 (6.0475)
Dealer 4 5.9700 (5.9650) 6.0125 (6.0075) 6.0525 6.0475
Dealer 5 (5.9700) (5.9500) (6.0100) (5.9900) (6.0450) (6.0250)
Dealer 6 5.9725 5.9600 6.0125 6.0000 6.0550 6.0400
Dealer 7 (5.9775) 5.9575 (6.0200) 6.0000 (6.0600) 6.0400
Dealer 8 5.9750 5.9550 (6.0200) 6.0000 6.0550 (6.0350)
Dealer 9 5.9750 (5.9550) 6.0150 6.0050 6.0600 6.0400
Dealer 10 (5.9700) 5.9600 (6.0050) (5.9950) (6.0500) 6.0400
12:00 PM Bond 1 Bond 2 Bond 3
Dealer Buy Yields Sell Yields Buy Yields Sell Yields Buy Yields Sell Yields
Dealer 1 5.9750 (5.9650) 6.0200 (6.0100) (6.0650) (6.0550)
Dealer 2 5.9750 5.9600 6.0175 6.0025 6.0575 6.0450
Dealer 3 5.9750 (5.9650) 6.0175 (6.0075) 6.0575 (6.0475)
Dealer 4 (5.9700) (5.9500) 6.0150 (5.9950) 6.0600 6.0400
Dealer 5 (5.9800) 5.9600 (6.0225) 6.0025 (6.0625) 6.0425
Dealer 6 5.9750 (5.9550) 6.0200 6.0000 6.0600 (6.0400)
Dealer 7 (5.9800) 5.9600 6.0200 (6.0000) 6.0600 (6.0400)
Dealer 8 5.9800 5.9600 (6.0250) 6.0050 6.0625 6.0425
Dealer 9 5.9750 5.9650 (6.0150) 6.0050 (6.0550) 6.0450
Dealer 10 (5.9750) 5.9650 (6.0150) 6.0050 (6.0575) 6.0475
 ( ) : Outlier yields, which are two highest and two lowest values on sell and buy side for individual
bond at a particular instant of polling
 Average of all the yields except those in parentheses () = 6.005787
 Settlement Yield = Average yield rounded off to 4 decimal digits = 6.0058
Page 98 of 156
Futures Settlement Price =
   
.07
   100 * 
100 10
 

 2 
  .060058  10    .060058  k 
k 1
 1     1   
  2     2  
= Rs. 104.2397
10.2 Regulatory and Legal aspects
10.2.1 Exchange
The Interest Rate Futures on 5-year GoI Securities shall be traded on the Currency
Derivative Segment of a recognized Stock Exchange. Eligible Stock Exchanges
may introduce these contracts after obtaining prior approval from SEBI.
Page 99 of 156
11 DERIVATIVE CONTRACTS ON FOREIGN INDICES
11.1 Underlying
Derivative contracts on foreign stock indices are permitted as per the eligibility
criteria.
11.2 Eligibility Criteria
A stock exchange may introduce derivatives on a foreign stock index if:
i. Derivatives on that Index is available on any of the stock exchanges listed in
table given below :
S No. Exchange
Americas
1. BM&FBOVESPA
2. Chicago Board Options Exchange (CBOE)
3. CME Group
4. ICE Futures U.S.
5. International Securities Exchange (ISE)
6. MexDer
7. Montréal Exchange
8. NASDAQ OMX PHLX
Asia Pacific
1. Australian Securities Exchange
2. Bursa Malaysia
3. Hong Kong Exchanges
4. Korea Exchange
5. Osaka Securities Exchange
6. Singapore Exchange
7. TAIFEX
8. Tokyo Stock Exchange Group
Europe, Africa, Middle East
1. Borsa Italiana
2. Eurex
3. Johannesburg SE
4. MEFF
5. NASDAQ OMX Nordic Exchange
6. NYSE Liffe (European markets)
7. Oslo Børs
8. Tel Aviv SE
Page 100 of 156
ii. In terms of trading volumes (number of contracts), derivatives on that Index
figure among the top 15 Index derivatives globally.
OR
That Index has a market capitalization of at least USD 100 billion.
iii. That index is “broad based”. An Index is broad based if :
a. The Index consists of a minimum of 10 constituent stocks and
b.No single constituent stock has more than 25% of the weight,
computed in terms of free float market capitalization, in the Index.
11.3 Failure to meet Eligibility Criteria
After introduction of derivatives on a particular stock index, if that stock index fails
to meet any of the eligibility criteria for three months consecutively, no fresh
contract shall be introduced on that Index. However, the existing unexpired
contracts would be traded till expiry and new strikes may be introduced on those
contracts.
11.4 Currency Denomination
The absolute numerical value of the underlying foreign stock index shall be
denominated in Indian Rupees (INR). The derivatives contracts on that foreign
stock index would be denominated traded and settled in Indian rupees.
11.5 Risk Management Framework
The stock exchange shall submit the risk management framework along with its
application for introduction of derivatives on foreign stock indices.
11.6 Position Limits
The Trading Member/Mutual Funds position limits (higher of Rs. 500 crore or 15%
of the total open interest in Index derivatives) as well as the disclosure requirement
for clients whose position exceed 15% of the open interest of the market, as
applicable to domestic stock index derivatives, shall be applicable to derivatives on
foreign stock indices.
11.7 Information Sharing
The stock exchange shall ensure that material price sensitive information and
information relating to regulatory actions and corporate actions relating to
constituent stocks of the foreign stock index, as available in public domain, are
available to Indian investors.
11.8 Legal Compliance
The stock exchange shall ensure compliance with any other legal provisions relating
to introduction of derivatives on foreign stock indices and obtain requisite approvals
from the concerned regulatory bodies.
Page 101 of 156
11.9 Enforcement
Any kind of market demeanor in the market for the derivatives on foreign stock
indices shall be subject to the appropriate enforcement actions, as applicable to the
market for any securities.
11.10 Trading
Trading in derivatives on Foreign Stock Indices shall be restricted to residents in
India.
Page 102 of 156
12 MISCELLANEOUS
12.1 Corporate Action Adjustments:
Options on common stock trade on both NSE & BSE the corporate adjustment for the
Option on the same underlying should be uniform across markets. While a uniform
adjustment methodology could be adopted for certain corporate action, it would be difficult
to specify any uniform policy for all corporate actions at this stage. For this purpose, it has
been decided to constitute a group comprising NSE, BSE and other knowledgeable
persons, which would decide a uniform course of action for adjusting stock option
contracts on corporate actions, taking into account best practices followed internationally,
where a uniform criterion cannot be laid down at present. However, certain adjustments for
Corporate Actions for Stock Options would be as follows:
a. The basis for any adjustment for corporate action shall be such that the value of the
position of the market participants on cum and ex-date for corporate action shall
continue 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-money. This
will also address issues related to exercise and assignments.
b. Any adjustment for corporate actions shall be carried out on the last day on which a
security is traded on a cum basis in the underlying cash market.
c. Adjustments shall mean modifications to positions and/or contract specifications as
listed below such that the basic premise of adjustment laid down in para a. above is
satisfied :
1. Strike Price
2. Position
3. Market Lot/Multiplier
The adjustments shall be carried out on any or all of the above based on the nature of the
corporate action. The adjustments for corporate actions shall be carried out on all open,
exercised as well as assigned positions.
The corporate actions may be broadly classified under stock benefits and cash benefits. The
various stock benefits declared by the issuer of capital are:
 Bonus
 Rights
 Merger/De-merger
 Amalgamation
 Splits
 Consolidations
 Hive-off
 Warrants, and
 Secured Premium Notes (SPNs) among others.
 Extraordinary dividends
The methodology proposed to be followed for adjustment of various corporate actions to be
carried out are as follows :
Page 103 of 156
Bonus, Stock Splits and Consolidations
Strike Price: The new strike price shall be arrived at by dividing the old strike price by the
adjustment factor as under.
Market Lot / Multiplier: The new market lot/multiplier shall be arrived at by multiplying
the old market lot by the adjustment factor as under.
Position: The new position shall be arrived at by multiplying the old position by the
adjustment factor as under.
The adjustment factor for Bonus, Stock Splits and Consolidations is arrived at as follows:
Bonus
Ratio – A: B Adjustment factor: (A+B)/B
Stock Splits and Consolidations
Ratio – A: B Adjustment factor: A/B
Right
Ratio – A: B and Issue price of rights is S.
Adjustment factor: (P-E)/P
Where P = Spot price on last cum date
E = (P-S) x A / (A+B)
Strike Price: The new strike price shall be arrived at by multiplying the old strike price by
the adjustment factor as under.
Market Lot / Multiplier: The new market lot/multiplier shall be arrived at by dividing the
old market lot by the adjustment factor as under.
The above methodology may result in fractions due to the corporate action e.g. a bonus
ratio of 3:7. With a view to minimizing fraction settlements, the following methodology is
proposed to be adopted:
a. Compute value of the position before adjustment
b. Compute value of the position taking into account the exact adjustment factor
c. Carry out rounding off for the Strike Price and Market Lot
d. Compute value of the position based on the revised strike price and market lot
The difference between a and d above, if any, shall be decided in the manner laid down by
the group by adjusting Strike Price or Market Lot, so that no forced closure of open
position is mandated.
Dividends which are below 10% of the market value of the underlying stock would be
deemed to be ordinary dividends and no adjustment in the Strike Price would be made for
ordinary dividends. For extra-ordinary dividends, above 10% of the market value of the
underlying stock, the Strike Price would be adjusted.
Page 104 of 156
The Exchange may on a case to case basis carry out adjustments for other corporate actions
as decided by the group in conformity with the above guidelines.
Stock Exchanges to give notice of four weeks to the market for any change in the contract
specifications and also in case of change in a constituent of an Index on which derivatives
are available.
Clause 16 of the Equity Listing Agreement includes that the company on whose stocks,
derivatives are available or whose stocks form part of an index on which derivatives are
available, shall give a notice period of 30 days to stock exchanges for corporate actions like
mergers, de-mergers, splits and bonus shares.
All the following conditions shall be met in the case of shares of a company undergoing
restructuring through any means for eligibility to re-introduce derivative contracts on that
company from the first day of listing of the post restructured company/(s) ’s (as the case
may be) stock (herein referred to as post restructured company) in the underlying market,
a. the futures and options contracts on the stock of the original (pre restructure)
company were traded on any exchange prior to its restructuring;
b. the pre restructured company had a market capitalisation of at least Rs.1000 crores
prior to its restructuring;
c. the post restructured company would be treated like a new stock and if it is, in the
opinion of the exchange, likely to be at least one-third the size of the pre
restructuring company in terms of revenues, or assets, or (where appropriate)
analyst valuations; and
d. in the opinion of the exchange, the scheme of restructuring does not suggest that the
post restructured company would have any characteristic (for example extremely
low free float) that would render the company ineligible for derivatives trading,
If the above conditions are satisfied, then the exchange shall take the following course of
action in dealing with the existing derivative contracts on the pre-restructured company and
introduction of fresh contracts on the post restructured company:
a. In the contract month in which the post restructured company begins to trade, the
Exchange shall introduce near month, middle month and far month derivative
contracts on the stock of the restructured company.
b. In subsequent contract months, the normal rules for entry and exit of stocks in terms
of eligibility requirements would apply. If these tests are not met, the exchange
shall not permit further derivative contracts on this stock and future month series
shall not be introduced.
The Exchanges shall determine the manner of adjustment in derivative contracts at the time
of corporate actions in conformity with the following principles:-
a. The basis for any adjustment for corporate action shall be such that the value of the
position of the market participants on cum and ex-date for corporate action shall
continue to remain the same as far as possible.
