FAQs - Equity and Currency Derivatives

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FAQ on Equity and Currency Derivatives Q1What are Derivatives?A. Theterm"Derivative"indicatesthatithasnoindependentvalue,i.e.itsvalueisentirely"derived"fromthevalueoftheunderlyingasset.Theunderlyingassetcanbesecurities,commodities,bullion,currency,livestockoranythingelse.Inotherwords,Derivativemeansaforward,future,optionoranyotherhybridcontractofpredeterminedfixedduration,linkedforthepurposeofcontractfulfillment to the value of a specified real or financial asset or to an index of securities. WithSecuritiesLaws(SecondAmendment)Act,1999,DerivativeshasbeenincludedinthedefinitionofSecurities. The term Derivative has been defined in Securities Contracts (Regulations) Act, as:-A Derivative includes: -a.asecurityderivedfromadebtinstrument,share,loan,whethersecuredorunsecured,riskinstrument or contract for differences or any other form of security;b.a contract which derives its value from the prices, or index of prices, of underlying securities; Q2What is a Futures Contract?A.FuturesContractmeansalegallybindingagreementtobuyorselltheunderlyingsecurityonafuturedate.Futurecontractsaretheorganized/standardizedcontractsintermsofquantity,quality(incaseofcommodities),deliverytimeandplaceforsettlementonanydateinfuture.Thecontractexpiresonapre-specifieddatewhichiscalledtheexpirydateofthecontract.Onexpiry,futurescanbesettledbydeliveryoftheunderlyingassetorcash.Cashsettlementenablesthesettlementofobligationsarisingout of the future/option contract in cash. Q3What is an Option contract?A.OptionsContractisatypeofDerivativesContractwhichgivesthebuyer/holderofthecontracttheright(butnottheobligation)tobuy/selltheunderlyingassetatapredeterminedpricewithinoratendofaspecifiedperiod.Thebuyer/holderoftheoptionpurchasestherightfromtheseller/writerforaconsiderationwhichiscalledthepremium.Theseller/writerofanoptionisobligatedtosettletheoptionasperthetermsofthecontractwhenthebuyer/holderexerciseshisright.Theunderlyingassetcouldinclude securities, an index of prices of securities etc.UnderSecuritiesContracts(Regulations)Act,1956optionsonsecuritieshasbeendefinedas"optioninsecurities"meaningacontractforthepurchaseorsaleofarighttobuyorsell,orarighttobuyandsell,securitiesinfuture,andincludesateji,amandi,atejimandi,agalli,aput,acalloraputandcallinsecurities.AnOptiontobuyiscalledCalloptionandoptiontoselliscalledPutoption.Further,ifanoptionthatisexercisableonorbeforetheexpirydateiscalledAmericanoptionandonethatisexercisableonlyonexpirydate,iscalledEuropeanoption.ThepriceatwhichtheoptionistobeexercisediscalledStrikeprice or Exercise price.Therefore,inthecaseofAmericanoptionsthebuyerhastherighttoexercisetheoptionatanytimeonorbeforetheexpirydate.ThisrequestforexerciseissubmittedtotheExchange,whichrandomlyassignstheexerciserequesttothesellersoftheoptions,whoareobligatedtosettlethetermsofthecontract within a specified time frame.Asinthecaseoffuturescontracts,optioncontractscanbealsobesettledbydeliveryoftheunderlyingassetorcash.However,unlikefuturescashsettlementinoptioncontractentailspaying/receivingthedifferencebetweenthestrikeprice/exercisepriceandthepriceoftheunderlyingasseteitheratthetimeof expiry of the contract or at the time of exercise / assignment of the option contract. page: 1[ www.sebi.gov.in ]

