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TMI BlogMaster Circular on Matters relating to Exchange Traded DerivativesX X X X Extracts X X X X X X X X Extracts X X X X ..... IES AND EXCHANGE BOARD OF INDIA 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 ............ ..... 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Clearing Corporation/House for Equity Derivatives ....... 24 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 .. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ............................... 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 ............................................... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 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 ................................................................................ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ........................................................................................ 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 Managemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... latory 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 ................................................................................... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .................................................................................... 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 ........................................................................................ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ................................. 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 7.3.1 Exchange: ...................................................................................................... 78 7.3.2 Clearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ......... 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ........................................ 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 ................................................. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ....................................................... 103 12.1 Corporate Action Adjustments: ....................................................................... 103 12.2 Governance ...................................................................................................... 106 12.3 Reporting and Disclosure ................................................................................ 106 12.3.1 Monthly Activity Report ........................................................................... 106 12.3.2 Reporting of derivative transactions to the media and the newspapers ..... 106 12.4 Straight through Processing ............................................................................. 107 12.5 Certification ..................................................................................................... 111 12.6 Client Registration Form ................................................................................. 111 12.7 Introduction of Volatility and Bond Index ...................................................... 111 12.7.1 Volatility Index .......................................................................................... 111 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dex 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 ₹ 2 Lakhs at the time of its introduction in the market. The mini derivative contract on Index (Sensex and Nifty) shall have a minimum contract size of ₹ 1 lakh at the time of its introduction in the market. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; 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 ₹ 1,00,000 1 month contract is ₹ 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learing corporation, containing, inter alia, the following terms: I. 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. II. 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. a. 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. b. 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. c. The clearing corporation shall take adequate care t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et. 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: rt = ln (It/It-1) where It is the 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 (3σt)-1) and the percentage margin on long positions would be equal to 100(1- exp (-3σt)). 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. On the first day of index futures trading the formula given above would require a value of σ t-1, i.e. the estimated volatility at the end of the day preceding the first day of index 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. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. 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 gui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: • ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs 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 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovement 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 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 exchang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 2 INDEX OPTIONS 2.1 Product Design 2.1.1 Underlying The benchmark indices and the various secto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard to Index Options. 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 wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 positions will get adjusted ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that of index future contracts as specified in section 1.3.4. 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 ₹ 5 Lakh (Rupees Five 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 ₹ 100 crores (Rupees Hundred 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 ₹ 2 lakh. b. MWPL of the stock shall not be less than ₹ 60 crore. 