Page 105 of 156
b. The exchanges shall take into account best practices followed internationally.
c. The Exchanges shall consider the circumstances of a particular case and the general
interest of investors in the market.
d. The Exchanges shall ensure that the adjustment methodology for a corporate action
is uniform across all exchanges.
12.2 Reporting and Disclosure
12.2.1 Monthly Activity Report
The exchange is requested to submit information to SEBI on a monthly basis in the
format as prescribed by SEBI from time to time.
12.2.2 Reporting of derivative transactions to the media and the newspapers
The Derivative Exchanges/Segments and their Clearing House/Corporation are
required to report the following details for the transactions in derivative contracts,
to the media/newspapers, on a daily basis:
a. Contracts Description
b. Number of contracts traded
c. Notional Value (for option contracts, notional value would be calculated as
[strike + Premium] * lot size * number of contracts traded).
d. Open
e. High
f. Low
g. Value of premium traded (for option contracts)
h. Open Interest (in number of contracts)
12.3 Straight through Processing
Straight Through Processing (STP) is generally understood to be a mechanism that
automates the end to end processing of transactions of financial instruments. It
involves use of a system to process or control all elements of the work flow of a
financial transaction, what are commonly known as the Front, Middle, Back office
and General Ledger. In other words, STP allows electronic capturing and processing
of transactions in one pass from the point of order origination to final settlement. STP
thus streamlines the process of trade execution and settlement and avoids manual
entry and re-entry of the details of the same trade by different market intermediaries
and participants. Usage of STP enables orders to be processed, confirmed, settled in a
shorter time period and in a more cost effective manner with fewer errors. Apart from
compressing the clearing and settlement time, STP also provides a flexible, cost
effective infrastructure, which enables e-business expansion through online
processing and access to enterprise data.
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To resolve the issue of inter-operability between the STP Service Providers, a STP
Centralised Hub would be setup in consultation with the stock exchanges and the
STP Service Providers. Currently this STP Centralised Hub has been setup and made
operational by NSE. NSE has obtained the necessary approvals from Department of
Telecommunications (DoT) as an Internet Service Provider (ISP). Subsequently this
STP Centralised Hub would be further developed jointly with BSE.
In view of the aforesaid developments, it has been decided that all the institutional
trades executed on the stock exchanges would be mandatorily processed through the
STP System. An institutional trade for the purpose of STP shall mean a trade which
is settled through a custodian. Institutional trades where electronic contract note in
the prescribed format is issued, no physical contract note (for such a trade) shall be
issued by the brokers. The system flow of the STP framework would be as follows:
a. A STP user intending to send an instruction would send the message to his
STP service provider after digitally signing the same.
b. The STP service provider would verify the signature of the STP user and
forward it to the
i) Recipient STP user, if the recipient STP user is availing services of the
same STP service provider; or the
ii) STP centralized hub if the recipient STP user is not with the same STP
service provider. In such a case the STP service provider would be
required to prepare a message as per the STP centralized hub prescribed
message format, enclose the user’s message, digitally sign the message
and then send it to the STP centralized hub
c. On receipt of the message by the STP centralized hub, the STP centralized
hub would
i) verify the signature of the sending STP service provider only.
ii) send an acknowledgment to the sending STP service provider.
d. The STP centralized hub would forward the message to the recipient STP
service provider after digitally signing on the message.
e. The recipient STP service provider on receipt of the message from the STP
centralized hub shall verify the signature of the STP centralized hub, verify
if the recipient STP user is associated with itself and send an appropriate
acknowledgment with digital signature to the STP centralized hub. The STP
centralized hub would in turn forward the acknowledgment (received from
the recipient STP service provider) duly signed to the sending STP service
provider.
f. The recipient STP service provider shall forward the message to the
recipient STP user. The recipient STP user would receive the message and
verify the signature of the recipient STP service provider and sending STP
user.
To enable inter-operation, the STP centralized hub would provide a utility / client
software to the STP service provider. The STP service provider’s point of interface
with the STP centralized hub would be through this utility / client software. The
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PKI (Public key infrastructure) system for the interface shall be implemented at a
later stage. The block diagram of the entire STP System is enclosed in Annexure I.
SEBI in order to regulate the STP service has issued the SEBI (STP centralised hub
and STP service providers) Guidelines, 2004 (herein referred to as “STP
Guidelines”) which also prescribes the model agreement between the STP
centralised hub and the STP service providers.
The STP guidelines prescribes the eligibility criteria and conditions of approval for
the STP centralised hub and the STP service providers, obligations and
responsibilities of the STP centralized hub and the STP service providers and code
of conduct for the STP service providers. The STP centralised hub and the STP
service providers shall abide by these Guidelines. The guidelines are given as
Annexure II.
To prescribe contractual obligations between the STP centralised hub and the STP
service providers and to facilitate standardisation of service, a model agreement
between the STP centralised hub and the STP service providers has also been
prescribed by SEBI and is prescribed as Schedule II of the STP Guidelines. The
agreement between the STP centralised hub and the STP service provider shall
include the provisions included in the model agreement.
STP users shall be required to use IFN 515 messaging standard for issue of contract
note, IFN 548 / 598 for confirmation of the contract note by the custodian / fund
manager to the broker and messaging formats IFN 540 to 547 for settlement
instructions and their confirmations between the fund manager and the custodians
for settlement of such trades.
The messaging formats prescribed for STP in India is based on the internationally
accepted ISO 15022 messaging standards. However the descriptors for each
messaging format had been formulated in a manner to describe the practices
followed in the Indian securities’ market (from the perspective of settlement
obligation of a stock broker). However it has been observed that that there has been
some confusion in certain sections of the market with respect to the intended use of
the messaging format on account of the messaging descriptors.
Accordingly it is clarified that the descriptors shall mean the following:
a. IFN 540: settlement instruction for a buy trade free of payment
b. IFN 541: settlement instruction for a buy trade against payment
c. IFN 542: settlement instruction for a sell trade free of payment
d. IFN 543: settlement instruction for a sell trade against payment
e. IFN 544: confirmation of a settlement instruction for a buy trade free of
payment (response to IFN 540)
f. IFN 545: confirmation of a settlement instruction for a buy trade against
payment (response to IFN 541)
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g. IFN 546: confirmation of a settlement instruction for a sell trade free of
payment (response to IFN 542).
h. IFN 547: confirmation of a settlement instruction for a sell trade against
payment (response to IFN 543)
It is also clarified that in the IFN 515 message, if the trade is intended to be settled
by the custodian with the Clearing Corporation (by accepting the settlement
obligation), then it shall be termed as "FREE" and if the trade is intended to be
settled by the broker with the Clearing Corporation then it shall be termed as
"APMT" (meaning against payment) in the tag 22H of the IFN 515 message.
In order to integrate the Securities Transaction Tax (STT) in the STP system, it
would be necessary to provide for necessary fields in the appropriate messaging
standards. After deliberation with the STP centralised hub and the STP service
providers, it has been decided to make the following modifications in the prescribed
messaging formats:
a. Message Types that shall be modified are IFN515, IFN540, IFN541,
IFN542 and IFN543
b. A Qualifier shall be used to identify Securities Transaction Tax Amount:
"COUN", Country, National Federal Tax.
c. The change in the ISO Structure for the impacted message types shall be as
follows:
Start of
M 16R AMT
block
Format: (Qualifier)
//(Currency Code) (Amount)
For: Securities Transaction
tax Amount
Qualifier: "COUN" (4 Upper
To identify
case Characters)
the
Narrative: "INR" (3 Upper
M 19A Amount :4!c//3!a11d Securities
Letters)
Transaction
Amount: Up to 10 digits
Tax Amount
(only Integer value allowed)
followed by a comma (used
as decimal sign) . Comma is
mandatory. Amount can be
zero or greater than zero.
M 16S AMT End of block
d. Securities Transaction Tax Block shall be placed before the Settlement
Amount Block in the stated Message Types. (IFN515, IFN540, IFN541,
IFN542 and IFN543)
e. Securities Transaction Tax block will be mandatory amount block in
IFN515 and optional amount block in IFN540, IFN541, IFN542 and
IFN543.
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f. If the Contract Note (issued by means of IFN 515) is rejected on the basis of
Securities Transaction Tax amount then the reason for the rejection shall be
specified in the "Tag70D Narrative" field and "Tag 24B Reason" specified
should be "NARR".
SEBI has extended the facility of issuance of ECNs as a legal document using
Straight Through Processing (STP) to the equity derivatives segment also.
Accordingly a model contract note in electronic form (IFN 515 messaging format)
and confirmation of electronic contract note (IFN 598 messaging format) are
enclosed as Annexure III. The Exchanges are advised to modify/amend their bye-
laws, rules and regulations to;
a. Permit issuance of electronic contract note including all the standard pre-
printed terms and conditions as given in the physical contract note.
b. Permit signing of the electronic contract note with a digital signature so as to
make the modified format of the electronic contract note a valid legal
document like the physical contract note.
c. Prescribe a standard format for the issuance of the electronic contract note.
The standard terms of contract as are required to be mentioned in the Contract
Notes as per the Bye-laws and Regulations of exchanges, which are not contained
in ECNs, shall be incorporated in the Client Broker Agreement or where applicable,
the Tripartite Agreement between the stock broker, sub-broker and the client.
12.4 Certification
The guidelines for conduct of certification examination for broker/dealers and
salespersons in the derivative market are given as Annexure IV.
12.5 Introduction of Volatility and Bond Index
12.5.1 Volatility Index
Exchanges shall construct a Volatility Index and disseminate the same. The
Exchanges are free to decide whether they want to adopt any of the Volatility Index
computation models available globally or may like to develop their own model for
computation of Volatility Index. The detailed methodology for computing the
Volatility Index shall be disseminated by the Exchange for the benefit of the market
participants and investors.
12.5.2 Derivatives on Volatility Index
Stock Exchanges are permitted to introduce derivative contracts on Volatility Index,
subject to the conditions that:
 The underlying Volatility Index has a track record of at least one year.
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 The Exchange has in place the appropriate risk management framework for
such derivative contracts.
Before introduction of such contracts, the Stock Exchanges shall submit the
following to SEBI:
I. Contract specifications
II. Position and Exercise Limits
III. Margins
IV. The economic purpose it is intended to serve
V. Likely contribution to market development
VI. The safeguards and the risk protection mechanism adopted by the
exchange to ensure market integrity, protection of investors and smooth
and orderly trading
VII. The infrastructure of the exchange and the surveillance system to
effectively monitor trading in such contracts, and
VIII. Details of settlement procedures & systems
IX. Details of back testing of the margin calculation for a period of one year
considering a call and a put option on the underlying with a delta of 0.25
& -0.25 respectively and actual value of the underlying
12.5.3 Bond Index
It has been decided that, to begin with, Exchanges shall construct a Bond Index
(both corporate & GOI) and disseminate the same. The Exchanges are free to
decide whether they want to adopt any of the Bond Index computation models
available globally or may like to develop their own model for computation of Bond
Index. The detailed methodology for computing the Bond Index shall be
disseminated by the Exchange for the benefit of the market participants and
investors. Based on experience gained and awareness generated, derivatives on
Bond Index shall be considered for introduction in due course of time.
12.6 Modification of Client Codes of Non-institutional Trades Executed
on Stock Exchanges (All Segments)
12.6.1 Modification of Client Codes
Stock Exchanges may allow modifications of client codes of non-institutional trades
only to rectify a genuine error in entry of client code at the time of placing /
modifying the related order in all segments (derivatives as well as cash).
The following shall be classified as genuine errors for the purpose of client code
modification:
a. Error due to communication and/or punching or typing such that the original
client code/name and the modified client code/name are similar to each
other.
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b. Modification within relatives (‘Relative’ for this purpose would mean as
defined under Companies Act, 1956).
