Master Circular on Matters relating to Exchange Traded Derivatives

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..... ment 022-2644-9460 [email protected] MASTER CIRCULAR ON EXCHANGE-TRADED DERIVATIVES JANUARY 2012 SECURITIES 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 .............................................................................. .....

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..... .. 21 1.3.4 Surveillance System ...................................................................................... 22 1.4 Eligibility Criteria for Derivative Exchange / Derivative Segment of the Exchange, Trading Members, 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 Ten .....

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..... itoring of Position Limits ....................................................................... 32 2.3.4 Surveillance System ...................................................................................... 32 3 Stock Futures .............................................................................................................. 33 3.1 Product Design ...................................................................................................... 33 3.1.1 Underlying ..................................................................................................... 33 3.1.2 Eligibility Criteria .......................................................................................... 33 3.1.3 Trading Hours ................................................................................................ 35 3.1.4 Size of the Contract ....................................................................................... 35 3.1.5 Quotation........................................................................................................ 35 3.1.6 Tenor of the contract .................................................... .....

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..... ..................................... 41 3.3.3 Monitoring of Position Limits ....................................................................... 43 3.3.4 Surveillance System ...................................................................................... 43 4 Stock Option ............................................................................................................... 44 4.1 Product Design ...................................................................................................... 44 4.1.1 Underlying ..................................................................................................... 44 4.1.2 Eligibility Criteria .......................................................................................... 44 4.1.3 Trading Hours ................................................................................................ 44 4.1.4 Size of the Contract ....................................................................................... 44 4.1.5 Quotation........................................................................................................ 44 4.1.6 Tenor of the contra .....

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..... ion Limits ....................................................................... 48 4.3.4 Surveillance System ...................................................................................... 48 5 Currency Futures ....................................................................................................... 49 5.1 Product Design ...................................................................................................... 49 5.1.1 Underlying ..................................................................................................... 49 5.1.2 Trading Hours ................................................................................................ 49 5.1.3 Size of the contract......................................................................................... 49 5.1.4 Quotation........................................................................................................ 49 5.1.5 Tenor of the contract ..................................................................................... 49 5.1.6 Available contracts.............................................................................. .....

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..... .............. 55 5.3.3 Surveillance system ....................................................................................... 57 5.4 Eligibility Criteria of the Segment, Exchanges and Trading Members ................ 59 5.4.1 Eligibility criteria of currency futures segment ............................................. 59 5.4.2 Eligibility criteria for the Clearing Corporation of the currency futures segment ...................................... 60 5.4.3 Eligibility criteria for members in the currency futures segment .................. 61 5.4.4 Regulatory and legal aspects ......................................................................... 62 6 Currency options ........................................................................................................ 63 6.1 Product Design ...................................................................................................... 63 6.1.1 Underlying ..................................................................................................... 63 6.1.2 Trading Hours ............................................................................................... .....

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..... ....................................... 66 6.2.11 Safeguarding client s money ....................................................................... 66 6.2.12 Periodic risk evaluation report ..................................................................... 66 6.3 Surveillance and Disclosures ................................................................................ 66 6.3.1 Unique client code ......................................................................................... 66 6.3.2 Position limits ................................................................................................ 66 6.3.3 Surveillance system ....................................................................................... 67 6.4 Eligibility Criteria of the Segment, Exchanges and Trading Members ................ 67 6.4.1 Eligibility criteria of currency options segment............................................. 67 6.4.2 Eligibility criteria for the Clearing Corporation of the currency options segment ....................................... 67 6.4.3 Eligibility criteria for members in the currency futures segment .................. .....

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..... 1.18 Extreme Loss Margin .................................................................................. 72 7.1.19 Calendar Spread Margin .............................................................................. 72 7.1.20 Model for Determining Standard Deviation ................................................ 72 7.1.21 Formula for Determining Standard Deviation ............................................. 72 7.1.22 Position Limits ............................................................................................. 75 7.2 Risk Management Measures ................................................................................. 76 7.2.1 Introduction ................................................................................................... 76 7.2.2 Portfolio Based Margining ............................................................................ 76 7.2.3 Real-Time Computation................................................................................. 76 7.2.4 Liquid Networth ............................................................................................ 76 7.2.5 Liquid Assets ........... .....