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 elig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 ₹ 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 ₹ 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 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 ₹ 500 crores or more, the combined futures and options position limit shall be 20% of applicable MWPL or ₹ 300 crores, whichever is lower and within which stock futures position cannot exceed 10% of applicable MWPL or ₹ 150 crores, whichever is lower. For stocks having applicable market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od 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. 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%. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture 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. 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us 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 σt)-1) and the percentage margin on long positions would be equal to 100(1-exp (-3.5σt)). 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. 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. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ₹ 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 loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alising 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly, 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 cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring 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 approvaMl. To be eligible for such approval, it should satisfy the following conditions: 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 abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). Risk Scenario Number: Price Move in Multiples of Price Range Volatility Move in Multiples of Volatility Range Fraction of Loss to be Considered 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ₹ 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quent 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 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 IS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... line, 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 ₹ 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 (Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ci is coupon at time ti, y is the annually compounded yield, m is the frequency of coupon payments, B is the price of the bond. Modified duration essentially measures percentage change in price due to change in yield by 100 bps. Y Yield of security is its YTM (Yield to maturity) calculated as 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. t is the yield of 10-year Notional Coupon-bearing GoI security futures at time t; and σyt (sigma) is the standard deviation of daily logarithmic returns of yield of 10- year Notional Coupon-bearing GoI security futures at time t. The percentage margin on long position would be equal to 100 (D*3.5σyt* Yt) and the percentage margin on short position would be equal to 100 (D*(-3.5σyt)* Yt). The Modified Duration for 10-Year Notional Coupon-bearing GoI security futures shall be 10. 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, Yt =Yie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in Interest Rate Futures, at any point in time. 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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. 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 del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ₹ 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... piry 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 * Pf where Pf is the settlement price of the notional bond. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ₹ 1000 crores whichever is higher. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 * Pw (Here Pw is weighted average futures quote of last half an hour). 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. 10.1.10 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. 10.1.11 Final Contract Settlement Value The Final Contract Settlement Value would be = 2000 * Pf where Pf is the settlement price of the notional bond. 10.1.12 Initial Margin The Initial Margin requirement shall be based on a worst case loss of a portfolio of an individual client across various scenari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arithmic 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 %. 10.1.16 Position 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 ₹ 300 crores whichever is higher. The Exchange will disseminate alerts whenever the gross open position of the client exceeds 3% of the total open inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 unexpire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary dividends, above 10% of the market value of the underlying stock, the Strike Price would be adjusted. 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 or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cil/Executive Committee of Derivatives Clearing House/Clearing Corporation), Chief Executive Officer of Derivatives Exchange/Segment, Chief Executive Officer of Derivatives Clearing House/Corporation and Statutory Committees such as Disciplinary Action Committee, Arbitration Committee, Defaulters Committee is given as Annexure I. Exchanges are advised to submit, on a half-yearly basis i.e. on 30th June and 31st December, every year, the following information with regard to the Governing Council/Executive Committee of Derivative Exchange/Segment, with regard to the Clearing Council/Executive Committee of Derivatives Clearing House/Clearing Corporation, as well as with regard to the Statutory Committees i.e., Disciplinary Action Committee, Arbitration Committee and Defaulters Committee: * The name of the members of the respective Committee/Council. * The respective categories to which they belong and * The date of their appointment / nomination to the Committee/Council. In addition to the above, the Exchanges are also advised to send complete bio-data of members of the respective committees highlighting necessary professional competence and experience in the areas related to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k will be mandatory amount block in IFN515 and optional amount block in IFN540, IFN541, IFN542 and IFN543. 