Q4What are Index Futures and Index Option Contracts?A.Futurescontractbasedonanindexi.e.theunderlyingassetistheindex,areknownasIndexFuturesContracts.Forexample,futurescontractonNIFTYIndexandBSE-30Index.Thesecontractsderivetheir value from the value of the underlying index.Similarly,theoptionscontracts,whicharebasedonsomeindex,areknownasIndexoptionscontract.However,unlikeIndexFutures,thebuyerofIndexOptionContractshasonlytherightbutnottheobligationtobuy/selltheunderlyingindexonexpiry.IndexOptionContractsaregenerallyEuropeanStyle options i.e. they can be exercised / assigned only on the expiry date.Anindex,inturnderivesitsvaluefromthepricesofsecuritiesthatconstitutetheindexandiscreatedtorepresentthesentimentsofthemarketasawholeorofaparticularsectoroftheeconomy.Indicesthatrepresentthewholemarketarebroadbasedindicesandthosethatrepresentaparticularsectoraresectoral indices.InthebeginningfuturesandoptionswerepermittedonlyonS&PNiftyandBSESensex.Subsequently,sectoralindiceswerealsopermittedforderivativestradingsubjecttofulfillingtheeligibilitycriteria.Derivativecontractsmaybepermittedonanindexif80%oftheindexconstituentsareindividuallyeligibleforderivativestrading.However,nosingleineligiblestockintheindexshallhaveaweightageofmorethan5%intheindex.Theindexisrequiredtofulfilltheeligibilitycriteriaevenafterderivativestradingontheindexhasbegun.Iftheindexdoesnotfulfillthecriteriafor3consecutivemonths,thenderivative contracts on such index would be discontinued.Byitsverynature,indexcannotbedeliveredonmaturityoftheIndexfuturesorIndexoptioncontractstherefore, these contracts are essentially cash settled on Expiry. Q5Why mini derivative contract?A.TheminimumcontractsizefortheminiderivativecontractonIndex(SensexandNifty)isRs.1lakhatthetimeofitsintroductioninthemarket.Thelowerminimumcontractsizemeansthatsmallerinvestorsareabletohedgetheirportfoliousingthesecontractswithalowercapitaloutlay.Thismeansabetterhedge for portfolio, and also results in more liquidity in the market. Q6Why longer dated index options?A.Longerdatedderivativesproductsareusefulforthoseinvestorswhowanttohavealongtermhedgeorlongtermexposureinderivativemarket.Thepremiumsforlongertermderivativesproductsarehigherthanforstandardoptionsinthesamestockbecausetheincreasedexpirationdategivestheunderlyingassetmoretimetomakeasubstantialmoveandforthe investortomakeahealthyprofit.Presently,longerdatedoptionsonSensexandNiftywithtenureofupto3yearsareavailablefortheinvestors. Q7What is Bond Index?A.Abondindexisusedtomeasuretheperformanceofbondmarkets.Theindexisusedasabenchmarkagainstwhichinvestmentmanagersmeasuretheirperformance.Itisalsousedasameasuretocomparetheperformanceofdifferentassetclasses.Thegovernmentbondmarketisthemost liquid segment of the bond market. Q8What is Volatility Index?A.VolatilityIndexisameasureofexpectedstockmarketvolatility,overaspecifiedtimeperiod,conveyedbythepricesofstock/indexoptions.Itdepictsthecollectivesentimentofthemarketontheimplied future volatility. Q9What is the structure of Derivative Markets in India?A.DerivativetradinginIndiatakescanplaceeitheronaseparateandindependentDerivativeExchangeoronaseparatesegmentofanexistingStockExchange.DerivativeExchange/SegmentfunctionasaSelf-RegulatoryOrganisation(SRO)andSEBIactsastheoversightregulator.Theclearingpage: 2[ www.sebi.gov.in ]

&settlementofalltradesontheDerivativeExchange/SegmentwouldhavetobethroughaClearingCorporation/House,whichisindependentingovernanceandmembershipfromtheDerivativeExchange/Segment.Q10What are the various membership categories in the equity derivatives market?A.The various types of membership in the derivatives market are as follows:i. TradingMember(TM)-ATMisamemberofthederivativesexchangeandcantradeonhisown behalf and on behalf of his clients.ii. ClearingMember(CM)-Thesemembersarepermittedtosettletheirowntradesaswellasthetradesoftheothernon-clearingmembersknownasTradingMemberswhohaveagreedtosettlethetrades through them.iii. Self-clearingMember(SCM)-ASCMarethoseclearingmemberswhocanclearandsettletheir own trades only. Q11Whataretherequirementstobeamemberoftheequityderivativesexchange/clearingcorporation?A.i. BalanceSheetNetworthRequirements:SEBIhasprescribedanetworthrequirementofRs.3croresforclearingmembers.Theclearingmembersarerequiredtofurnishanauditor'scertificateforthenetworthevery6monthstotheexchange.ThenetworthrequirementisRs.1croreforaself-clearing member. SEBI has not specified any networth requirement for a trading member.ii. LiquidNetworthRequirements:Everyclearingmember(bothclearingmembersandself-clearingmembers)hastomaintainatleastRs.50lakhsasLiquidNetworthwiththeexchange/clearingcorporation.iii. Certificationrequirements:TheMembersarerequiredtopassthecertificationprogrammeapprovedbySEBI.Further,everytradingmemberisrequiredtoappointatleasttwoapproveduserswhohavepassedthecertificationprogramme.Onlytheapprovedusersarepermittedtooperatethederivatives trading terminal. Q12What are requirements for a Member with regard to the conduct of his business?A.ThederivativesmemberisrequiredtoadheretothecodeofconductspecifiedundertheSEBIBrokerSub-Brokerregulations.ThefollowingconditionsstipulationshavebeenlaidbySEBIontheregulationof sales practices:i. SalesPersonnel:ThederivativesexchangerecognizesthepersonsrecommendedbytheTradingMemberandonlysuchpersonsareauthorizedtoactassalespersonneloftheTM.Thesepersons who represent the TM are known as Authorised Persons.ii. Know-your-client:ThememberisrequiredtogettheKnow-your-clientformfilledbyeveryoneofclient.iii. Riskdisclosuredocument:Thederivativesmembermusteducatehisclientontherisksofderivatives by providing a copy of the Risk disclosure document to the client.iv. Member-clientagreement:TheMemberisalsorequiredtoenterintotheMember-clientagreement with all his clients. Q13Which derivative contracts are permitted by SEBI?A.DerivativeproductshavebeenintroducedinaphasedmannerstartingwithIndexFuturesContractsinJune2000.IndexOptionsandStockOptionswereintroducedinJune2001andJuly2001followedbyStockFuturesinNovember2001.SectoralindiceswerepermittedforderivativestradinginDecember2002.DuringDecember2007SEBIpermittedminiderivative(F&O)contractonIndex(SensexandNifty).Further,inJanuary2008,longertenureIndexoptionscontractsandVolatilityIndexandinApril2008,BondIndexwasintroduced.Inadditiontotheabove,duringAugust2008,SEBIpermittedExchange traded Currency Derivatives. page: 3[ www.sebi.gov.in ]