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..... ....................................... 82 8.1.6 Contract months ............................................................................................. 82 8.1.7 Settlement mechanism ................................................................................... 82 8.1.8 Contract value ................................................................................................ 82 8.1.9 Daily Contract Settlement value .................................................................... 82 8.1.10 Expiry/Last trading day/Final settlement day .............................................. 83 8.1.11 Final Contract Settlement value .................................................................. 83 8.1.12 Initial margin ............................................................................................... 83 8.1.13 Extreme Loss margin ................................................................................... 83 8.1.14 Calendar spread margin ............................................................................... 83 8.1.15 Formula for determining standard deviation................................... .....

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..... ....................................... 87 9.1.16 Position Limits ............................................................................................. 88 9.1.17 Settlement Mechanism ................................................................................ 90 9.1.18 Worked out Example of Settlement price calculation: ................................ 91 9.2 Regulatory and Legal aspects ................................................................................ 92 9.2.1 Exchange ....................................................................................................... 92 10 Interest Rate Futures on 5 Year Notional Coupon Bearing Government of India (GoI) Security ............................ 93 10.1 Product Design, Margins and Position Limits ................................................... 93 10.1.1 Underlying ................................................................................................... 93 10.1.2 Trading hours ............................................................................................... 93 10.1.3 Size of the contract............................................... .....

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..... ........ 100 11.3 Failure to meet Eligibility Criteria ............................................................... 101 11.4 Currency Denomination ............................................................................... 101 11.5 Risk Management Framework...................................................................... 101 11.6 Position Limits ............................................................................................. 101 11.7 Information Sharing ..................................................................................... 101 11.8 Legal Compliance ........................................................................................ 101 11.9 Enforcement ................................................................................................. 102 11.10 Trading........................................................................................................ 102 12 Miscellaneous............................................................................................................ 103 12.1 Corporate Action Adjustments: ....................................................................... 103 .....

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..... ....................................................................... 121 13.3.1 ANNEXURE III(A) ................................................................................... 133 13.4 ANNEXURE IV ............................................................................................ 134 13.5 ANNEXURE-V ............................................................................................... 154 13.6 ANNEXURE VI .............................................................................................. 156 13.7 ANNEXURE VII ............................................................................................. 164 1 INDEX FUTURES 1.1 Product Design 1.1.1 Underlying The benchmark indices and the various sectoral indices are permitted as per eligibility criteria. 1.1.2 Eligibility Criteria The Exchange may consider introducing derivative contracts on an index, if weightage of constituent stocks of the index, which are individually eligible for derivatives trading, is atleast 80%. However, no single ineligible stock in the index shall have a weightage of more than 5% in the index. The index on which futures and opt .....

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..... serve, c. likely contribution to market development, d. the safeguards and the risk protection mechanism adopted by the exchange to ensure market integrity, protection of investors and smooth and orderly trading, e. the infrastructure of the exchange and the surveillance system to effectively monitor trading in such contracts, and f. details of settlement procedures systems with regard to Index Futures. 1.2 Risk Management Liquid Net Worth and Exposure Limits of a Clearing Member The Liquid Net Worth is defined as under: total liquid assets deposited with the exchange / clearing corporation / house towards initial margin and capital adequacy, LESS initial margin applicable to the total gross open positions at any given point of time on all trades to be cleared through the clearing member. The clearing member s liquid net worth must satisfy both the conditions given below on a real time basis: Condition 1: Liquid Net Worth shall not be less than ₹ 50 lacs at any point of time. Condition 2: The mark to market value of gross open positions at any point of time of all trades cleared through the clearing member shall not exceed 33 1/3 (thirt .....