If a Stock Exchange wishes to allow trading members to modify client codes of
non-institutional trades, it shall:
a. Set up a mechanism to monitor that the trading members modify client
codes only to rectify a genuine error.
b. Ensure that modification of client codes is covered in the internal audit of
trading members prescribed by SEBI through its circular No.
MRD/DMSCir-29/2008 dated October 21, 2008.
12.6.2 Penalty Structure
i. The Stock Exchanges shall levy a penalty from trading members and credit
the same to its Investor Protection Fund as under:
‘a’ as % of ‘b’ Penalty as % of ‘a’
≤ 5 1
> 5 2
Where,
a = Value (turnover) of non-institutional trades where client codes have been
modified by a trading member in a segment during a month.
b = Value (turnover) of non-institutional trades of the trading member in the
segment during the month.
ii. The Stock Exchange shall conduct a special inspection of the trading
member to ascertain whether the modifications of client codes are being
carried out only to rectify genuine errors as mentioned above, if ‘a’ as a %
of ‘b’, as defined above, exceeds 1% during a month and take appropriate
disciplinary action, if any deficiency is observed.
iii. Exemption from penalty: Shifting of trades to the error account of broker
would not be treated as modification of client code, provided the trades in
error account are subsequently liquidated in the market and not shifted to
some other code.
Further, brokers shall disclose the codes of accounts which are classified as
‘error accounts’ to the Exchanges. Each broker should have a well
documented error policy approved by the management of the broker.
Exchanges shall periodically review the trades flowing to the error accounts
of the brokers.
SEBI shall examine implementation of the provisions mentioned above under
Section 12.8 during inspection of the Stock Exchanges.
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12.7 Short-collection/Non-collection of client margins
a. Stock Exchanges shall levy following penalty on trading members for short-
collection/non-collection of margins from clients in Equity and Currency
Derivatives segments:
For each member
‘a’ %age of ‘a’
(< Rs 1 lakh) And (< 10% of applicable margin) 0.5
(≥ Rs 1 lakh) Or (≥ 10% of applicable margin) 1.0
Where a = Short-collection/non-collection of margins per client per segment
per day
b. If short/non-collection of margins for a client continues for more than 3
consecutive days, then penalty of 5% of the shortfall amount shall be levied
for each day of continued shortfall beyond the 3rd day of shortfall.
c. If short/non-collection of margins for a client takes place for more than 5
days in a month, then penalty of 5% of the shortfall amount shall be levied
for each day, during the month, beyond the 5th day of shortfall.
d. Notwithstanding the above, if short collection of margin from clients in
equity derivatives segment is caused due to movement of 3% or more in the
index (close to close value of Nifty/Sensex for all equity derivatives) on a
given day, (day T), then, the penalty for short collection shall be imposed
only if the shortfall continues to T+2 day.
Further, in currency derivatives segment, if short collection/non- collection
of margin from clients is caused due to movement of 1% or more in the
USD-INR currency pair (close to close settlement price of the near month
currency futures) on a given day then the penalty for short collection shall
be imposed only if shortfall continues to T+2 day. The currency pair being
considered for this movement would be only the USD-INR and the
condition of two days of continued shortfall shall be applicable for all
currencies.
e. All instances of non-reporting shall amount to 100% short collection and the
penalty as applicable shall be charged on these instances in respect of short
collection.
f. If during inspection it is found that a member has reported falsely the
margin collected from clients, the member shall be penalized 100% of the
falsely reported amount along with suspension of trading for 1 day in that
segment.
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g. The penalty shall be collected by the Stock Exchange within five days of the
last working day of the trading month and credited to its Investor Protection
Fund.
h. The margin statement which is forwarded on a daily basis by the broker to
the clients shall include a column stating the margin charged by the
Exchange/Clearing Corporation.
i. When penalty is being collected by a broker for short collection / non-
collection from a client, then the broker shall provide the relevant
supporting documents to the client.
SEBI shall examine implementation of the provisions mentioned above under
Section 12.9 during inspection of the Stock Exchanges.
12.8 Liquidity Enhancement Schemes for Illiquid Securities in Equity
Derivatives Segment
Stock Exchanges are permitted to introduce one or more liquidity enhancement
schemes (LES) to enhance liquidity of illiquid securities in their equity derivatives
segments subject to following conditions:
1. The Stock Exchange shall ensure that the LES, including any modification therein
or its discontinuation,
a. has the prior approval of its Board and its implementation and
outcome is monitored by the Board at quarterly intervals;
b. prescribes and monitors the obligations of liquidity enhancers
(liquidity provider, market maker, maker-taker or by whatever name
called);
c. disburses the incentives linked to performance;
d. is objective, transparent, non-discretionary and non-discriminatory;
e. does not compromise market integrity or risk management;
f. complies with all the relevant laws; and
g. is disclosed to market at least 15 days in advance and its outcome
(incentives granted and volume achieved – liquidity enhancer wise
and security wise) is disseminated monthly within a week of the
close of the month.
2. The LES can be introduced in any of the following securities:
a. New securities permitted on the Stock Exchange after the date of this circular,
b. Securities in case of a new Stock Exchange / new Segment, and
c. Securities where the average trading volume for the last 60 trading days on the
Stock Exchange is less than 0.1% of market capitalization of the underlying.
3. The LES can be discontinued at any time with an advance notice of 15 days. It
shall, however, be discontinued as soon as the average trading volume on the Stock
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Exchange, during the last 60 trading days, reaches 1% of market capitalization of
the underlying, or six months from introduction of the scheme, whichever is earlier.
4. If a Stock Exchange introduces LES on securities eligible under Para 2 above, other
Stock Exchanges may introduce LES in the same / competing securities even if
those are not eligible under Para 2 above. Such LES of the other Stock Exchanges
cannot be continued beyond the period of LES of the former stock Exchange.
5. The incentives under LES shall be transparent and measurable. These may take
either of the two forms:
a. Discount in fees, adjustment in fees in other segments, cash payment;
b. Shares, including options and warrants, of the Stock Exchange.
6. If a Stock Exchange chooses the form specified in Para ‘5a’ above, the incentives
under all LES, during a financial year, shall not exceed 25% of the net profits or
25% of the free reserves of the Stock Exchange, whichever is higher, as per the
audited financial statements of the preceding financial year. If, however, a Stock
Exchange chooses the form specified in Para ‘5b’ above, the shares, including the
shares that may accrue on exercise of warrants or options, given as incentives under
all LES, during a financial year, shall not exceed 25% of the issued and outstanding
shares of the Stock Exchange as on the last day of the preceding financial year.
7. The Stock Exchange shall submit half-yearly reports on the working of its LES for
review of SEBI. Implementation of LES shall be covered in the inspection of the
Stock Exchange conducted by SEBI.
12.9 Requirement of Base Minimum Capital for Trading Member
1. Base Minimum Capital (BMC) is the deposit given by the member of the exchange
against which no exposure for trades is allowed. The BMC deposit requirement was
prescribed to be commensurate with the risks, other than market risk, that the broker
may bring to the system. It has been decided to realign the BMC requirements with the
risk profiles of the stock brokers / trading members in cash / derivative segment of the
stock exchange.
2. Accordingly, the requirement of BMC would be implemented in the following manner
–
a. Stock brokers / trading members shall maintain the prescribed BMC based on their
profiles –
Categories BMC
Deposit
(in INR)
Only Proprietary trading without Algorithmic trading (Algo) 10 Lacs
Trading only on behalf of Client (without proprietary trading) 15 Lacs
and without Algo
Proprietary trading and trading on behalf of Client without 25 Lacs
Algo
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All Trading Members/Brokers with Algo 50 Lacs
Explanation: The profiling of members may be explained with the following
example – A scenario may arise, wherein, a member has registration as a “stock
broker” as well as a “trading member” and is engaged as a principal doing
proprietary trading on cash segment and is also engaged as an agent and transacting
only on behalf of the clients in the derivatives segment. Further, the member may
not have availed facility for algorithmic trading. In such a case, the profile of such a
member shall be assessed as “Proprietary trading and trading on behalf of client
without Algo”. The applicable BMC deposit for such a member shall be INR 25
Lacs.
b. This BMC deposit requirement stipulated in the table above, is applicable to all
stock brokers / trading members of exchanges having nation-wide trading
terminals.
c. For stock brokers / trading members of exchanges not having nation-wide trading
terminals, the deposit requirement shall be 40% of the above said BMC deposit
requirements.
d. The BMC deposit shall be maintained for meeting contingencies in any segment of
the exchange. For members having registration for more than one segment of the
same exchange, the BMC deposit requirement shall not be additive for such
number of segments and shall be the highest applicable BMC deposit, across
various segment.
e. No exposure shall be granted against such BMC deposit. The Stock Exchanges shall
be permitted to prescribe suitable deposit requirements, over and above the SEBI
prescribed norms, based on their perception and evaluation of risks involved.
f. Minimum 50% of the deposit shall be in the form of cash and cash equivalents. The
existing guidelines on collateral composition shall continue to remain applicable.
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13 ANNEXURES
13.1 ANNEXURE I
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13.2 ANNEXURE II
SECURITIES AND EXCHANGE BOARD OF INDIA (STP CENTRALISED HUB
AND STP SERVICE PROVIDERS) GUIDELINES, 2004
1) PRELIMINARY
(1) These Guidelines shall be called the Securities and Exchange Board of India (STP
Centralised Hub and STP Service Providers) Guidelines, 2004.
(2) These Guidelines are being issued under section 11 of the Securities and Exchange
Board of India Act, 1992 to promote the development of the securities market.
(3) They shall come into force on 26th day of May, 2004
2) DEFINITIONS
(1) In these Guidelines, unless the context otherwise requires:-
(a) “Act” means the Securities and Exchange Board of India Act, 1992;
(b) “Certifying Authority” means a certifying authority who has been granted a
license under section 24 of the Information Technology Act, 2000;
(c) "SEBI" means the Securities and Exchange Board of India established under
Section 3 of the Act;
(d) “STP” means straight through processing;
(e) “STP centralised hub” means an infrastructure set-up by a person or entity for
the purpose of rendering STP service by providing a platform for communication
between different STP service providers;
(f) "STP message" means and includes all the messages for electronic trade
processing with a common messaging standard as may be defined by SEBI from
time to time;
(g) “STP service” means the setting up and maintaining of infrastructure to create
an electronic communication network to facilitate information exchange with
respect to securities market transactions between various market participants from
the stage of trade initiation to final settlement through a STP system flow as may be
determined by SEBI from time to time;
(h) "STP service provider” means a person or entity providing STP service to STP
users to the extent of conveying messages between a STP user and the STP
centralised hub and/or between two STP users;
(i) “STP user” means all the users of the STP service and includes such users as are
stipulated by SEBI; and,
(j) “TRAI” means the Telecom Regulatory Authority of India established under the
Telecom Regulatory Authority of India Act, 1997.
(2) Words and expressions used and not defined in these Guidelines, but defined in the Act
or in the Securities Contracts (Regulation) Act, 1956 or in any rules or regulations made
thereunder, shall have the meanings respectively assigned to them in such Acts, rules or
regulations.
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3) ELIGIBILITY CRITERIA FOR STP CENTRALISED HUB AND STP SERVICE
PROVIDERS
(1) No person shall act as an STP centralised hub or a STP Service provider unless it
obtains approval from SEBI to provide such service.
(2) For the grant of a certificate of approval SEBI shall take into account the following:
i. whether the applicant is a person or entity with a minimum networth as may be
prescribed from time to time.
ii. whether the applicant has adequate infrastructure facilities setup in India like
office space, equipment and manpower with adequate experience in dealing in
securities market and adequate expertise in providing necessary services and
software solutions.