Q14What is the eligibility criteria for stocks on which derivatives trading may be permitted?A.Astockonwhichstockoptionandsinglestockfuturecontractsareproposedtobeintroducedisrequired to fulfill the following broad eligibility criteria:-i. Thestockshallbechosenfromamongstthetop500stockintermsofaveragedailymarketcapitalisation and average daily traded value in the previous six month on a rolling basis.ii. Thestock'smedianquarter-sigmaordersizeoverthelastsixmonthsshallbenotlessthanRs.1Lakh.Astock'squarter-sigmaordersizeisthemeanordersize(invalueterms)requiredtocause a change in the stock price equal to one-quarter of a standard deviation.iii. The market wide position limit in the stock shall not be less than Rs.50 crores.Astockcanbeincludedforderivativestradingassoonasitbecomeseligible.However,ifthestockdoesnotfulfilltheeligibilitycriteriafor3consecutivemonthsafterbeingadmittedtoderivativestrading,then derivative contracts on such a stock would be discontinued. Q15What is the lot size of contract in the equity derivatives market?A.Lotsizereferstonumberofunderlyingsecuritiesinonecontract.Thelotsizeisdeterminedkeepinginmindtheminimumcontractsizerequirementatthetimeofintroductionofderivativecontractsonaparticular underlying.Forexample,ifsharesofXYZLtdarequotedatRs.1000eachandtheminimumcontractsizeisRs.2lacs,thenthelotsizeforthatparticularscripsstandstobe200000/1000=200sharesi.e.onecontractin XYZ Ltd. covers 200 shares. Q16What is corporate adjustment?A.Thebasisforanyadjustmentforcorporateactionissuchthatthevalueofthepositionofthemarketparticipantoncumandex-dateforcorporateactioncontinuestoremainthesameasfaraspossible.Thiswillfacilitateinretainingtherelativestatusofpositionsviz.in-the-money,at-the-moneyandout-of-the-money.Anyadjustmentforcorporateactionsiscarriedoutonthelastdayonwhichasecurityistradedonacumbasisintheunderlyingcashmarket.Adjustmentsmeanmodificationstopositionsand/or contract specifications as listed below:a. Strike priceb. Positionc. Market/Lot/ MultiplierTheadjustmentsarecarriedoutonanyoralloftheabovebasedonthenatureofthecorporateaction.Theadjustmentsforcorporateactionarecarriedoutonallopen,exercisedaswellasassignedpositions.Thecorporateactionsarebroadlyclassifiedunderstockbenefitsandcashbenefits.Thevariousstockbenefits declared by the issuer of capital are:a. Bonusb. Rightsc. Merger/ demergerd. Amalgamatione. Splitsf. Consolidationsg. Hive-offh. Warrants, andi. Secured Premium Notes (SPNs) among othersThe cash benefit declared by the issuer of capital is cash dividend. Q17What is the margining system in the equity derivatives market?A.Two type of margins have been specified -i. InitialMargin-Basedon99%VaRandworstcaselossoveraspecifiedhorizon,whichdepends on the time in which Mark to Market margin is collected.page: 4[ www.sebi.gov.in ]