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..... = 19,00,00,000 300,00,000 1.2.1 Liquid Assets At least 50% of the total liquid assets shall be in the form of cash equivalents viz. cash, bank guarantee, fixed deposits, T-bills and dated government securities. Liquid Assets for the purposes of initial margins as well as liquid net worth would include cash, fixed deposits, bank guarantees, Treasury bills, government securities or dematerialized securities (with prescribed haircuts) pledged in favour of the exchange / clearing corporation or bank guarantees as defined hereunder. Units of money market mutual funds and units of gilt funds may be accepted towards cash equivalent component of the liquid assets of a clearing member. The unit shall be valued on the basis of its Net Asset Value after applying a hair cut of 10% on the NAV and any exit load charged by the mutual fund. The valuation or the marking to market of such units shall be carried out on a daily basis. 1.2.2 Bank Guarantees The clearing corporation / house would set an exposure limit for each bank, taking into account all relevant factors including the following: a. The Governing Council or other equivalent body of the clearing corporation / house .....

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..... . Debt securities shall be acceptable only if they are investment grade. Haircuts shall be at least 10% with daily mark to market. The total exposure of the clearing corporation to the debt or equity securities of any company shall not exceed 75% of the trade guarantee fund or 15% of the total liquid assets of the clearing corporation / house whichever is lower. Exposure for this purpose means the mark to market value of the securities less the applicable haircuts. All securities deposited for liquid assets shall be pledged in favour of the clearing corporation. Reserve Bank of India (RBI) vide A. P. (DIR Series) Circular no. 2 dated July 19, 2007 has permitted clearing corporations and clearing members a. to open and maintain demat accounts with foreign depositories and to acquire, hold, pledge and transfer the foreign sovereign securities, offered as collateral by FIIs; b. to remit the proceeds arising from corporate action, if any, on such foreign sovereign securities; and c. to liquidate such foreign sovereign securities if the need arises. In view of the above clearing members are permitted to accept foreign sovereign securities with AAA rating, (herei .....

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..... as part of the cash component of the liquid assets of the clearing member, and shall be subject to the condition that the value of the sovereign for acceptance and release of collateral tendered by domestic investors in the case of domestic securities shall be adopted mutatis mutandis for the sovereign securities tendered by FII, except to the extent specifically provided otherwise. 1.2.4 Initial Margin Computation The Initial Margin requirements are based on worst scenario loss of a portfolio of an individual client to cover 99% VaR over one day horizon across various scenarios of price changes and volatility shifts. For Index products, the price scan range is specified at three standard deviation (3 sigma) and the volatility scan range is specified at 4%. The Exponential Weighted Moving Average method (EWMA) shall be used to obtain the volatility estimate every day. For Index products the price scan range is specified at three standard deviation (3 sigma) and the volatility scan range is specified at 4%. The estimate at the end of day t ( t ) is estimated using the previous volatility estimate, i.e., as at the end of t-1 day (t-1), and the return (r t ) observed in .....

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..... The volatility estimation and margin fixation methodology should be clearly made known to all market participants so that they can compute what the margin would be for any given closing level of the index. Further, the trading software itself should provide this information on a real time basis on the trading workstation screen. There is also a minimum margin requirement. For index futures contracts it is specified that in no case the initial margin shall be less than 5% of the value of the contract. 1.2.5 Margins for Calendar Spreads A calendar spread is a situation in which a position at one maturity is hedged by an offsetting position at a different maturity on the same underlying, e.g., a short position in six months contract hedged by a long position in nine month contract. The margin on calendar spreads shall be at a flat rate of 0.5% per month of spread on the far month contract subject to a minimum margin of 1% and a maximum margin of 3% on the far side of the spread. 1.2.6 Exposure Limits It has been prescribed that the notional value of gross open positions at any point in time in the case of Index Futures shall not exceed 33 1/3 (thirty three one by th .....

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..... ing benefit shall be computed at client level on an online real time basis and provided to the trading member/clearing member/custodian, as the case may be, who, in turn, shall pass on the benefit to the client. For institutional investors, however, the cross margining benefit shall be provided after confirmation of trades. To avail the facility of cross margining, a client may maintain two accounts with the trading member/clearing member, namely arbitrage account and a non-arbitrage account, to allow converting partially replicated portfolio into a fully replicated portfolio by taking opposite positions in two accounts. However, for the purpose of compliance and reporting requirements, the positions across both accounts shall be taken together and client shall continue to have unique client code. A client may settle through a trading member/clearing member/custodian, as the case may be, who is clearing in both the segments or through two trading members/clearing members/custodians, one of whom is a trading member/custodian in the cash segment and the other is a clearing member in the derivatives segment. However, in course of time, a client will settle through only one clear .....