4) OBLIGATIONS AND RESPONSIBILITIES OF STP CENTRALISED HUB
(1) The STP centralised hub shall comply with the following:-
i. The STP centralised hub shall at all times comply with the requirement of
eligibility criteria, specified by SEBI.
ii. The STP centralised hub shall abide by all the provisions of the Act, Rules,
Regulations, Guidelines, Resolutions, Notifications, Directions, Circular, etc. as
may be issued by the Government of India / TRAI / Department of
Telecommunications and SEBI from time to time as may be applicable to the STP
centralised hub.
iii. The STP centralised hub shall obtain such approval/s from such authorities as
may be necessary to function as a centralised hub.
iv. The STP centralised hub shall obtain a digital signature certificate from a
Certifying Authority and shall ensure that such digital signature certificate is valid
and in force at all times. A copy of the certificate shall be submitted to all the
recognized STP service providers.
v. The STP centralised hub shall deliver a consistent and secure communication
platform and shall establish continuous connectivity with all the recognized STP
service providers to the best of its ability.
vi. The STP centralised hub shall verify the digital signature certificate furnished by
the STP Service Provider before connecting it to the STP centralized hub.
vii. The STP centralised hub shall confirm authenticity, integrity and non-
reputability of all messages submitted by the STP Service Provider.
viii. The STP centralised hub shall ensure that the message received from the STP
service provider is in the specified messaging standard.
ix. The STP centralised hub shall promptly deliver the messages to the recipient
STP service provider and shall ensure that only the intended STP Service Provider
receives the message.
x. The STP centralised hub shall digitally sign all messages sent to the STP service
provider.
xi. The STP centralised hub shall maintain a directory of all STP service providers
and STP users.
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xii. The STP centralised hub shall maintain a complete record of the flow of
messages processed. The records of the STP centralised hub shall be open for
inspection by SEBI or any other person duly authorised by SEBI for this purpose.
xiii. The STP centralised hub shall not modify / amend the communication protocol
without consulting all the approved STP service providers.
xiv. The STP centralised hub shall ensure that the message is not misused or
tampered with while in its possession.
xv. The STP centralised hub shall maintain confidentiality of information about its
users and shall not divulge the same to other clients, the press or any other person
except in accordance with law or as per the directions of any court of law or of
SEBI.
xvi. The STP centralised hub may charge reasonable fees from the STP service
providers.
5) OBLIGATIONS AND RESPONSIBILITIES OF STP SERVICE PROVIDER
(1)The STP Service provider shall comply with the following :
i. The STP service provider shall at all times comply with the requirement of
eligibility criteria, specified by SEBI.
ii. The STP service provider shall establish connectivity with the STP centralised
hub before providing STP service to its users.
iii. The STP service provider shall provide the necessary details of the STP users
connected with it and all its details to the STP centralised hub for the purpose of
creating and maintaining a directory of STP service providers and STP users.
iv. The STP service provider shall comply with the minimum specifications
specified by the STP centralised hub and as may be mutually agreed upon.
v. The STP service provider shall abide by the service standards as may be specified
by SEBI and / or the STP centralised hub in consultation with the STP service
providers.
vi. The STP Service Provider shall obtain a digital signature certificate from a
Certifying Authority and submit a copy of the Certificate to the STP centralised
hub.
vii. The STP Service Provider shall ensure that the digital signature certificate is
valid and in force.
viii. The STP service providers shall deliver a consistent and secure communication
platform and shall establish continuous connectivity with the STP centralised hub to
the best of its ability.
ix. The STP service provider shall ensure that the message sent to the STP
centralised hub is in the prescribed messaging standard.
x. The STP service provider shall verify the digital signature certificate furnished by
the STP centralised hub before connecting itself to the STP centralised hub.
xi. The STP service provider shall confirm authenticity, integrity and
nonrepudiability of all messages submitted to the STP centralised hub. The STP
service provider shall keep complete track of the flow of messages for record and
audit.
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xii. The STP service providers may charge reasonable fees from the STP users.
xiii. The STP service provider shall exchange messages between other STP service
providers only through the STP centralised hub. Provided that in force majuere
measures or any other circumstances due to which the connectivity of the STP
centralised hub is not available, the STP service providers after mutual discussion
may exchange messages directly among themselves for such period.
xiv. The STP service providers shall digitally sign all messages sent from it to the
STP centralised hub.
xv. The STP service provider shall enter into an agreement with all its STP users
which shall also specify the fees payable by the STP user for the services.
xvi. The STP service provider shall maintain a directory of the STP users connected
to it.
xvii. The STP service provider shall maintain a complete record of the flow of
messages handled. The records of the STP service provider shall be open for
inspection by SEBI or any other person duly authorised by SEBI for this purpose.
xviii. The STP Service Provider shall verify the Digital signature on the message of
the STP user connected to the STP Service Provider
xix. The STP service provider shall ensure that the message from the STP user is in
the specified messaging format.
xx. The STP service provider shall promptly deliver messages to and from the STP
user.
xxi. In respect of inter STP service provider messages, the STP service provider
shall perform all actions to the best of its ability in the same manner, diligence,
speed and with all checks and balances as if the message is to be delivered /
received by the same service provider.
(2) Nothing in these guidelines shall exempt the STP service provider from discharging any
obligations placed on it by any law, regulations and guidelines.
6) CONDITIONS OF APPROVAL FOR STP CENTRALISED HUB AND STP
SERVICE PROVIDERS
(1) Terms of approval:
i. The approval by SEBI shall be for an initial period of five years for STP
centralised hub and for a period of three years for STP service providers and must
be renewed periodically.
ii. The STP centralised hub and STP service provider must ensure continuous
validity of approval by SEBI in order to function as a STP service provider.
iii. The Board shall have the right to suspend / cancel the approval of the STP
centralised hub and/or STP service provider in case of violation of the terms of the
guidelines.
7) CODE OF CONDUCT FOR STP SERVICE PROVIDERS
Every STP service provider shall abide by the Code of Conduct as specified in Schedule I.
8) MODEL AGREEMENT
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The STP centralised hub shall enter into an agreement with every STP service provider on
the lines of the Model Agreement given in Schedule II.
SCHEDULE I
CODE OF CONDUCT FOR STP SERVICE PROVIDERS (Clause 7 of the Guidelines)
a. The STP service provider shall render at all times high standards of service, exercise due
diligence, ensure proper care and exercise independent professional judgment.
b. The STP service provider shall disclose to the clients its possible sources or potential
areas of conflict of duties and interest and provide unbiased services.
c. The STP service provider herein agrees and undertakes to perform its duties as a STP
service provider with the highest standards of int egrity and fairness in all its dealings.
d. The STP service provider shall abide by the obligation as specified under these
Guidelines and the terms of the agreement entered into by the STP service provider with
the STP users / STP centralised hub.
e. The STP service provider shall maintain true and correct record of the messages
processed by it under the scheme and in particular the records in respect of:-
i. the STP users
ii. the messages exchanged within the same STP service provider
iii. the messages exchanged with other STP service providers through the STP
centralised hub
f. The STP service provider shall ensure that the message is not misused or tampered with
while in its possession.
g. The STP service provider shall maintain confidentiality of information about its users
and shall not divulge the same to other clients, the press or any other interested party except
in accordance with law or as per the directions of any court of law.
h. The STP service provider shall abide by all the provisions of the Act, Rules,
Regulations, Guidelines, Resolutions, Notifications, Directions, Circular, etc. as may be
issued by the Government of India / Telecom Regulatory Authority of India / Department
of Telecommunications and Securities and Exchange Board of India from time to time as
may be applicable to the STP service provider.
SCHEDULE II
MODEL AGREEMENT BETWEEN STP CENTRALISED HUB AND STP
SERVICE
PROVIDER
(Clause 8 of the Guidelines)
THIS AGREEMENT is made at _______ on this the___ day of ______________
between _______________________ having its Registered office at
___________________________ (hereinafter referred to as the ‘STP Centralised Hub ’
which expression shall, unless it be repugnant to the context or the meaning thereof, be
deemed to include its successors, legal representatives and assigns) of the First Part;
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And ____________________________________________________ a Company
incorporated under the Companies Act, 1956 and having its registered office
at________________ (hereinafter referred to as the ‘STP Service Provider’ which
expression shall unless it be repugnant to the context or the meaning thereof, be deemed to
include its successors, legal heirs,
legal representatives and assigns as the case may be) of the Second Part.
WHEREAS
1. The Securities and Exchange Board of India has mandated Straight Through
Processing (hereinafter referred to as ‘STP’) for facilitating settlement of
institutional trades.
2. In terms of the Securities and Exchange Board of India (STP Centralised Hub
and STP Service Providers) Guidelines, 2004 an agreement has to be entered into
between the STP Centralised Hub and the STP Service Provider.
3. The STP centralised hub has obtained such approval/s as may be necessary to
function as a centralised hub.
NOW THIS AGREEMENT WITNESSETH AND IT IS HEREBY AGREED BY
AND
BETWEEN _____________ AND ______________ AS UNDER:
A. DEFINITIONS
1. DoT means Department of Telecommunications, India, Government of India and /or its
successors.
2. EFFECTIVE DATE: The date on which this Agreement is entered into.
3. EMERGENCY means an emergency of any kind, including any circumstances whatever
resulting from major accidents and natural disasters.
4. INTERNET: Internet is a global information system that:
is logically linked together by a globally unique address, based on Internet
Protocol (IP) or its subsequent enhancements / upgradations;
is able to support communications using the Transmission Control Protocol /
Internet Protocol (TCP/IP) suite or its subsequent enhancements / upgradations, and
all other IP compatible protocols; and
5. “TELECOM AUTHORITY” shall mean The Director General, DoT, Government of
India and includes any officer empowered by him to perform all or any of the functions of
the Telegraph Authority under the Indian Telegraph Act, 1885 or such other authority as
may be established by law.
6. “TRAI” – shall mean the Telecom Regulatory Authority of India established under the
TRAI Act, 1997.
B. FEES PAYABLE BY STP SERVICE PROVIDER –
The STP Service Provider agrees to pay Fees as listed in the Annexure III(A) in
consideration for the services provided by STP centralised hub hereof. The said fees may
be revised by STP centralised hub as may be mutually agreed upon with the STP Service
Providers. The STP service provider shall also be liable to pay interest @___% p.a. in case
of delay in payments on the amount due till the actual date of payment.
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C. STP SERVICE PROVIDER OBLIGATION
1. The STP Service Provider shall obtain a digital signature certificate from a Certifying
Authority, which has been issued a license by the Controller of Certifying Authorities
appointed under the Information Technology Act, 2000. A copy of the Certificate shall be
submitted to STP centralised hub.
2. The STP Service Provider shall verify the Digital signature on the message of the STP
User connected to the STP Service Provider before sending the message to the STP
Centralized hub.
3. The STP Service Provider agrees to comply with the minimum specifications prescribed
by STP centralised hub and as may be mutually agreed upon.
4. The STP Service Provider shall adhere to the guidelines prescribed by SEBI from time to
time.
5. The STP Service Provider acknowledges that the software for STP Centralized Hub
including the STP Centralized hub client software is the legal property of STP centralized
hub. The permission given by STP centralised hub to access and use STP Centralized Hub
through the STP Centralized hub client software will not convey any proprietary or
ownership rights in the above software. The access of the STP Service Provider is limited
to the STP Centralized hub Client software.
6. The STP Service Provider shall not attempt to modify, translate, disassemble, decompile
or reverse engineer Centralized the STP Centralized hub client software or create any
derivative product based on that software.
7. The STP Service Provider shall have a non-exclusive right to access STP Centralized
Hub through the STP Centralized hub client software. This right is not transferable under
any circumstances and shall be used by the STP Service Provider itself or by its authorized
agent as may be mutually agreed.