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 IV. 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 issuan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... II. 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 12.7.3 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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. 12.9 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' Per day Penalty as %age of 'a' (< ₹ 1 lakh) And (< 10% of applicable margin) 0.5 (≥ ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Corporation, etc. * Chief Executive Officer of the Derivative Exchange/Segment means the person responsible for day to day operations of the derivatives exchange /segment. * Chief Executive Officer of Derivatives Clearing House/Corporation means the person responsible for day to day operation of the derivatives clearing house / corporation. * Statutory Committees means the Disciplinary Action Committee, Arbitration Committee and Defaulters Committee for the derivatives trading and settlement. Board means the Securities and Exchange Board of India(SEBI). The exchanges / clearing house shall within a period of two months from the date of final approval for trading and settlement granted by the Board shall constitute the Governing Board, Clearing Council and Statutory Committees in the manner prescribed hereunder:- 1) Unless otherwise agreed to by the Board, the Governing Board of the Derivative Exchange/ Segment shall be constituted as follows: i. The Derivative Exchange/Segment should have a separate Governing Board which shall not have representation of Trading/Clearing Members of the Derivative Exchange/Segment/Clearing House/Clearing Corporation beyond 40% of the to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ume all responsibility for the duties specified for CEO. iv. The members on the clearing council shall elect a Chairman within a period of 10 days from the constitution of the clearing council. v. The members appointed on the clearing council shall not be subject to retirement by rotation and shall hold office at the pleasure of the Board or as per the provisions of the Act and the Rules under which the clearing house / corporation is constituted. 3) For the purpose of appointment of the non-elected members on the governing board of the derivatives exchange / segment or on the clearing council, the derivatives exchange /segment and the clearing council may forward the names of persons to the Board for approval of such appointments. The Board shall, however have the right to appoint any other persons, whose names have not been forwarded by the governing board of the derivatives exchange/segment and / or clearing council. 5) The Rules or Article of Association, as the case may be, of the stock exchange shall provide that besides the governing board / clearing council, it shall be the duty of the Chief Executive Officer to give effect to the directives, guidelines and orders iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 regu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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. 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 ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice 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 manne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents 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 softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent and Options Remarks Rules M 16R GENL Start of block M 20C Reference :4!c//16x Type of CN, Exchange number and CN No. Format: (Qualifier)/ (References) Qualifier: "SEME" (4 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 new message or cancellation of a previous message Format: (Function) Function: "NEWM" O 98A Date :4!c//8!n Preparation Date Format: (Qualifier)//(Date) Qualifier: "PREP" (4 Uppercase Characters) Date: YYYYMMDD (8 Digits) M 22F Indicator :4!c//4!c Dummy (taken since mandatory) Format: (Qualifier)//(Indicator) Qualifier: " TRTR" (4 Uppercase Characters) Indicator: "TRAD" (4 Uppercase Characters) Mandatory Subsequence A1 Linkages M 16R LINK Start of block M 20C :4!c//16x To indicate the cancelled contract note (CANC). In case of NEWM, the field ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contract note. Format: (Qualifier) //(SEBI Regn No.) Subsequent to SEBI‟s mandating, Map In will be used for the same. Qualifier: "INVE" (4 Uppercase Characters) O 97A Account :4!c//35x To identify the safekeeping account. All clients need to obtain a code as specified in the circular Format: (Qualifier) //(Code as specified in the circular) Qualifier: "SAFE" (4 Upper Characters) Code as specified in the circular (35 characters) M 16S CONFPRTY End of block End of Mandatory Subsequence C1 (Confirmation Parties) M 36B Quantity of Financial Instrument :4!c//4!c/15d To define the trade quantity Format: (Qualifier)//(Quantity Type Code) /(Quantity)Qualifier: "CONF" (4 Uppercase Characters)Quantity Type 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. M 35B Identification of Security [ISIN1!e12!c] [4*35x] To identify the ISIN of the Scrip and company name. Format: (Identification of Security)(Description of Security)Identification of Security: " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and me/us out of these Line 7:transactions, the matter shall be 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 Delivery Type. The name of the clearing corporation is to be used in case of a clearing house trade. In case of a hand delivery trade, the brokers name is to be used. Format: (Qualifier)//( Name of Clearing House) Qualifier: "REAG" in case of a Sale "DEAG" in case of a Purchase - "BOISL" for BSE trades, or - "NSCCL" for NSE trades (For Clearing House Trades) and SEBI reg number of the broker (For Hand Delivery Trades) M 16S SETPRTY End of block End of Subsequence D1 (Settlement Parties) Mandatory Subsequence D3 (Amounts) M 16R AMT Start of block M 19A Amount :4!c//3!a15d To identify the Deal Amount Format: (Qualifier) //(Currency Code) (Amount) For: Deal Amount Qualifier: "DEAL" (4 Upper case Characters) Narrative: "INR" (3 Upper Letters) Amount: upto 15 digits (including decima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ier) //(Narrative) Qualifier: "PART" ( 4 Upper case Characters) Narrative: Trade Ref. No (15Digits) Trade Ref. Qty (15 Digits) Trade Ref. Rate (15 Digits comma at appropriate place) Date: YYYYMMDD HHMMSS (15 Character Sets) O 20C Reference :4!c//16x To identify the Order number Format: (Qualifier) //(Reference) Qualifier: "PROC" (4 Character) Reference : Order number (16 Character Sets) M 16S OTHRPRTY End of block End of Sequence E Other Parties Message IFN 598 : Format Sequence Status Tag Generic Field Name Content/Options Purpose Rules Mandatory Sequence A General Information M 16R GENL Start of Block M 20C Reference :4!c//16x Sender's Reference Format: (Qualifier)//(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-message type 3!n To identify sub-message type Value = 548 M 23G 4!c To convey that this message is meant to indicate a transaction status [INST] Format: (Qualifier)Qualifier: "INST" O 98A Date/Time :4!c//8! ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion has not been matched; the counterparty expects a delivery from you, not a receipt, or vice versa. DEPT- Disagreement Place of Settlement 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 paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lement 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 70D Narrative :4!c//6*35x Reason Narrative (for un-matched transactions) Format:(Qualifier)(Narrative)Qualifier: "REAS" Narrative: 6 lines of 35 characters each [This is mandatory in case the reason code in 24B is NARR] M 16S REAS End of Block End of Subsequence A2a Reason M 16S STAT End of Block End of Subsequence A2 Status M 16S GENL End of Block End of Sequence A General Information Optional Sequence B Settlement Transaction Details M 16R SETTRAN Start of Block Note: This sequence is to be used only in case of the contract being against payment. M 35B Security [ISIN1!e12!c] [4*35x] Identification of the Financial Instrument Format: (Identification of Security)(Description of Security)Identification of Security: "ISIN" which will always be present. (ISIN of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sage. Format: (Qualifier)//SEBI Reg. No. / MAP-IN id of contracting broker) Qualifier: "BUYR" in case of a Sale "SELL" in case of a Purchase M 16S SETPRTY End of block Mandatory Subsequence B1 (Settlement Parties)* M 16R SETPRTY Start of block M 95Q Party :4!c//4*35x Indicates the party with whom trade has to be settled. SEBI reg. Number / MAP-IN id of broker / custodian / seller / clearing house This tag should contain the same information as was uploaded in the corresponding contract note message Format: (Qualifier)//( SEBI reg. No. / MAP-IN of settling party) Qualifier: "REAG" in case of a Sale "DEAG" in case of a Purchase M 16S SETPRTY End of block M 16S SETTRAN End of Block 13.5 ANNEXURE-V 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould 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. 13.6 ANNEXURE VI CLIENT APPLICATION FORM (The details given hereunder should be included in all client application forms Exchanges may prescribe any additional disclosure requirement.) TRADING MEMBER'S CLEARING MEMBER'S Name, Address, Telephone No. Name, Address, Telephone No. SEBI Registration No. SEBI Registration No. (if clearing member other than trading member) Client Details * Name of Account Holder : __________ * Sex : Male/Female : __________ * Date of Birth : __________ * Address Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case there is any change in the information provided by the client to the member at the time of opening the account, the client shall immediately notify the member of such change in writing. 2. Client's understanding of risks involved in derivatives trading: The agreement shall clearly specify the client's responsibility for all investment decisions and his complete understanding of the risks involved in trading of various derivatives contracts. The member shall ensure that the client has read and signed the Risk Disclosure Document. Even if the client has failed to understand the risk involved or the member has failed to explain the risk to the client, the trading contract will not be void or voidable and the client shall be responsible for all the risk and consequences for entering into derivatives trading. 3. Types of services offered: The agreement shall specify the nature of services provided by the broker e.g. trading facilities, clearing facilities, advisory services, portfolio management services etc. 4. Commissions, Brokerage, other fees: The agreement shall indicate the rate of brokerage/ commission/ fee charged by the broker in respect of various services provided by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gashnishee order has been served by a bank, etc. Similarly, trading member agrees to inform client immediately about the contract specifications and associated obligations, daily settlement position, etc. The member should also inform the client if the price of the index has moved against the client. 11. Abiding by SEBI/ Stock Exchange /Clearing Corporation Rules and Regulations : A client agrees to be bound by all the rules and regulations of SEBI and the Bye-laws, rules and regulations of the exchange and clearing corporation. Further, the client and member should agree to refer the dispute to the arbitration as per the bye-laws of the exchange. 