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..... gin and/or the settlement dues on a quarterly basis. Failure for this purpose means a shortfall for three consecutive trading days of 50% or more of the liquid net worth of the member. Any proposal for changes in the methodology to compute the initial margin should be filed with SEBI and released to the public for comments along with detailed comparative back testing results of the proposed methodology and the current methodology. The proposal shall specify the date from which the new methodology will become effective and this effective date shall not be less than three months after the date of filing with SEBI. At any time, up to two weeks before the effective date, SEBI may instruct the derivatives exchange and clearing corporation/house not to implement the change, or the derivatives exchange and clearing corporation/ house may on its own decide not to implement the change. The derivatives exchange/segment of the exchange/clearing corporation/clearing house of the exchange may choose to impose more stringent requirements, other than those prescribed above. 1.3 Surveillance and Disclosures 1.3.1 Unique client code The Exchange shall ensure that each client is a .....

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..... ve contracts in the manner specified below: a. The FII would be required to notify the names of the Clearing Member/s and Custodian through whom it would clear its derivative trades to exchanges and their Clearing House / Clearing Corporation. b. A unique code would be assigned by the exchanges and / or the Clearing House/Clearing Corporation to each registered FII intending to trade in derivative contracts. c. The FII would be required to confirm all its positions and the positions of all its sub-accounts to the designated Clearing Members online but before the end of each trading day. d. The designated Clearing Member/s would at the end of each trading day submit the details of all the confirmed FII trades to the derivative Segment of the exchange and their Clearing House / Clearing Corporation. e. The exchanges and their Clearing House / Clearing Corporation would then compute the total FII trading exposure and would monitor the position limits at the end of each trading day. The cumulative FII position may be disclosed to the market on a T + 1 basis, before the commencement of trading on the next day. f. In the event of an FII breaching the position limits on .....

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..... chemes of Mutual Funds will be treated as clients like sub-accounts of FIIs. 1.3.4 Surveillance System The surveillance systems of the exchanges should be designed keeping in view all the relevant aspects including the following - a. The alerts in the online surveillance system should be so designed that indications of material aberrations from normal activity are automatically generated and thrown up by the system. b. The parameters which need to be monitored either through the online system or otherwise should inter-alia include the following parameters as suggested by the Advisory Committee on Derivatives: I. Monitoring of open interest, cost of carry/impact cost and volatility. II. Monitoring of closing prices. III. The open positions in the derivative market should be seen in conjunction with the open positions in the cash market. i.e the position deltas should be monitored. IV. The timing of disclosure by corporates should be monitored as this could influence the prices of the contract at the time of introduction and expiry. V. Strike prices with large open positions should be monitored as this could influence the prices of the contract at the tim .....

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..... omplaints received against the broker, history of risk management related defaults and regulatory violations etc. Information obtained through broker inspections should also be made available to the monitoring/surveillance departments of stock exchanges. h. The information gathered by the risk management departments/clearing corporations while enforcing the risk management measures and settlement processes are critical inputs. Such information could include pattern of defaults related to specific scrips/contracts and special risk management measures taken keeping in view the market conditions. i. The exchanges should call for information from brokers in a standard form, and preferably in electronic form, to facilitate faster analysis as well as building up of databases. It may also be ensured that duly authenticated information is submitted by the broker or his designated agent. j. While implementing a stock watch type of system for derivatives, the system should be designed to provide online access to relevant historical data on derivatives trading for at least a year. k. The underlying securities in the derivatives market may be listed on more than one exchange and br .....

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..... es) Regulations, 2008. The minimum net worth for clearing members of the derivatives clearing corporation / house shall be ₹ 300 lacs. The net worth of a member shall be computed as follows: Capital + free Reserves Less non-allowable assets viz. a) Fixed assets b) Pledged securities c) Member s card d) Non-allowable securities (unlisted securities) e) Bad deliveries f) Doubtful debts and advances* g) Prepaid expenses, losses h) Intangible assets i) 30% of marketable securities * Explanation Includes debts/ advances overdue for more than three months or given to associates. The trading members shall be required to have qualified approved user and sales person who have passed a Certification Programme approved by SEBI. The Dr. L.C Gupta Committee on Derivatives had permitted existing stock exchanges having cash trading to trade in derivative contracts through a separate segment with separate membership. The derivative segment of an exchange and its Clearing House/Corporation shall be separate from the cash segment in the following areas a. The legal framework governing trading, clearing and settlement of the derivative se .....