8. The STP Service Provider shall not use the infrastructure or the facilities provided by
STP centralised hub for any other purpose other than those mentioned in this Agreement.
9. The STP Service Provider shall indemnify STP centralised hub against any damage, loss,
expenses, costs etc incurred by it due to negligence (intentional or unintentional) of the
STP Service Provider.
10. The STP Service Provider shall ensure that by using the Hub client software provided
by STP centralised hub
a. No damage will be caused to the STP Centralized hub, and that it does not
propagate virus infected information
b. It will pass on only relevant information to be exchanged with the other STP
service provider.
c. It will not try to probe any other information available on the STP Centralized
Hub
D. STP CENTRALISED HUB OBLIGATIONS
1. STP centralised hub shall obtain a digital signature certificate from a Certifying
Authority, which has been issued a license by the Controller of Certifying Authorities
appointed under the Information Technology Act, 2000. A copy of the Certificate shall be
submitted to STP service provider.
2. STP centralised hub acknowledges that STP infrastructure of the STP service provider is
the legal property of STP service provider. The permission given by STP service provider
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to STP centralised hub’s STP hub client software to co-locate on STP infrastructure will
not convey any proprietary or ownership rights in the STP infrastructure.
3. STP centralised hub may subcontract and employ agents to carry out any of its
obligations under such terms and conditions as may be mutually agreed.
4. STP centralised hub shall be solely responsible for installation, networking and operation
of applicable systems. STP centralised hub shall clearly display and publicise specifications
of STP Service Providers terminal equipment at Service Provider premises which are
necessary for interfacing to network.
5. STP centralised hub shall abide by the guidelines issued by SEBI from time to time on
the STP framework.
6. STP centralised hub shall confirm authenticity, integrity and non-repudiability of all
messages submitted by the STP Service Provider.
7. The STP Centralized Hub would keep complete track of the flow of messages for record
and audit.
8. STP centralised hub shall ensure that only the intended STP Service Provider receives
the message.
9. STP centralised hub shall not misuse/ alter / reverse engineer / decompile the content of
the messages submitted by the STP Service Providers.
10. STP centralised hub will digitally sign all messages sent from the STP Centralized Hub
to the STP Service Provider.
11. STP centralised hub agrees to PKI enable the STP Hub client software within ------
months after the agreement would come into force. STP centralised hub shall digitally sign
all messages at STP Centralized Hub prior to sending it to STP Service Providers. hub
client software will maintain unsigned logs of such events.
12. STP centralised hub shall indemnify the STP service provider against any damage, loss,
expenses, costs etc incurred by it due to its negligence (intentional or unintentional). STP
centralised hub shall not use the infrastructure or the facilities provided by STP service
provider for any other purpose other than those mentioned in this Agreement.
13. Hub client software provided by STP centralised hub will ensure that :
a. No damage will be caused to the service providers system.
b. It will not propagate virus infected information
c. It will pass on only relevant information to be exchanged with the other STP
service provider.
d. It will not try to probe any other information available on the STP Service
Providers setup
e. It will not try to modify, translate, disassemble, de-compile or reverse engineer
the software to gain access to restricted information or create any derivative product
based on STP service provider’s system.
E. COMPLIANCE WITH LAWS
1. Both the parties represent that they have taken all necessary corporate action to authorise
the execution and consummation of this agreement and shall furnish satisfactory evidence
of the same upon request to other party.
2. Both the parties hereto agree that they shall comply with all applicable Central, state and
local laws, ordinances, regulations and codes in performing their obligations hereunder,
including the procurement of licenses, permits and certificates and payment of taxes where
required.
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3. The parties shall fully inform themselves of all necessary obligations and statutes under
Indian Law (including the security measures prevalent in India) and shall not hold the other
party responsible for any lapse in this regard. This shall include, but not be limited to, the
knowledge and understanding of the physical, environmental and technical standards
required for the provision and operation of the Equipment, software and services within
India. The monetary obligations, if any, devolving on either of the parties due to statutory
changes subsequent to the conclusion of the Agreement, shall be borne by the respective
party, if applicable.
F. SERVICE CHANGES AND DISCONTINUATION
STP centralised hub shall if directed by regulatory authorities, suspend the STP Service
Provider’s access to the STP Centralized Hub at any time without notice. The STP Service
Provider agrees that STP centralised hub will not be liable to any third party for any
modification or discontinuance of the STP Centralized Hub. If STP centralised hub
receives prior notice of such direction it shall be communicated to the service provider
immediately.
In order to maintain the security and integrity of the service STP centralised hub may also
suspend the STP Service Provider’s access to the STP Centralized Hub. The STP Service
Provider agrees that STP centralised hub will not be liable to or any third party for any
modification or discontinuance of the STP Centralized Hub. The Parties shall make every
effort to resolve amicably by direct informal negotiation any disagreement or dispute
arising between them under or in connection with the arrangement. In the case of any
issues arising out of the security and integrity of the messages being exchanged through the
hub, the same shall be resolved by mutual discussion. In the event the parties are not able to
settle the same within the time frame agreed between the parties either party may, by
written notice of 30 days sent to the other party, temporarily suspend the arrangements, in
whole or in part, till the parties find a technical solution to the security and technical issues.
The notice of termination shall specify the termination is at whose instance, the extent to
which performance of the agreement is suspended, and the date upon which such
suspension becomes effective.
F. FORCE MAJEURE
If the performance of any obligations by any party as specified in this agreement is
prevented, restricted, delayed or interfered by reason of force majeure then notwithstanding
anything hereinbefore contained, the party affected shall be excused from its performance
to the extent such performance relates to such prevention, restriction, delay or interference
and provided the party so affected uses its best efforts to remove such cause of non-
performance and when removed the party shall continue performance with utmost urgency.
For the purpose of this clause "Force Majeure" means & includes fire, explosion, cyclone,
floods, war, revolution, blockage or embargo, any law, order, demands or requirements of
any Government or statutory authority, strikes, which are not instigated for the purpose of
avoiding obligations herein or anyother circumstances beyond the control of the party
affected.
G. AMENDMENT TO THE AGREEMENT
The rights and obligations of the parties are governed only by this agreement. This
agreement may be amended, altered, modified, varied or added to from time to time only
by a written instrument duly signed by both the parties to this agreement. All previous
Page 126 of 156
communications, both oral and written between the parties and related to this agreement,
but inconsistent with the terms and conditions of this agreement, are hereby declared null
and void.
I. VALIDITY
This Agreement is valid so long as STP service provider holds valid approval from SEBI
and STP centralised hub holds valid approval as STP Centralised Hub from SEBI. This
Agreement shall be valid for an initial period of _____ years (hereinafter referred to as the
‘Term’). After the term, the arrangement may be extended on mutually acceptable terms.
H. TERMINATION
Without prejudice to the rights, liabilities, interests and obligations that have accrued to the
parties prior to the date of terminations
1. Either party may terminate this agreement upon material breach by the other of
any provision of this agreement, and (if such breach is remediable) that other fails
to remedy such breach within a mutually agreed time frame in writing.
2. This agreement may, at any time during its Term, be terminated by either party
by a written 90 days notice to the other party without prejudice to the rights,
liabilities, interests and obligations that have accrued to the parties prior to the date
of such termination. The grounds upon which this agreement may be terminated
pursuant to this clause are as under:
i) In case a Receiver has been appointed with respect to all or substantially
all the assets of the parties. Provided that this clause shall not be applicable
when winding up proceedings have been initiated to facilitate an
amalgamation with another company proposing to carry on the same
business
ii) if one of the parties enters into an arrangement of composition with its
creditors.
3. This agreement may, at any time during its Term, be terminated by STP
centralised hub by a written notice in case the ISP license of STP centralised hub is
revoked or the services are taken over by DoT / Telecom Authority in the event of
an emergency or otherwise. If STP centralised hub receives prior notice of the same
it shall be provided to the service provider immediately.
4. This agreement may, for convenience, at any time during its term, be terminated
by either party, by a written notice of 90 days to the other party.
5. The provisions contained hereinabove shall not preclude the other party from
recourse to any other remedies available to itself by statute or otherwise, at law or
in equity.
6. In order to maintain the security and integrity of its infrastructure STP service
provider may also suspend the STP hub client software access to its system at any
time without notice.
I. NOTICE
Any notice to be given by one party to the other pursuant to this agreement shall be sent by
registered post A.D., speed post or facsimile transmission to the address mentioned below:
1. _________________ (NAME OF THE STP CENTRALISED HUB)
____________________(ADDRESS)
2. __________________________(NAME OF STP SERVICE PROVIDER)
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________________________________(ADDRESS)
J. WAIVER OF RIGHTS
No forbearance, delay or indulgence by any party in enforcing any of the provisions of this
agreement shall prejudice or restrict the rights of that party nor shall any waiver of its rights
operate as a waiver of any subsequent breach and no rights, powers, remedies herein
conferred upon or reserved for the parties is exclusive of any other right, power or remedy
available to that party and each right, power or remedy shall be cumulative.
K. ARBITRATION AND JURISDICTION
In the case of any dispute or any difference between the parties arising out of or in relation
to this agreement including dispute or difference as to the validity of this agreement or
interpretation of any of the provisions of this agreement or losses or damages arising under
clause C-8 and the relevant clause under STP Centralizedized hub of this agreement, the
same shall be resolved by mutual discussion. If the parties fail to settle the dispute or
difference mutually, then the same shall be resolved in accordance with and subject to the
provisions of the Arbitration and Conciliation Act, 1996 or any modifications or
amendments thereto, or any enactment for the time being in force subject to the stipulation
that only courts at Mumbai shall have exclusive jurisdiction in all such matters. The
provisions of this clause shall survive the termination of this agreement.
L. GOVERNING LAW
1. This agreement shall be governed by and construed and interpreted in accordance with
the laws of India, SEBI Act, Regulations, Rules and SEBI (STP centralised hub and STP
service providers) Guidelines, 2004.
2. If any term or provision of this agreement should be declared invalid by a court of
competent jurisdiction, the remaining terms and provisions of this agreement shall remain
unimpaired and in full force and effect.
M. DISCLAIMER
STP centralised hub shall use its best endeavor only to ensure that the services provided
shall be in conformity with the terms of this agreement. STP centralised hub shall not be
liable for bad/slow connection or any technical glitches on account of reasons beyond its
control.
N. CONFIDENTIALITY
The Parties hereto shall at all times maintain and keep secret and confidential any
knowhow, information and data which it has or may acquire from time to time relating to
the business, ctivities or operations of the other Party and shall not disclose or divulge the
same or any part thereof to any third party. The terms of this clause shall survive
termination of the Agreement.
The obligations shall not apply with respect to Information which:
1) is or becomes publicly available other than through a breach of this Agreement
or is unlawfully appropriated;
2) is already in the possession of the other party without any breach of this
Agreement ;
3) is obtained by the other party from a third party without any breach of this
Agreement .
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4) is required to be produced before a judicial authority and only where the other
party is compelled to do so by such an authority, provided that the said authority (
or individual representing such authority ) has the authority, under the laws in force,
to compel such disclosure.
Notwithstanding the foregoing, before making any use or disclosure on any of the
foregoing exceptions, the Party disclosing such information shall intimate the Other Party
as soon as practicable the applicable exceptions (s) and circumstances giving rise thereto.
Page 129 of 156
13.2.1 ANNEXURE II(A)
STP centralised hub shall charge a fee of Rs. -----------------. The fees shall be charged to
the sending service provider. The billing shall be on a -------------------- basis.