ii. MarktoMarketMargin(MTM)-collectedincashforallFuturescontractsandadjustedagainsttheavailableLiquidNetworthforoptionpositions.InthecaseofFuturesContractsMTMmaybeconsidered as Mark to Market Settlement.Dr.L.CGuptaCommitteehadrecommendedthatthelevelofinitialmarginrequiredonapositionshouldberelatedtotheriskoflossontheposition.Theconceptofvalue-at-riskshouldbeusedincalculatingrequiredlevelofinitialmargins.Theinitialmarginsshouldbelargeenoughtocovertheonedaylossthatcanbeencounteredonthepositionon99%ofthedays.TherecommendationsoftheDr.L.CGuptaCommitteehavebeenaguidingprincipleforSEBIinprescribingthemargincomputation&collectionmethodologytotheExchanges.WiththeintroductionofvariousderivativeproductsintheIndiansecuritiesMarkets,themargincomputationmethodology,especiallyforinitialmargin,hasbeenmodifiedtoaddressthespecificriskcharacteristicsoftheproduct.Themarginingmethodologyspecifiedisconsistentwiththemarginingsystemusedindevelopedfinancial&commodityderivativemarketsworldwide.Theexchangesweregiventhefreedomtoeitherdeveloptheirownmargincomputationsystem or adapt the systems available internationally to the requirements of SEBI.AportfoliobasedmarginingapproachwhichtakesanintegratedviewoftheriskinvolvedintheportfolioofeachindividualclientcomprisingofhispositionsinallDerivativeContractsi.e.IndexFutures,IndexOption,StockOptionsandSingleStockFutures,hasbeenprescribed.Theinitialmarginrequirementsarerequiredtobebasedontheworstcaselossofaportfolioofanindividualclienttocover99%VaRover a specified time horizon.The Initial Margin is Higher of(Worst Scenario Loss +Calendar Spread Charges)OrShort Option Minimum ChargeTheworstscenariolossarerequiredtobecomputedforaportfolioofaclientandiscalculatedbyvaluingtheportfoliounder16scenariosofprobablechangesinthevalueandthevolatilityoftheIndex/IndividualStocks.Theoptionsandfuturespositionsinaclient'sportfolioarerequiredtobevaluedbypredictingthepriceandthevolatilityoftheunderlyingoveraspecifiedhorizonsothat99%oftimesthepriceandvolatilitysopredicteddoesnotexceedthemaximumandminimumpriceorvolatilityscenario.Inthismannerinitialmarginof99%VaRisachieved.Thespecifiedhorizonisdependentonthetimeofcollection of mark to market margin by the exchange.Theprobablechangeinthepriceoftheunderlyingoverthespecifiedhorizoni.e.'pricescanrange',inthecaseofIndexfuturesandIndexoptioncontractsarebasedonthreestandarddeviation(3?)where'?'isthevolatilityestimateoftheIndex.Thevolatilityestimate'?',iscomputedaspertheExponentiallyWeightedMovingAveragemethodology.ThismethodologyhasbeenprescribedbySEBI.Incaseofoptionandfuturesonindividualstocksthepricescanrangeisbasedonthreeandahalfstandard deviation (3.5 ?) where '?' is the daily volatility estimate of individual stock.Ifthemeanvalue(takingorderbooksnapshotsforpastsixmonths)oftheimpactcost,foranordersizeofRs.0.5million,exceeds1%,thepricescanrangewouldbescaledupbysquarerootthreetimestocoverthecloseoutrisk.Thismeansthatstockswithimpactcostgreaterthan1%wouldnowhaveapricescanrangeof-Sqrt(3)*3.5?orapprox.6.06?.Forstockswithimpactcostof1%orless,theprice scan range would remain at 3.5?.ForIndexFuturesandStockfuturesitisspecifiedthataminimummarginof5%and7.5%wouldbecharged.Thismeansifforstockfuturesthe3.5?valuefallsbelow7.5%thenaminimumof7.5%should be charged. This could be achieved by adjusting the price scan range.Theprobablechangeinthevolatilityoftheunderlyingi.e.'volatilityscanrange'isfixedat4%forIndexoptionsandisfixedat10%foroptionsonIndividualstocks.Thevolatilityscanrangeisapplicableonlyfor option products.Calendarspreadsareoffsettingpositionsintwocontractsinthesameunderlyingacrossdifferentexpiry.Inaportfoliobasedmarginingapproachallcalendar-spreadpositionsautomaticallygetamarginoffset.However,riskarisingduetodifferenceincostofcarryorthe'basisrisk'needstobeaddressed.Itisthereforespecifiedthatacalendarspreadchargewouldbeaddedtotheworstscenariolossforarrivingattheinitialmargin.Forcomputingcalendarspreadcharge,thesystemfirstidentifiesspreadpositionspage: 5[ www.sebi.gov.in ]

