Derivatives trading takes place under the
Securities and Exchange Board of India Act, 1992 and the framework
including suggestive bye-law and its Clearing Corporation/House has been
laid down by Dr. L.C. Gupta Committee, constituted by SEBI.
Some of the eligibility conditions laid down by SEBI for Derivative
Exchange/Segment and its Clearing Corporation/House are as follows:
- The Derivatives Exchange/Segment shall have on-line surveillance
capability to monitor positions, prices, and volumes on a real time
basis so as to deter market manipulation.
- The Derivatives Exchange/ Segment should have arrangements for
dissemination of information about trades, quantities and quotes on
a real time basis through atleast two information vending networks,
which are easily accessible to investors across the country.
- The Derivatives Exchange/Segment should have arbitration and
investor grievances redressal mechanism operative from all the four
areas / regions of the country.
- The Derivatives Exchange/Segment should have satisfactory system
of monitoring investor complaints and preventing irregularities in
trading.
- The Derivative Segment of the Exchange would have a separate
Investor Protection Fund.
- The Clearing Corporation/House shall perform full novation, i.e.,
the Clearing Corporation/House shall 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.
- The Clearing Corporation/House shall have the capacity to monitor
the overall position of Members across both derivatives market and
the underlying securities market for those Members who are
participating in both.
- The level of initial margin on Index Futures Contracts shall be
related to the risk of loss on the position. The concept of
value-at-risk shall be used in calculating required level of initial
margins. The initial margins should be large enough to cover the
one-day loss that can be encountered on the position on 99% of the
days.
- The Clearing Corporation/House shall establish facilities for
electronic funds transfer (EFT) for swift movement of margin
payments.
- In the event of a Member defaulting in meeting its liabilities,
the Clearing Corporation/House shall transfer client positions and
assets to another solvent Member or close-out all open positions.
- The Clearing Corporation/House should have capabilities to
segregate initial margins deposited by Clearing Members for trades
on their own account and on account of his client. The Clearing
Corporation/House shall hold the clients' margin money in trust for
the client purposes only and should not allow its diversion for any
other purpose.
- The Clearing Corporation/House shall have a separate Trade
Guarantee Fund for the trades executed on Derivative Exchange /
Segment.
Presently, SEBI has permitted Derivative Trading on the Derivative
Segment of BSE and the F&O Segment of NSE.
The rights of investors in the Derivative Market are well protected by
SEBI. The measures specified by SEBI are as follows:
- Investor's money has to be kept separate at all levels and is
permitted to be used only against the liability of the Investor and
is not available to the trading member or clearing member or even
any other investor.
- The Trading Member is required to provide every investor with a
risk disclosure document which will disclose the risks associated
with the derivatives trading so that investors can take a conscious
decision to trade in derivatives.
- Investor would get the contract note duly time stamped for
receipt of the order and execution of the order. The order will be
executed with the identity of the client and without client ID order
will not be accepted by the system. The investor could also demand
the trade confirmation slip with his ID in support of the contract
note. This will protect him from the risk of price favour, if any,
extended by the Member.
- In the derivative markets all money paid by the Investor towards
margins on all open positions is kept in trust with the Clearing
House/ Clearing corporation and in the event of default of the
Trading or Clearing Member the amounts paid by the client towards
margins are segregated and not utilised towards the default of the
member. However, in the event of a default of a member, losses
suffered by the Investor, if any, on settled / closed out position
are compensated from the Investor Protection Fund, as per the rules,
bye-laws and regulations of the derivative segment of the exchanges
FAQs on
Derivatives
What
derivative contracts are permitted by SEBI?
- Index Futurs Contractrs, introduced
in June 2000.
- Index Options, introduced in June
2001
- Stock Options, introduced in July
2001
What is
minimum contract size?
Not below Rs. 2 Lakhs according to the Standing Committee on Finance, a
Parliamentary Committee, at the time of recommending amendment to
Securities Contract (Regulation) Act, 1956.
What is the lot size of a contract?
Lot size refers to number of underlying securities in one contract.
Addition to it, for stock specific derivative contracts SEBI has
specified that the lot size of the underlying individual security should
be in multiples of 100 and fractions, if any, should be rounded of to
the next higher multiple of 100. This requirement of SEBI along with the
requirement of minimum contract size makes the basis of arriving at the
lot size of a contract.
Is there any market wide limits?
For index products it is nil.
For stock specific products it is of open positions.
For an option and futures it is as undementioned:
- 30 times the average number of shares traded daily, during the
previous calendar month, in the cash segment of the Exchange, OR
- 10% of the number of shares held by non-promoters i.e. 10% of the
free float, in terms of number of shares of a company.
It is also specified that when the total open interest in a contract
reaches 80% of the market wide limit in that contract, the exchanges
would make the price scan range and volatility scan range (specified)
double. The exchanges has to continuously review the impact of measures
and take further proactive risk containment measures as may be
appropriate, including, further increases in the scan ranges and levying
additional margins.
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