One message shall mean and include the following –
 One ISO message sent by a service provider to the STP centralised hub
 Acknowledgement message sent by the STP centralised hub to the Sending service
provider
 The message forwarded to the receiving service provider
 Acknowledgement received from the receiving service provider for the message
 Forwarding the acknowledgement received from the receiving service provider to
the sending service provider
In consideration of the fees STP centralised hub shall endeavour to provide the following
service standards –
 Infrastructure availability
- 99% Uptime for business hours from 0930 hrs till 1930 hrs computed on a
quarterly basis. Planned Outage excluded
- Uptime on best effort basis between 1930 hrs to 0930 hrs
- Resolution time: 4 hours for called logged between 0930 to 1800 hrs
 Trouble Ticketing
- Business Hrs - Telephonic reporting of Fault on STP centralised hub
Helpdesk
- Non-Business Hrs - Telephonic reporting of Fault on STP centralised hub
Operations
- Call closure confirmation - STP service Provider to give respective
telephone numbers
Page 130 of 156
13.3 ANNEXURE– III
Message IFN 515:
Mandatory Block A (General Information)
Status Field Field Content Remarks Rules
Name and
Options
M 16R GENL Start of block
M 20C Referen :4!c//16x Type of CN, Format: (Qualifier)/
ce Exchange /(References)
number and Qualifier: "SEME" (4
CN No. Uppercase Characters)
References: (Contract Type/
Exchange No. / Contract
Number)
Contract Type: A or B (1
Character Set)
Exchange number (2 digits –
e.g. Calcutta Stock Exchange
will be 03 )
Contract Number: xxxxxxxxxx
(13Characters)
The reference should not start
or end with slash ‘/’ and must
not contain two consecutive
slashes ‘//’.
M 23G 4!c To indicate Format: (Function)
new message Function: "NEWM"
or cancellation
of a previous
message
O 98A Date :4!c//8!n Preparation Format: (Qualifier)//(Date)
Date Qualifier: "PREP" (4
Uppercase Characters)
Date: YYYYMMDD (8 Digits)
M 22F Indicato :4!c//4!c Dummy (taken Format: (Qualifier)//(Indicator)
r since Qualifier: " TRTR" (4
mandatory) Uppercase Characters)
Indicator: "TRAD" (4
Uppercase Characters)
Mandatory
Subsequence A1
Page 131 of 156
Linkages
M 16R LINK Start of block
M 20C :4!c//16x To indicate the Format: (Qualifier)
cancelled //(Reference)
contract note Qualifier: " PREV" (4
(CANC). In Uppercase Characters)
case of NEWM, Reference: The reference no.
the field should as given in field SEME of the
contain earlier contract note that is
"DUMMY" being cancelled. (16
Characters)
[In case of NEWM, the field
should contain "DUMMY"]
M 16S LINK End of Block
End of Mandatory
Subsequence A1
Linkages
M 16S GENL End of block
Mandatory Block C
(Confirmation details)
M 16R CONFDET Start of block
M 98A Trade :4!c//8!n To give details Format: (Qualifier)//(Date)
Date of the trade Qualifier: "TRAD" (4
date. Uppercase Characters)
Date: "YYYYMMDD" (8
Digits)
M 98A Settlem :4!c//8!n To give details Format: (Qualifier) / (Date)
ent of the Qualifier: "SETT" (4
Date settlement Uppercase Characters)
date. Date: "YYYYMMDD" (8
Digits)
M 90B Price :4!c//4!c/3! To indicate the Format: (Qualifier)/ /(Amount
a15d trade rate Type Code)/ (Currency Code)
(Price)
Qualifier: "DEAL" (4
Uppercase Characters)
Amount Type Code: "ACTU"
(4 Uppercase Characters)
Currency Code: "INR" (3
Uppercase Alphabets)
Price: Upto 15 digits
Page 132 of 156
(including decimal places and
decimal sign) comma has to
be used as decimal sign and
is mandatory. Integer part of
amount must contain atleast
one digit.
O 92A Price :4!c//[N]15 To indicate Format: (Qualifier)/ /(Amount
d brokerage rate Type Code)/ (Currency Code)
per share (Price)
Qualifier: "CORA" (4
Uppercase Characters)
Sign (-/+)
Price: Upto 15 digits
(including decimal places and
decimal sign) comma has to
be used as decimal sign and
is mandatory. Integer part of
amount must contain atleast
one digit.
M 94B Place :4!c//4!c/30 To identify the Format:(Qualifier)/ /(Place
x exchange Code)/(MAPIN code /
Narrative)
Qualifier: "TRAD" (4
Uppercase Characters)
Place Code: "EXCH" (4
Uppercase Characters)
M 22H Indicato :4!c//4!c To indicate Format: (Qualifier)//(Indicator)
r whether the Qualifier: "BUSE" (4
trade is Buy Uppercase Characters)
[BUYI] / Sell Indicator: "BUYI" or "SELL" (4
[SELL] Uppercase Characters)
M 22H Indicato :4!c//4!c To indicate Format: (Qualifier)
r where the //(Indicator)
trades is Qualifier: "PAYM" (4
against Uppercase Characters)
payment Indicator: "FREE" for clearing
[APMT] or free house trades or "APMT" for
of payment DVP trades(4 Uppercase
[FREE] Characters)
Mandatory Sub Block
C1 (Confirmation
Parties)
Page 133 of 156
M 16R CONFPRT Start of block
Y
M 95Q Party :4!c//4*35x To give details Format: (Qualifier) //(SEBI
of the client as Regn No.) Subsequent to
mentioned on SEBI’s mandating, Map In will
the contract be used for the same.
note.
Qualifier: "INVE" (4
Uppercase Characters)
O 97A Accoun :4!c//35x To identify the Format: (Qualifier) //(Code as
t safekeeping specified in the circular)
account. All
clients need to
obtain a code
as specified in
the circular
Qualifier: "SAFE" (4 Upper
Characters) Code as
specified in the circular (35
characters)
M 16S CONFPRT End of block
Y
End of Mandatory Subsequence C1
(Confirmation Parties)
M 36B Quantity :4!c//4!c/1 To define the Format: (Qualifier)//(Quantity
of 5d trade quantity Type Code)
Financia /(Quantity)Qualifier: "CONF"
l (4 Uppercase
Instrume Characters)Quantity Type
nt Code: "UNIT" (4 Uppercase
Characters)Quantity: upto 15
digits (including decimal
places and decimal sign)
comma has to be used as
decimal sign and is
mandatory. Integer part of
amount must contain atleast
one digit.
Page 134 of 156
M 35B Identific [ISIN1!e1 To identify the Format: (Identification of
ation of 2!c] ISIN of the Security)(Description of
Security [4*35x] Scrip and Security)Identification of
company Security: "ISIN" which will
name. always be present. (ISIN of
the security). Additionally, the
first line (35 characters) of the
description may be used if
required and may contain the
scrip code (4 lines of 35
Characters) .
The contract descriptor shall
be provided in the first line of
35 characters
M 70E Narrativ :4!c//10*3 To identify Format: (Qualifier)
e 5x Segment Type //(Narrative)
i.e. Rolling Qualifier: "TPRO" (4 Upper
(DR) or Inter Characters)
FII (DI) or Narrative:
Auction Rolling Line 1: "DR" or "DI" or "AR" or
(AR) or Trade "TT" or "OT"/ Settlement
to Trade (TT) Number as mentioned on
or Others (OT) Stock Exchange system (35
/Settlement Character Sets)
Number
O 98C Date/Ti :4!c//8!n6! To Identify Format: (Qualifier) /(Date)/
me n order time (Time)
Qualifier: "PROC" (4 Upper
Characters)
Date: YYYYMMDD
Time : HHMMSS
M 16S CONFDE End of block
T
End of Sequence C (Confirmation
Details)
Mandatory Sequence D (Settlement Details)
M 16R SETDET Start of block
M 22F Indicator :4!c//4!c Dummy (since Format: (Qualifier)
mandatory) //(Indicator)
Qualifier: "SETR" (4 Upper
Characters)
Indicator: "TRAD" (4 Upper
Characters)
Page 135 of 156
Mandatory Subsequence D1 (Settlement Parties)
M 16R SETPRTY Start of block
M 95P Party :4!c//4!a2!a Indicates the shall not be used
2!c[3!c] contracting
broker
Broker BIC
code is used
In case the BIC code doesn’t exist
95Q Party :4!c//4*35x Indicates the Format: (Qualifier)//(SEBI
Broker regn no. of broker) MAPIN will
used on SEBImandating the
same
Qualifier: "BUYR" in case of a
Sale
"SELL" in case of a Purchase
Name:of the contracting
broker
O 70C Narrativ :4!c//4*35x To provide Format: (Qualifier)
e additional //(Narrative)
broker contact Qualifier: "PACO" (4
details Uppercase Upper Characters)
Narrative: Broker Exchange
Broker code (140 Characters)
O 70E Narrativ :4!c//10*35 To provide for Format: (Qualifier)
e x Declaration //(Narrative)
Qualifier: "DECL" (4
Uppercase Upper Characters)
Narrative: Arbitration
Clause(10 lines of 35 char
each)
Line 1:This contract is subject
to Rules,
Line 2:Byelaws and
Regulations and
Line 3:usages of (name of the
exchange). In event
Line4: of any claim (whether
admitted or
Line 5:not), difference or
dispute arising
Line 6:between you and
me/us out of these
Line 7:transactions, the
matter shall be
Page 136 of 156
Line 8:referred to arbitration
as provided
Line 9:in the Rules, Byelaws
and
Line 10:Regulations of (name
of the exchange).
Line 11: Consolidated Stamp
Duty paid
M 16S SETPRTY End of block
M 16R SETPRTY Start of block
M 95Q Party :4!c//4*35x Indicates the Format: (Qualifier)//( Name of
Delivery Type. Clearing House)
The name of Qualifier: "REAG" in case of a
the clearing Sale "DEAG" in case of a
corporation is Purchase
to be used in - "BOISL" for BSE trades, or
case of a - "NSCCL" for NSE trades
clearing house (For Clearing House Trades)
trade. In case and SEBI reg number of the
of a hand broker (For Hand Delivery
delivery trade, Trades)
the brokers
name is to be
used.
M 16S SETPRTY End of block
End of Subsequence D1 (Settlement
Parties)
Mandatory Subsequence D3
(Amounts)
M 16R AMT Start of block
Page 137 of 156
M 19A Amount :4!c//3!a15 To identify the Format: (Qualifier) //(Currency
d Deal Amount Code) (Amount)
For: Deal Amount
Qualifier: "DEAL" (4 Upper
case Characters)
Narrative: "INR" (3 Upper
Letters)
Amount: upto 15 digits
(including decimal places and
decimal sign) comma has to
be used as decimal sign and
is mandatory. Integer part of
amount must contain atleast
one digit. Deal amount =
trade quantity * trade rate
M 16S AMT End of block
M 16R AMT Start of block
M 19A Amount :4!c//3!a15 To identify the For Brokerage:
d brokerage Qualifier: "EXEC" (4 Upper
case Characters)
Narrative: "INR" (3 Upper
Letters)
Amount: upto 15 digits
(including decimal places and
decimal sign) comma has to
be used as decimal sign and
is mandatory. Integer part of
amount must contain atleast
one digit.
M 16S AMT End of block
M 16R AMT Start of block
M 19A Amount :4!c//3!a15 To identify the For Service Tax:
d service tax Qualifier: "TRAX" (4 Upper
case Characters)
Narrative: "INR" (3 Upper
Letters)
Amount: upto 15 digits
(including decimal places and
decimal sign) comma has to
be used as decimal sign and
Page 138 of 156
is mandatory. Integer part of
amount must contain atleast
one digit.