andthenthespreadchargewhichis0.5%permonthonthefarlegofthespreadwithaminimumof1%andmaximumof3%.Presently,calendarspreadpositiononExchangetradedequityderivativeshasbeen granted calendar spread treatment till the expiry of the near month contract.Inaportfoliooffuturesandoptions,thenon-linearnatureofoptionsmakeshortoptionpositionsmostrisky.Especially,shortdeepoutofthemoneyoptions,whicharehighlysusceptibleto,changesinpricesoftheunderlying.Thereforeashortoptionminimumchargehasbeenspecified.Theshortoptionminimumchargeis3%and7.5%ofthenotionalvalueofallshortIndexoptionandstockoptioncontractsrespectively.Theshortoptionminimumchargeistheinitialmarginifthesumoftheworst-scenario loss and calendar spread charge is lower than the short option minimum charge.TocalculatevolatilityestimatestheexchangearerequiredtousesthemethodologyspecifiedintheProfJ.RVarmaCommitteeReportonRiskContainmentMeasuresforIndexFutures.Further,tocalculatetheoptionvaluetheexchangescanusestandardoptionpricingmodels-Black-Scholes,Binomial,Merton, Adesi-Whaley.The initial margin is required to be computed on a real time basis and has two components:-i. Thefirstiscreationofriskarraystakingpricesatdiscreettimestakinglatestpricesandvolatilityestimates at the discreet times, which have been specified.ii. Thesecondistheapplicationoftheriskarraysontheactualportfoliopositionstocomputetheportfolio values and the initial margin on a real time basis.The initial margin so computed is deducted from the available Liquid Networth on a real time basis.CONDITIONS FOR LIQUID NETWORTHLiquidnetworthmeansthetotalliquidassetsdepositedwiththeclearinghousetowardsinitialmarginandcapitaladequacy;LESSinitialmarginapplicabletothetotalgrossopenpositionatanygivenpointof time of all trades cleared through the clearing member.The following conditions are specified for liquid net worth:i. Liquid net worth of the clearing member should not be less than Rs 50 lacs at any point of time.ii. Marktomarketvalueofgrossopenpositionsatanypointoftimeofalltradesclearedthroughthe clearing member should not exceed the specified exposure limit for each product.Liquid AssetsAtleast50%oftheliquidassetsshouldbeintheformofcashequivalentsviz.cash,fixeddeposits,bankguarantees,Tbills,unitsofmoneymarketmutualfunds,unitsofgiltfundsanddatedgovernmentsecurities.Liquidassetswillincludecash,fixeddeposits,bankguarantees,Tbills,unitsofmutualfunds,datedgovernmentsecuritiesorGroupIequitysecuritieswhicharetobepledgedinfavoroftheexchange.Collateral ManagementCollateralManagementconsistsofmanaging,maintainingandvaluingthecollateralintheformofcash,cashequivalentsandsecuritiesdepositedwiththeexchange.Thefollowingstipulationshavebeenlaiddown to the clearing corporation on the valuation and management of collateral:i. At least weekly marking to market is required to be carried out on all securities.ii. Debtsecuritiesofonlyinvestmentgradecanbeaccepted.10%haircutwithweeklymarktomarket will be applied on debt securities.iii. Totalexposureofclearingcorporationtothedebtorequityofanycompanynottoexceed75%of the Trade Guarantee Fund or 15% of its total liquid assets whichever is lower.iv. UnitsofmoneymarketmutualfundsandgiltfundsshallbevaluedonthebasisofitsNetAssetValue after applying a hair cut of 10% on the NAV and any exit load charged by the mutual fund.v. UnitsofallothermutualfundsshallbevaluedonthebasisofitsNAVafterapplyingahaircutequivalent to the VAR of the units NAV and any exit load charged by the mutual fund.vi. Equitysecuritiestobeindematform.OnlyGroupIsecuritieswouldbeaccepted.Thesecuritiesarerequiredtobevalued/markedtomarketonadailybasisafterapplyingahaircutequivalenttothe respective VAR of the equity security. page: 6[ www.sebi.gov.in ]

Mark to Market MarginOptions-Thevalueoftheoptionarecalculatedasthetheoreticalvalueoftheoptiontimesthenumberofoptioncontracts(positiveforlongoptionsandnegativeforshortoptions).ThisNetOptionValueisaddedtotheLiquidNetworthoftheClearingmember.ThusMTMgainsandlossesonoptionsareadjustedagainsttheavailableliquidnetworth.Thenetoptionvalueiscomputedusingtheclosingpriceof the option and are applied the next day. Futures-Thesystemcomputestheclosingpriceofeachseries,whichisusedforcomputingmarktomarketsettlementforcumulativenetposition.IfthismarginiscollectedonT+1incash,thentheexchangechargesahigherinitialmarginbymultiplyingthepricescanrangeof3?&3.5?withsquarerootof2,sothattheinitialmarginisadequatetocover99%VaRoveratwodayshorizon.OtherwiseiftheMemberarrangestopaytheMarktoMarketmarginsbytheendofTdayitself,thentheinitialmarginswouldnotbescaledup.Therefore,theMemberhastheoptiontopaytheMTMmarginseitherat the end of T day or on T+1 day.page: 7[ www.sebi.gov.in ]

Summary of parameters specified for Initial Margin Computation IndexOptionsIndexFuturesStockOptionsStockFuturesPriceScanRange3 sigma3 sigma3.5sigmaForordersizeofRs.5Lakh,ifmeanvalueofimpactcost>1%,thePriceScanRangebescaledupby?3(inadditiontolookaheaddays)VolatilityScanRange4% 10% Minimummarginrequirement 5% 7.50%Shortoptionminimumcharge3% 7.50% CalendarSpread0.5%permonthonthefarmonthcontract(min of 1% and max of 3%)MarktoMarketNetOptionValue(positiveforlongpositionsandnegativeforshortpositions)tobeadjustedfromtheliquidnetworthonarealtime basis.ThedailyclosingpriceofFuturesContractforMarktoMarketsettlementwouldbecalculatedonthebasisofthelasthalfanhour weighted average price of the contract.page: 8[ www.sebi.gov.in ]