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..... ange should ensure that for index options contracts on Nifty and Sensex there are 8 semi annual contracts of the cycle June/December in sequence to 3 serial monthly contracts and 3 quarterly contracts of the cycle March/June/September/December. Each maturity shall have a minimum of three strikes (in the money, at the money and out of the money). 2.1.8 Settlement Mechanism Same as that for index future contracts as specified in Section 1.1.8. Initially, the Exchanges shall introduce premium style index options. 2.1.9 Settlement Price Same as that for index future contracts as specified in Section 1.1.9. 2.1.10 Final Settlement Day Same as that for index future contracts as specified in Section 1.1.10. 2.1.11 Application The Derivative Exchange/Segment shall submit their proposal for approval of the index option contract to SEBI which shall include: g. the details of proposed derivative contract to be traded on the exchange which would include: i. Symbol ii. Underlying iii. Multiplier iv. Strike Price Intervals v. Premium Quotation vi. Last Trading Day vii. Expiration day/month viii. Exercise Style ix. Settlement of Option .....

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..... 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 is defined to be three standard deviations as calculated for VaR purposes in the index fu .....

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..... he 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 against the available Liquid Net Worth. Since the options are premium style, mark to market gains and losses will not be settled in cash for option positions. 6. Cash Settlement of Premium For option positions, the premium shall be paid in by the buyers in cash and paid out to the sellers in cash on T+1 day. 7. Unpaid Premium Until the buyer pays in the premium, the premium due shall be deducted from the available Liquid Net Worth on a real time basis. 2.2.3 Exposure Limits The notional value of gross open positions at any point in time in the case of all Short Index Option Contracts shall not exceed 33 1/3 (thirty three one by three) times the liquid net worth of a member. 2.2.4 Real Time Compu .....

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..... r-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 before introduction of new contracts. Further, the market wide position limit (which is in number of shares) shall be valued taking the closing prices of stocks in the underlying cash market on the date of expiry of contract in the month. In case circuit filter on a stock is reduced even once during the past six months, on account of surveillance action, then that stock should undergo a cooling off period of six months before the exchange decides to introduce derivatives on it. The Exchange shall be guided by the following for the purpose of calculating quarter sigma order size in a stock:- a. .....

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..... hall 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 eligibility criteria for three consecutive months (instead of one month as specified earlier) to be re-introduced for derivatives trading. Derivative contracts on such stocks may be re-introduced by the exchange subject to SEBI approval. The Exchange may compulsorily close out all derivative contract positions in a particular underlying when that underlying has ceased to satisfy the eligibility criteria or the exchange is of the view that the continuance of derivative contracts on such underlying is detrimental to the interest of the market keeping in view the market integrity and saf .....

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..... -month and three-month would be introduced simultaneously. Therefore, at any point in time at least three Single Stock Futures contracts on a particular underlying would be available for trading. 3.1.8 Settlement Mechanism The Stock Exchanges have the flexibility to offer: a. Cash settlement (settlement by payment of differences) for both stock options and stock futures; or b. Physical settlement (settlement by delivery of underlying stock) for both stock options and stock futures; or c. Cash settlement for stock options and physical settlement for stock futures; or d. Physical settlement for stock options and cash settlement for stock futures. A Stock Exchange may introduce physical settlement in a phased manner. On introduction, however, physical settlement for all stock options and/or all stock futures, as the case may be, must be completed within six months. The settlement mechanism shall be decided by the Stock Exchanges in consultation with the Depositories. On expiry / exercise of physically settled stock derivatives, the risk management framework (i.e., margins and default) of the cash segment shall be applicable. Settlements of cash and equity der .....