M 16S AMT End of block
M 16R AMT Start of block
M 19A Amount :4!c//3!a11 To identify the For Securities Transaction
d Securities Tax Amount
Transaction Qualifier: "COUN" (4 Upper
Tax amount case Characters)
Narrative: "INR" (3 Upper
Letters)
Amount: upto 10 digits
(excluding decimal sign)
comma has to be used as
decimal sign and is
mandatory. Integer part of
amount must contain atleast
one digit.
M 16S AMT End of block
M 16R AMT Start of block
M 19A Amount :4!c//3!a15 To identify the For Settlement Amount
d settlement Qualifier: "SETT" (4 Upper
amount case Characters)
Narrative: "INR" (3 Upper
Letters)
Amount: upto 15 digits
(including decimal places and
decimal sign) comma has to
be used as decimal sign and
is mandatory. Integer part of
amount must contain atleast
one digit.
M 16S AMT End of block
End of Mandatory Subsequence D3
(Amounts)
Page 139 of 156
M 16S SETDET End of block
End of Sequence D Settlement
Details
Optional Sequence E (Other Parties)
M 16R OTHRPRT Start of block
Y
M 95Q Party :4!c//4*35x Dummy (since Format: (Qualifier)
mandatory) //(Narrative)
Qualifier: "EXCH" ( 4 Upper
case Characters)
Narrative: "ORDER
DETAILS"
O 70D Party :4!c//6*35x To identify the Format: (Qualifier)
trade Ref. //(Narrative)
Number. The Qualifier: "PART" ( 4 Upper
same field can case Characters)
be repeated Narrative:
multiple times Trade Ref. No (15Digits)
to identify Trade Ref. Qty (15 Digits)
different order Trade Ref. Rate (15 Digits
numbers comma at appropriate place)
Date: YYYYMMDD HHMMSS
(15 Character Sets)
O 20C Referen :4!c//16x To identify the Format: (Qualifier)
ce Order number //(Reference)
Qualifier: "PROC" (4
Character)
Reference : Order number
(16 Character Sets)
M 16S OTHRPRT End of block
Y
End of Sequence E Other Parties
Page 140 of 156
Message IFN 598 :
Format Sequence
Statu Ta Generic Conte Purpose Rules
s g Field nt/Opti
Name ons
Mandatory Sequence A General Information
M 16 GENL Start of Block
R
M 20 Reference :4!c//16 Sender's Format: (Qualifier)//(Reference
C x Reference number)Qualifier: "SEME"
Reference Number: 16
Characters (Alphanumeric)
The reference should not start
or end with slash ‘/’ and must
not contain two consecutive
slashes ‘//’.
M 12 Sub- 3!n To identify Value = 548
message sub-message
type type
M 23 4!c To convey Format: (Qualifier)Qualifier:
G that this "INST"
message is
meant to
indicate a
transaction
status 

O 98 Date/Time :4!c//8! Preparation Format: (Qualifier) //(Date)
A n Date Qualifier: “PREP” (4
Characters)
Date: YYYYMMDD (8 number)
Mand
atory
Subs
eque
nce
A1
Linka
ges
M 16 LINK Start of Block
R
Page 141 of 156
O 13 Link :4c//3d To indicate the Will contain the corresponding
A Message corresponding message type of client received
Indicator message type from client. Should be 515
received from
client. Though
this tag is
optional, the
tag should be
made
mandatory
requirement
for Indian
Market.
Value = 515
M 20 Reference :4!c//16 To indicate the Format: (Qualifier)//(Reference)
C x reference Qualifier: ”RELA” (4 Uppercase
number of the Characters)
related Reference: The reference no.
contract note. as given in field SEME of the
contract note that is being
updated. (16 Characters)
M 16 LINK End of Block
S
End of Subsequence A1 Linkages
Mandatory Subsequence A2 Status
M 16 STAT Start of Block
R
M 25 Status :4!c//4! To display the Format:(Qualifier)//(Status
D c status of the Code)
contract note
(vis a vis
Trade
Instruction
received from
client)
Within the The possible options are
scope of this MTCH//MACH: The contract
module, the note matches with the trade
status updates instruction received from client
of matched / MTCH//NMAT: The contract
unmatched note has not been matched
contract notes
are being
defined.
Page 142 of 156
Optional Subsequence A2a Reason
M 16 REAS Start of Block
R
M 24 Reason. :4!c//4! To display the Format:(Qualifier)//(Reason
B c reason for the Code)
This block status of the CADE - Disagreement
is optional contract note Repurchase Call Delay
and can be [in case the The instruction has not been
omitted in contract note matched because the
case the is not repurchase call delay does not
status matched]. match.
codes is CLAT - Counterparty too late
match. for Matching
The instruction has not been
matched. Counterparty's
instruction was too late for
matching.
CMIS- Matching Instruction Not
Found
The instruction has not been
matched; the matching
instruction from your
counterparty could not be
found.
CPCA- Counterparty
Cancelled Instruction
Your instruction is unmatched.
Your counterparty has
cancelled their instruction.
DDAT- Disagreement
Settlement Date
The instruction has not been
matched; the counterparty
disagrees with the settlement
date/time.
DDEA- Disagreement Deal
Price
The deal price does not match.
DELN- Disagreement Direction
of Trade
The instruction has not been
matched; the counterparty
expects a delivery from you,
not a receipt, or vice versa.
DEPT- Disagreement Place of
Settlement
Page 143 of 156
The instruction has not been
matched; the counterparty
disagrees with the place of
settlement.
DMON- Disagreement
Settlement Amount
The instruction has not been
matched; the counterparty
disagrees with the settlement
amount.
DQUA- Disagreement Quantity
The instruction has not been
matched; the counterparty
disagrees with the quantity of
securities.
DSEC- Disagreement Security
The instruction has not been
matched; the counterparty
disagrees with the
security/issue (i.e. ISIN differs,
Financial Instrument Attributes
differs...).
DTRA- Not Recognised
The instruction has not been
matched; the counterparty has
been contacted or has
contacted us. Counterparty
does not recognise the
transaction.
DTRD- Disagreement Trade
Date
The instruction has not been
matched; the counterparty
disagrees with the trade date.
FORF- Disagreement Forfeit
Repurchase Amount
The forfeit repurchase amount
does not match.
FRAP- Disagreement Payment
Code
The instruction is unmatched
because the wrong instruction
was sent; your instruction is
free, counterparty is against
payment or vice versa.
ICAG- Incorrect Agent
Page 144 of 156
The instruction has not been
matched; incorrect delivering or
receiving agent. (counterparty
is incorrect).
ICUS- Disagreement receiving
or delivering custodian
The instruction has not been
matched; incorrect delivering or
receiving custodian.
IEXE- Incorrect Buyer or Seller
The instruction has not been
matched; incorrect buyer
(receiver) or seller (deliverer).
IIND- Disagreement common
reference
The instruction has not been
matched; the counterparty
disagrees with the common
reference (for markets where a
common reference is used as a
matching criterion).
LATE- Your Instruction Too
Late for Matching
The instruction has not been
matched. Your instruction was
too late for matching.
NARR- Narrative
Other (see narrative reason).
NCRR- Disagreement
Currency Settlement Amount
The instruction has not been
matched; the counterparty
disagrees with the currency of
the settlement amount.
NMAS- No Matching Started
The instruction has not been
matched; the matching process
did not yet start.
PHYS- Disagreement Physical
settlement
The instruction has not been
matched. The counterparty is
for physical settlement, your
instruction is not, or vice versa.
PLCE- Disagreement Place of
Trade
Page 145 of 156
Place of trade does not match.
PODU- Possible Duplicate
Instruction
The instruction has not been
matched. It is a possible
duplicate instruction.
REGD- Disagreement
Registration Details
The instruction has not been
matched; there are
discrepancies in the
registrations details linked to
the transaction.
REPA- Disagreement
Repurchase Amount
Repurchase amount does not
match.
REPO- Disagreement
Repurchase Rate
Repurchase rate does not
match.
REPP- Disagreement
Repurchase Premium Amount
Repurchase premium amount
does not match.
RERT- Disagreement
Repurchase Rate Type
Repurchase rate type does not
match.
RSPR- Disagreement
Repurchase Spread Rate
Repurchase spread rate does
not match.
RTGS- Disagreement RTGS
System
The instruction has not been
matched. The counterparty is
for RTGS settlement system,
you are for non-RTGS, or vice
versa.
SAFE- Disagreement
Safekeeping Account
The safekeeping account used
as matching criteria on the
market concerned
(buyer/seller's account, direct
Page 146 of 156
client's account at the
receiving/delivering agent,
receiving or delivering agent's
account at the CSD) does not
match.
SETR - Disagreement
Settlement Transaction
Settlement transaction type
does not match (relates to the
settlement transaction type
codes available for sequence E
field 22F, qualifier SETR).
TERM - Disagreement Closing
date/time
Closing date/time does not
match.
VASU - Disagreement
Variable Rate Support
Variable rate support does not
match (repo).
DMKT - Disagreement in
market type
SLMT - Security under RBI
Limits
O 70 Narrative :4!c//6* Reason Format:(Qualifier)(Narrative)Qu
D 35x Narrative (for alifier: "REAS"
un-matched Narrative: 6 lines of 35
transactions) characters each
[This is
mandatory in
case the
reason code in
24B is NARR]
M 16 REAS End of Block
S
End of Subsequence A2a Reason
M 16 STAT End of Block
S
End of Subsequence A2 Status
M 16 GENL End of Block
S
Page 147 of 156
End of Sequence A General Information
Optional Sequence B Settlement Transaction
Details
M 16 SETTR Start of Block Note: This sequence is to be
R AN used only in case of the
contract being against
payment.
M 35 Security [ISIN1! Identification Format: (Identification of
B e12!c] of the Security)(Description of
[4*35x] Financial Security)Identification of
Instrument Security: "ISIN" which will
always be present. (ISIN of the
security). Additionally, the first
line (35 characters) of the
description may be used if
required and may contain the
scrip code (4 lines of 35
Characters) .
The contract descriptor shall be
provided in the first line of 35
characters.
M 36 Quantity of :4!c//4! Quantity of Format: (Qualifier)//(Quantity
B Financial c/15d Financial Type Code) /(Quantity)
Instrument Instrument to Qualifier: “SETT” (4 Uppercase
be Settled Characters)
Quantity Type Code: ”UNIT” or
“FAMT” (4 Uppercase
Characters)
Quantity: 15 digits (including
decimal comma)
FAMT indicates Quantity into
Face Value.
O 19 Amount :4!c//3! To indicate the Format: (Qualifier) //(Currency
A a15d settlement Code) (Amount) Qualifier:
amount as “SETT” (4 Upper case
was displayed Characters) Narrative: “INR” (3
in the contract Upper Letters) Amount: 15
note digits (including decimal
comma)
M 97 Account :4!c//35 To indicate the Format: (Qualifier) //(Custodian
A x custodian Participant Code) Qualifier:
participant “SAFE” (4 Upper Characters)
code that will Custodian Participant Code:
Page 148 of 156
be displayed (35 Characters)
in the contract
note
M 22 Dummy :4!c//4! Dummy (since Format: (Qualifier) //(Indicator)
F Indicator c mandatory Qualifier: “SETR” (4 Upper
according to Characters) Indicator: “TRAD”
ISO) (4 Upper Characters)
M 22 Receive/De :4!c//4! To indicate is Format: (Qualifier) //(Indicator)
H liver c the trade was Qualifier: “REDE” (4 Upper
Indicator a buy or a sell Characters) Indicator: “DELI”
for a sale (4 Upper Characters)
Or “RECE” for a purchase (4
Upper Characters)
M 22 Payment :4!c//4! To indicate if Format: (Qualifier) //(Indicator)
H Indicator c the trade was Qualifier: “PAYM” (4 Upper
free of Characters) Indicator: "APMT"
payment or for DVP Trades for against
against payment (4 Upper Characters)
payment Or "FREE" for Clearing House
trades (4 Upper Characters)
M 98 Settlement :4!c//8! To give details Format: (Qualifier)//(Date)
A Date n of the Qualifier: “SETT” (4 Uppercase
settlement Characters) Date:
date. (as is ”YYYYMMDD” (8 Digits)
given in the
incoming
MT515 –
Contract Note)
Mandatory Subsequence B1 (Settlement Parties)*
M 16 SETP Start of block
R RTY
M 95 Party :4!c//4* Indicates the Format: (Qualifier)//SEBI Reg.