MARGIN COLLECTIONInitialMargin-isadjustedfromtheavailableLiquidNetworthoftheClearingMemberonanonlinerealtime basis.Mark to Market Margins-Futurescontracts:Theopenpositions(grossagainstclientsandnetofproprietary/selftrading)inthefuturescontractsforeachmemberaremarkedtomarkettothedailysettlementpriceoftheFuturescontractsattheendofeachtradingday.Thedailysettlementpriceattheendofeachdayistheweightedaveragepriceofthelasthalfanhourofthefuturescontract.Theprofits/lossesarisingfromthedifferencebetweenthetradingpriceandthesettlementpricearecollected/giventoalltheclearingmembers.page: 9[ www.sebi.gov.in ]

OptionContracts:ThemarkedtomarketforOptioncontractsiscomputedandcollectedaspartoftheSPANMarginintheformofNetOptionValue.TheSPANMarginiscollectedonanonlinerealtimebasis based on the data feeds given to the system at discrete time intervals.Client MarginsClearingMembersandTradingMembersarerequiredtocollectinitialmarginsfromalltheirclients.Thecollectionofmarginsatclientlevelinthederivativemarketsisessentialasderivativesareleveragedproductsandnon-collectionofmarginsattheclientlevelwouldprovidezerocostleverage.InthederivativemarketsallmoneypaidbytheclienttowardsmarginsiskeptintrustwiththeClearingHouse/ClearingCorporationandintheeventofdefaultoftheTradingorClearingMembertheamountspaidbythe client towards margins are segregated and not utilised towards the dues of the defaulting member.Therefore,ClearingmembersarerequiredtoreportonadailybasisdetailsinrespectofsuchmarginamountsdueandcollectedfromtheirTradingmembers/clientsclearingandsettlingthroughthem.Tradingmembersarealsorequiredtoreportonadailybasisdetailsoftheamountdueandcollectedfromtheirclients.Thereportingofthecollectionofthemarginsbytheclientsisdoneelectronicallythroughthesystemattheendofeachtradingday.Thereportingofcollectionofclientlevelmarginsplaysacrucialrolenotonlyinensuringthatmemberscollectmarginfromclientsbutitalsoprovidestheclearing corporation with a record of the quantum of funds it has to keep in trust for the clients. Q18What are the exposure limits in equity derivatives market?A.IthasbeenprescribedthatthenotionalvalueofgrossopenpositionsatanypointintimeinthecaseofIndexFuturesandallShortIndexOptionContractsshallnotexceed331/3(thirtythreeonebythree)timestheavailableliquidnetworthofamember,andinthecaseofStockOptionandStockFuturesContracts,theexposurelimitshallbehigherof5%or1.5sigmaofthenotionalvalueofgrossopenposition. Q19What are the position limits in equity derivatives market?A.The position limits specified are as under-Client / Customer level position limits:Forindexbasedproductsthereisadisclosurerequirementforclientswhosepositionexceeds15%ofthe open interest of the market in index products.Forstockspecificproductsthegrossopenpositionacrossallderivativecontractsonaparticularunderlying of a customer/client should not exceed the higher of -i. 1% of the free float market capitalisation (in terms of number of shares) Or,ii. 5%oftheopeninterestinthederivativecontractsonaparticularunderlyingstock(intermsofnumber of contracts).Thispositionlimitsareapplicableonthecombinepositioninallderivativecontractsonanunderlyingstock at an exchange. The exchanges are required to achieve client level position monitoring in stages.Trading Member Level Position Limits:ForIndexoptionstheTradingMemberpositionlimitsareRs.250cror15%ofthetotalopeninterestinIndexOptionswhicheverishigherandforIndexfuturestheTradingMemberpositionlimitsareRs.250cr or 15% of the total open interest in Index Futures whichever is higher.Forstocksspecificproducts,thetradingmemberpositionlimitis20%ofthemarketwidelimitsubjecttoa ceiling of Rs. 50 crore.Itisalsospecifiedthatonceamemberreachesthepositionlimitinaparticularunderlyingthenthemembershallbepermittedtotakeonlyoffsettingpositions(whichresultinloweringtheopenpositionofthemember)inderivativecontractsonthatunderlying.Intheeventthatthepositionlimitisbreachedduetothereductionintheoverallopeninterestinthemarket,thememberarerequiredtotakeonlyoffsettingpositions(whichresultinloweringtheopenpositionofthemember)inderivativecontractinthatunderlyingandfreshpositionsshallnotbepermitted.Thepositionlimitattradingmemberlevelisrequired to be computed on a gross basis across all clients of the Trading member.Market wide limits:Therearenomarketwidelimitsforindexproducts.Forstockspecificproductsthemarketwidelimitofpage: 10[ www.sebi.gov.in ]