12. Any other clauses: The agreement may contain any other additional provisions as considered necessary by the broker/ exchanges. RISK DISCLOSURE DOCUMENT (This document should be read by each and every prospective client before entering into derivatives trading and a signed copy should be obtained by the broker from all the clients.) The following text should be part of all the risk disclosure documents. Exchanges may prescribe any additional disclosure requirements considered necessary by them High Leverage: The amount of initia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liarise yourself with the protections accorded to the money or other property you deposit with the broker member, particularly in case of insolvency or bankruptcy of the member. The extent to which you may recover your money or property may be governed by specific legislation or local rules. Such details should be clarified before commencement of trading in futures. In case of any dispute with the member, the same shall be subject to arbitration as per the bye-laws/ regulations of the exchange. G. You are required to provide all the details as mentioned in the Client application from. You must read the customer agreement in detail before signing this document. The relationship between the client and the broker member shall also be subject to the bye-laws of the exchange/clearing corporation relating to the relationship between the client and the member as applicable. H. Before you begin to trade, you should obtain a clear explanation of all commission, fees and other charges for which you will be liable. These charges will affect your net profit (if any) or increase your loss. I. You must ask your broker to provide the full details of the futures contracts you plan to trade i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ___ Customer Signature Date CLEARING MEMBER - TRADING MEMBER AGREEMENT The Clearing Member and the Trading Member shall enter into an agreement which should clearly state the nature of relationship between the two and should specify the duties, responsibilities, obligations and code of conduct of the concerned parties. The Clearing Member shall enter into a separate agreement with each of the trading member on whose behalf he will be clearing trades. The following points are to be included in the agreement, however, the member/exchange/clearing corporation may prescribe additional clauses as considered necessary by them: 1. Deposit from Trading Member - The Clearing Member shall specify the amount of deposit that would be required to be deposited by the trading member with the clearing member. It shall include the details of the minimum deposit at any point in time, the mode of payment, steps that can be taken by the clearing member in case of any shortfall e.g. restriction on further trading, close-out of open positions etc. This shall be as agreed by the two parties or as prescribed by the relevant authority from time to time. 2. Exposure limit - The agreement shall include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n order to enable the shifting of positions and safeguarding the money of clients, as stated above, it is necessary to be able to identify the individual client positions. 11. Default by Trading Member: In the event of a default of the trading member on his own account, the client money shall remain safe and shall not be utilized to meet the trading members liabilities. In such cases the client's positions shall be transferred to the clearing member or another trading member. In the event of a default due to failure of a specific client to fulfill his obligation, the money of other clients shall remain safe and cannot be utilized to meet the obligation of the defaulting client. 12. Default by Clearing Member - In the event of default by clearing member on his own account, the money of the clearing member's clients, trading members own account and trading members' clients shall remain safe and shall not be utilized to meet the clearing members liabilities. In such cases the positions of the clients and the trading members shall be transferable to some other clearing member. 13. Loss on account of close out of client positions because of failure of clearing member/trading member w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for Exchange Traded Currency Derivatives 22. Dec 02, 2008- Cross Margining across Exchange traded Equity (Cash) and Exchange traded Equity Derivatives (Derivatives) segments 23. Nov 06, 2008- Issuance of Electronic Contract Notes in Equity Derivatives Segment 24. Oct 20, 2008- Revised Exposure Margin for Exchange Traded Equity Derivatives 25. Oct 15, 2008- Revised Exposure Margin for Exchange Traded Equity Derivatives 26. Oct 06, 2008 -Eligibility criteria for introduction of derivatives on shares 27. Aug 08, 2008- Extending calendar spread treatment till expiry of the near month contract 28. Aug 06, 2008- Exchange Traded Currency Derivatives 29. Jan 15, 2008- Introduction of Volatility Index 30. Jan 11, 2008- Introduction of Index options with longer tenure 31. Dec 27, 2007- Introduction of mini derivative (Futures and Options) contract on Index -Sensex and Nifty 32. Sep 11, 2007- Circular on acceptance of Foreign Sovereign Securities as collateral from Foreign Institutional Investors (FIIs) for Exchange Traded Derivative Transactions 33. Feb 15, 2006- Clarification to Circular No. DNPD/Cir-31/2006 dated January 20, 2006 34. Jan 20, 2006- Modification of the Trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Straight Through Processing
58. May 13, 2002- Format of the Monthly Reporting Format
59. Feb 12, 2002- Scheme of FII Trading in all Exchange Traded Derivative Contracts
60. Nov 02, 200-1 Scheme for introduction of Single Stock Futures and the Risk Containment Measures
61. Aug 24, 2001- Reporting of derivative transactions to the media and the newspapers
62. Jun 21, 2001- Adjustment of Corporate Actions for Stock Option
63. Jun 20, 2001 -Reporting of option contracts to SEBI
64. Jun 20, 2001 -Risk containment measures for Stock Option
65. Feb 13, 2001 -SMDRP/Policy/Cir-10/2001
66. Dec 15, 2000 -Use of Digital Signature on Contract Notes
67. Dec 11, 2000- Risk containment measures for Option on Indices
68. Jun 20, 2000- Daily reports for trading and settlement of derivative trades
69. May 31, 2000- Circular No.8726
70. Jul 28, 1999 -Risk Containment Measures for the Index Futures Market
71. Dec 03, 1998- Client Registration Form, Client Agreement, Clearing Member - Trading Member Agreement and Risk Disclosure Document for Derivatives Segment
72. Jun 29, 1998- Circular No.1847
73. Jun 16, 1998- Derivatives trading in India X X X X Extracts X X X X X X X X Extracts X X X X
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