Q 35x SEBI Reg. No. No. / MAP-IN id of contracting
/ MAP-IN id of broker)
contracting
broker. This Qualifier: "BUYR" in case of a
tag should Sale "SELL" in case of a
contain the Purchase
same
information as
was uploaded
in the
Page 149 of 156
corresponding
contract note
message.
M 16 SETP End of block
S RTY
Mandatory Subsequence B1 (Settlement Parties)*
M 16 SETP Start of block
R RTY
M 95 Party :4!c//4* Indicates the Format: (Qualifier)//( SEBI reg.
Q 35x party with No. / MAP-IN of settling party)
whom trade
has to be Qualifier: "REAG" in case of a
settled. SEBI Sale
reg. Number / "DEAG" in case of a
MAP-IN id of Purchase
broker /
custodian /
seller /
clearing house
This tag
should contain
the same
information as
was uploaded
in the
corresponding
contract note
message
M 16 SETP End of block
S RTY
M 16 SETTR End of Block
S AN
Page 150 of 156
13.4 ANNEXURE-IV
GUIDELINES FOR CONDUCT OF CERTIFICATION EXAMINATION
1. Objective:
The examination should attempt to test the practical knowledge and skills required
to operate in the derivatives market ensuring that the caliber of persons entering the
market is kept high so that investors’ interests are best served.
2. Curriculum:
Any certification programme to be approved by SEBI should ensure that candidates
have a basic knowledge of financial derivatives and an understanding of various
Acts and Rules, Regulations and Byelaws of the Exchange. The certification
programme should at least cover the following:
 Characteristics of financial derivatives including futures and options.
 Principals of trading, hedging and investment strategies.
 Principles of clearing, margining, delivery and settlement and exercise.
 Risk management systems and procedures.
 Basics of Stock Index composition and calculation, including contract
specifications.
 Existing regulatory and legal structure in the securities and futures market
(including SCRA, SEBI Act, SEBI (Stock Broker and Sub-Broker)
Regulations, 1992, Dr. L.C. Gupta Committee Report, Suggestive Byelaws
and any other special regulatory requirements of the Derivatives market).
 Rules, Regulations and Byelaws of the Exchange (cash segment and
derivatives segment).
 Broker-Client relationship (Rights and obligations).
 Accounting standards for derivatives.
3. Fully automated testing environment:
The administration of the test and its subsequent evaluation should be
computerised. The test should be online computer based where the candidate is
required to answer multiple choice questions and forward them electronically. In
such an environment the candidate’s performance is also known instantaneously.
Procedure for dispatch of Computerised test also avoid certain malpractices which
may arise.
4. Nationwide access:
Page 151 of 156
The test should be conducted in all regions of the country including all metros. The
test should progressively be conducted in other cities to provide wider access to the
participants.
5. Flexibility of test dates:
Test dates should be announced in advance and should be held atleast once every
quarter. Candidates should be allowed to state their preference of date and test
centre.
6. Random generation of questions and Degree of difficulty:
The certifying institute should have a rich database of questions which are
randomly picked for each candidate taking the test. The questions may be graded on
different levels of difficulty though uniformity should be maintained in selection of
questions from each level for each candidate. Thus the level of difficulty of a
particular test for a particular candidate should be the same as that for any other
candidate.
7. Administrative monitoring:
The certifying institute should have adequate administrative capability to efficiently
run the certification programme. Procedures for enquiries and registration for the
certification test should be clearly laid down. The certificate to be issued to
successful candidates should carry the photograph of the candidate. The
examination should be undertaken on a "no profit" basis. The institution applying
for recognition to SEBI shall mention the procedure it expects to follow for sending
the candidate’s scores to prospective employers. At present the examination should
be kept at a ‘Basic Entry Level’ and later with the development of the market more
advanced courses/modules may be added.
Page 152 of 156
13.5 ANNEXURE V
List of Circulars issued on Exchange Traded Derivatives
1. March 20, 2013 - Acceptance of Corporate bonds and Government securities as
collateral from FIIs
2. Dec 19, 2012 - Requirement of Base Minimum Capital for Stock Broker and
Trading Member
3. Nov 20, 2012 - Mini derivative (Futures & Options) contract on Index (Sensex &
Nifty)
4. Jul 23, 2012 - Revision of Eligibility Criteria for Stocks in Derivatives Segment
5. May 23, 2012- Revised Position Limits for Trading Member (Banks) in Exchange
Traded USD:INR derivative contracts
6. December 30, 2011–Interest Rate Futures on 2-year and 5-year Government of
India Security
7. Aug 10, 2011-Short-collection/Non-collection of client margins (Derivatives
Segments)
8. Jul 05, 2011-Modification of Client Codes of Non-institutional Trades Executed on
Stock Exchanges (All Segments)
9. Jun 02, 2011-Liquidity enhancement schemes for illiquid securities in equity
derivatives segment
10. May 13, 2011-Self Clearing Member in the Currency Derivatives Segment
11. March 7, 2011-Futures on 91-day Government of India Treasury-Bill (T- Bill)
12. Jan 11, 2011-Introduction of Derivative Contracts on Foreign Stock Indices
13. Oct 27, 2010- European Style Stock Options
14. Jul 30, 2010- Options on USD-INR Spot Rate
15. Jul 15, 2010- Physical Settlement of Stock Derivatives
16. Jul 07, 2010- Revised Exposure Margin for Exchange Traded Equity Derivatives
17. May 04, 2010- Introduction of Index options with tenure up to 5 years
18. Apr 27, 2010- Introduction of derivative contracts on Volatility Index
19. Jan 19, 2010- Currency Futures on Additional Currency pairs
20. Jan 11, 2010- Market Wide Position Limits across Stock Exchanges
Page 153 of 156
21. Jan 08, 2010- Standardized lot size for derivative contracts on individual securities
22. Dec 22, 2009- Delivery Period for Interest Rate Futures
23. Nov 13, 2009- Expiry Date for Equity Derivative Contracts
24. Oct 23, 2009- Trading Hours on Stock Exchanges
25. Aug 28, 2009- Exchange traded Interest Rate Futures
26. Mar 24, 2009- Revised Position Limits for Exchange Traded Currency Derivatives
27. Dec 02, 2008- Cross Margining across Exchange traded Equity (Cash) and
Exchange traded Equity Derivatives (Derivatives) segments
28. Nov 06, 2008- Issuance of Electronic Contract Notes in Equity Derivatives
Segment
29. Oct 20, 2008- Revised Exposure Margin for Exchange Traded Equity Derivatives
30. Oct 15, 2008- Revised Exposure Margin for Exchange Traded Equity Derivatives
31. Oct 06, 2008 -Eligibility criteria for introduction of derivatives on shares
32. Aug 08, 2008- Extending calendar spread treatment till expiry of the near month
contract
33. Aug 06, 2008- Exchange Traded Currency Derivatives
34. Jan 15, 2008- Introduction of Volatility Index
35. Jan 11, 2008- Introduction of Index options with longer tenure
36. Dec 27, 2007- Introduction of mini derivative (Futures and Options) contract on
Index -Sensex and Nifty
37. Sep 11, 2007- Circular on acceptance of Foreign Sovereign Securities as collateral
from Foreign Institutional Investors (FIIs) for Exchange Traded Derivative
Transactions
38. Feb 15, 2006- Clarification to Circular No. DNPD/Cir-31/2006 dated January 20,
2006
39. Jan 20, 2006- Modification of the Trading Member/FII/Mutual Fund position limits
for stock based exchange traded derivative contracts
40. Jan 20, 2006- Review of the eligibility criteria of stocks for derivatives trading
especially on account of corporate restructuring
41. Sep 14, 2005- Trading by Mutual Funds in Exchange Traded Derivative Contracts
Page 154 of 156
42. Nov 22, 2004- Clarification on the definition of institutional trades and use of
physical contract note
43. Sep 28, 2004- Modifications in the STP messaging formats on account of
implementation of the Securities Transaction Tax STT
44. Jul 16, 2004- Risk containment measures, position limits and the broad eligibility
criteria of Stocks and Index on which futures and options could be introduced
45. Jul 08, 2004- Clarification for circular no. DNPD/Cir-25/04 dated June 10, 2004
46. Jun 10, 2004- Transaction work flow for the system of Straight Through
Processing in the Indian Securities Market and standardisation of the messaging
formats
47. May 26, 2004- Straight Through Processing Service in the Indian Securities Market
48. Apr 01, 2004- Mandatory use of STP system for all institutional trades executed on
the stock exchanges
49. Mar 09, 2004- Trading by FIIs and NRIs in Exchange Traded Interest Rate
Derivative Contracts
50. Feb 25, 2004- Issuance of Electronic Contract Notes - Debt Market
51. Feb 23, 2004- Minimum contract size for Exchange traded derivative contracts
52. Feb 06, 2004- Recognition of credit ratings given by reputed foreign credit rating
agencies
53. Feb 03, 2004- Issuance of Electronic Contract Notes
54. Jan 05, 2004- Scheme for introduction of Exchange Traded Interest Rate
Derivative Contracts on a basket of Government Securities
55. Oct 29, 2003- Trading by FIIs and NRIs in Exchange Traded Derivative Contracts
56. Apr 29, 2003- Issuance of Contract Notes in electronic form
57. Apr 19, 2003 -Circular-Scheme for introduction of Exchange Traded Interest Rate
Derivative Contracts
58. Mar 13, 2003- Monthly Reporting Format-Circular
59. Dec 18, 2002- Adjustment in stock option contracts and single stock future
contracts at the time of corporate actions
60. Dec 18, 2002- Review of recommendations of Dr.L.C.Gupta Committee on
Derivaties.
Page 155 of 156
61. Dec 18, 2002- Risk containment measures and broad eligibility criteriaof stocks on
which stock options and single stock futures could be introduced
62. Oct 03, 2002- Introduction of Straight Through Processing
63. May 13, 2002- Format of the Monthly Reporting Format
64. Feb 12, 2002- Scheme of FII Trading in all Exchange Traded Derivative Contracts
65. Nov 02, 200-1 Scheme for introduction of Single Stock Futures and the Risk
Containment Measures
66. Aug 24, 2001- Reporting of derivative transactions to the media and the
newspapers
67. Jun 21, 2001- Adjustment of Corporate Actions for Stock Option
68. Jun 20, 2001 -Reporting of option contracts to SEBI
69. Jun 20, 2001 -Risk containment measures for Stock Option
70. Feb 13, 2001 -SMDRP/Policy/Cir-10/2001
71. Dec 15, 2000 -Use of Digital Signature on Contract Notes
72. Dec 11, 2000- Risk containment measures for Option on Indices
73. Jun 20, 2000- Daily reports for trading and settlement of derivative trades
74. May 31, 2000- Circular No.8726
75. Jul 28, 1999 -Risk Containment Measures for the Index Futures Market
76. Dec 03, 1998- Client Registration Form, Client Agreement, Clearing Member -
Trading Member Agreement and Risk Disclosure Document for Derivatives
Segment
77. Jun 29, 1998- Circular No.1847- Guidelines on Conduct of Certification
Examination
78. Jun 16, 1998- Derivatives trading in India
Page 156 of 156