openpositions(intermsofthenumberofunderlyingstock)onanoptionandfuturescontractonaparticular underlying stock would be lower of -i. 30timestheaveragenumberofsharestradeddaily,duringthepreviouscalendarmonth,inthecash segment of the Exchange, Orii. 20%ofthenumberofsharesheldbynon-promotersi.e.20%ofthefreefloat,intermsofnumber of shares of a company.Summary of Position Limits IndexOptionsIndexFuturesStockOptionsStockFuturesClientlevelDisclosurerequirementforanypersonorpersonsactinginconcertholding15%ormoreoftheopeninterestofallderivativecontractsonaparticularunderlyingindexDisclosurerequirementforanypersonorpersonsactinginconcertholding15%ormoreoftheopeninterestofallderivativecontractsonaparticularunderlyingindex1%offreefloator5%ofopeninterestwhicheveris higher1%offreefloator5%ofopeninterestwhicheveris higherTradingMemberlevel15%ofthetotalOpenInterestofthemarketorRs.250crores,whicheveris higher15%ofthetotalOpenInterestofthemarketorRs.250crores,whicheveris higher20%ofMarketWideLimitsubjecttoaceilingofRs.50cr.20%ofMarketWideLimitsubjecttoaceilingofRs.50 cr.Marketwide 30timestheaveragenumberofsharestradeddaily,duringthepreviouscalendarmonth,intherelevantunderlyingsecurityintheunderlyingsegmentor,-20%of30timestheaveragenumberofsharestradeddaily,duringthepreviouscalendarmonth,intherelevantunderlyingsecurityintheunderlyingsegmentor,-20%ofpage: 11[ www.sebi.gov.in ]

thenumberofsharesheldbynon-promotersintherelevantunderlyingsecurity,whicheveris lowerthenumberofsharesheldbynon-promotersintherelevantunderlyingsecurity,whicheveris lower Q20WhataretherequirementsforaFIIanditssub-accounttoinvestin equityderivativesmarket?A.ASEBIregisteredFIIsanditssub-accountarerequiredtopayinitialmargins,exposuremarginsandmarktomarketsettlementsinthederivativesmarketasrequiredbyanyotherinvestor.Further,theFIIanditssub-accountarealsosubjecttopositionlimitsfortradinginderivativecontracts.TheFIIandsub-account position limits for the various derivative products are as under: IndexOptionsIndexFuturesStockOptionsSinglestockFuturesFIILevel Rs.250croresor15%oftheOIinIndexoptions,whicheveris higher.Inaddition,hedgepositionsarepermitted. Rs.250croresor15%oftheOIinIndexfutures,whicheveris higher.Inaddition,hedgepositionsarepermitted.20%ofMarketWideLimitsubjecttoaceilingofRs.50crores.20%ofMarketWideLimitsubjecttoaceilingofRs.50crores.Sub-accountlevel Disclosurerequirementforanypersonorpersonsactinginconcertholding15%ormoreoftheopeninterestofallderivativecontractsonaparticularunderlyingindexDisclosurerequirementforanypersonorpersonsactinginconcertholding15%ormoreoftheopeninterestofallderivativecontractsonaparticularunderlyingindex1%offreefloatmarketcapitalizationor5%ofopeninterestonaparticularunderlyingwhicheverishigher1%offreefloatmarketcapitalizationor5%ofopeninterestonaparticularunderlyingwhicheverishigher Q21What are the requirements for a NRI to invest in equity derivatives market?page: 12[ www.sebi.gov.in ]

A.NRIsarepermittedininvestinexchangetradedderivativecontractssubjecttothemarginandotherrequirementswhichareinplaceforotherinvestors.Inaddition,aNRIissubjecttothefollowingpositionlimits: IndexOptionsIndexFuturesStockOptionsSinglestockFuturesNRIlevel Disclosurerequirementforanypersonorpersonsactinginconcertholding15%ormoreoftheopeninterestofallderivativecontractsonaparticularunderlyingindexDisclosurerequirementforanypersonorpersonsactinginconcertholding15%ormoreoftheopeninterestofallderivativecontractsonaparticularunderlyingindex1%offreefloatmarketcapitalizationor5%ofopeninterestonaparticularunderlyingwhicheverishigher1%offreefloatmarketcapitalizationor5%ofopeninterestonaparticularunderlyingwhicheverishigher Q22What are Currency Futures?A.Currencyfuturesarecontractstobuyorsellaspecificunderlyingcurrencyataspecifictimeinthefuture,foraspecificprice.Currencyfuturesareexchange-tradedcontractsandtheyarestandardizedinterms of delivery date, amount and contract terms.Currencyfuturecontractsallowinvestorstohedgeagainstforeignexchangerisk.Sincethesecontractsaremarked-to-marketdaily,investorscan--byclosingouttheirposition--exitfromtheirobligationtobuyor sell the currency prior to the contract's delivery date. Q23Whataretheparametersforinitialmargin,exposuremarginandwhatarethepositionlimitsspecified for exchange traded currency futures?A.CurrencyFuturesPricescanRangeMinimumMarginRequirementCalendarspread Initial MarginComputation3.5 Sigma1%Rs.250permonthonthefarmonthcontract ExposureMarginI% of gross open positions ClientlevelTradingMemberlevel(Non-Bank)TradingMemberlevel (Bank) Position limits6%ofopeninterestor10millionUSDwhicheveris higher15%oftotalopeninterestor50millionUSDwhicheverishigher15%oftotalopeninterestor100millionUSDwhicheverishigher page: 13[ www.sebi.gov.in ]

Q24What are the eligibility criteria for members of the currency futures segment?A.ThetradingmemberissubjecttoabalancesheetnetworthrequirementofRs.1crorewhiletheclearingmemberissubjecttoabalancesheetnetworthrequirementofRs.10crores.Theclearingmember is subject to a liquid networth requirement of Rs. 50 lakhs. Q25Whataretheeligibilitycriteriaforsettingupofcurrencyfuturessegmentinarecognizedstock exchange?A.ArecognizedstockexchangehavingnationwideterminalsoranewexchangerecognizedbySEBImaysetupcurrencyfuturessegmentafterobtainingSEBI'sapproval.Thecurrencyfuturessegmentshould fulfill the following eligibility conditions for approval: Thetradingshouldtakeplacethroughanonlinescreen-basedtradingsystem,whichalsohasadisasterrecovery site.i. TheclearingofthecurrencyderivativesmarketshouldbedonebyanindependentClearingCorporation, which satisfies the eligibility for a clearing corporation.ii. Theexchangemusthaveanonlinesurveillancecapabilitywhichmonitorspositions,pricesandvolumes in real time so as to deter market manipulation.iii. The exchange shall have a balance sheet networth of atleastRs. 100 crores.iv. Informationabouttrades,quantities,andquotesshouldbedisseminatedbytheexchangeinrealtime to at least two information vending networks which are accessible to investors in the country.v. Theper-half-hourcapacityofthecomputersandthenetworkshouldbeatleast4to5timesoftheanticipatedpeakloadinanyhalfhour,oroftheactualpeakloadseeninanyhalf-hourduringtheprecedingsixmonths,whicheverishigher.Thisshallbereviewedfromtimetotimeonthebasisofexperience.vi. The segment should have at least 50 members to start currency derivatives trading.vii. Theexchangeshouldhavearbitrationandinvestorgrievancesredressalmechanismoperativefrom all the four areas/regions of the country.viii. The exchange should have adequate inspection capability.ix. Ifalreadyexisting,theexchangeshouldhaveasatisfactoryrecordofmonitoringitsmembers,handling investor complaints and preventing irregularities in trading. Q26WhatmeasureshavebeenspecifiedbySEBItoprotecttherightsofinvestorinDerivativesMarket?A.The measures specified by SEBI include:a. Investor'smoneyhastobekeptseparateatalllevelsandispermittedtobeusedonlyagainsttheliabilityoftheInvestorandisnotavailabletothetradingmemberorclearingmemberorevenany other investor.b. TheTradingMemberisrequiredtoprovideeveryinvestorwithariskdisclosuredocumentwhichwilldisclosetherisksassociatedwiththederivativestradingsothatinvestorscantakeaconsciousdecision to trade in derivatives.c. Investorwouldgetthecontractnotedulytimestampedforreceiptoftheorderandexecutionoftheorder.TheorderwillbeexecutedwiththeidentityoftheclientandwithoutclientIDorderwillnotbeacceptedbythesystem.TheinvestorcouldalsodemandthetradeconfirmationslipwithhisIDinsupportofthecontractnote.Thiswillprotecthimfromtheriskofpricefavour,ifany,extendedbytheMember.d. InthederivativemarketsallmoneypaidbytheInvestortowardsmarginsonallopenpositionsiskeptintrustwiththeClearingHouse/ClearingcorporationandintheeventofdefaultoftheTradingorClearingMembertheamountspaidbytheclienttowardsmarginsaresegregatedandnotutilizedtowardsthedefaultofthemember.However,intheeventofadefaultofamember,lossessufferedbytheInvestor,ifany,onsettled/closedoutpositionarecompensatedfromtheInvestorProtectionpage: 14[ www.sebi.gov.in ]

Fund, as per the rules, bye-laws and regulations of the derivative segment of the exchanges. e. TheExchangesarerequiredtosetuparbitrationandinvestorgrievancesredressalmechanismoperative from all the four areas / regions of the country. page: 15[ www.sebi.gov.in ]