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..... Single Stock Futures, the initial margin would be computed as the worst scenario loss of a portfolio comprising of all the positions of a client in all the futures and options contracts. For Single Stock Futures, the price scan range would be 3.5 Standard Deviation (3.5 sigma) and in no case the initial margin for Single Stock Futures contract shall be less than 7.5% of the value of the Single Stock Futures contract. The SPAN margining system, which has been adopted by both BSE NSE, does not have the provision to provide for charging a minimum margin of 7.5% for futures contracts. However, in order to achieve the requirement of minimum margin for the Single Stock Futures contract, the price scan range would be adjusted so as to ensure that the initial margin for Single Stock Futures contracts does not fall below 7.5% in any scenario. The standard deviation would be calculated as per the methodology specified in the index futures. The Initial Margin requirement shall continue to be netted at level of individual client and shall be calculated on a gross basis at the level of Trading/Clearing Member. The Initial margin requirement for the proprietary position of Trading/Clearing .....

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..... e 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 windows spread through the day. The impact cost shall be the p .....

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..... 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 client/TMs as a .....

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..... e readable, open format (preferably XML format). Further, the Exchange shall check on a monthly basis, whether a stock has remained subject to the ban on new position for a significant part of the month consistently for three months. If so, then the Exchange shall phase out derivative contracts on that underlying. 3.3.2.2 Customer Level/ NRI/Sub Accounts The gross open position across all derivative contracts on a particular underlying stock should not exceed the higher of: 1% of the free float market capitalization (in terms of number of shares). or 5% of the open interest in the derivative contracts on a particular underlying stock (in terms of number of contracts). a. These position limits would be applicable on the combined position in all derivative contracts on an underlying stock at an exchange. b. This requirement may not be monitored by the exchange on a real time basis, but if during any investigation or otherwise, any violation is proved, penalties can be levied. 3.3.2.3 Trading Member/FII/Mutual Fund For stocks having applicable market-wise position limit (MWPL) of ₹ 500 crores or more, the combined futures and options position li .....

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..... 2. Underlying giving details of the calculations mentioned above and ensuring that the stock fulfills the eligibility criterion specified. 3. Lot Size / Multiplier 4. Strike Price Intervals 5. Premium Quotation 6. Last Trading Day 7. Expiration day/month 8. Exercise Style 9. Mode of Assignment 10. Time period of settlement of Option Exercise 11. Position and Exercise Limits 12. Margin 13. Trading Hours b. the economic purpose it is intended to serve, c. likely contribution to market development, d. the safeguards and the risk protection mechanism adopted by the exchange to ensure market integrity, protection of investors and smooth and orderly trading, e. the infrastructure of the exchange and the surveillance system to effectively monitor trading in such contracts, and f. details of settlement procedures systems with regard to Stock Options. g. details of back testing of the margin calculation for a period of one year considering a call and a put option on the underlying with a delta of +25 -25 and actual price of the underlying security. 4.2 Risk Management 4.2.1 Initial Margin Computation: The Initial Margin .....

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..... d Disclosures 4.3.1 Unique client code Same as that for index future contracts as specified in Section 1.3.1. 4.3.2 Position Limits 4.3.2.1 Market Level Same as that for stock future contracts as specified in 3.3.2.1. 4.3.2.2 Customer Level/ NRI/Sub Accounts Same as that for stock future contracts as specified in 3.3.2.2. 4.3.2.3 Trading Member/FII/Mutual Fund Same as that for stock future contracts as specified in 3.3.2.2. 4.3.3 Monitoring of Position Limits 4.3.3.1 NRI Same as that for index future contracts as specified in section 1.3.3.1. 4.3.3.2 FII /Sub Accounts Same as that for index future contracts as specified in section 1.3.3.2. 4.3.3.3 Mutual Funds Same as that for index future contracts as specified in section 1.3.3.3. 4.3.4 Surveillance System Same as that for index future contracts as specified in section 1.3.4. 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 .....

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..... Second Schedule to the Reserve Bank of India Act, 1934, and specifically authorized by RBI for this purpose, a. is eligible to become Clearing Member and/or Trading Member of the Currency Derivatives Segment of an Exchange, on the recommendation of the governing body of the Exchange. b. such bank can act as member for their proprietary dealings, to act on their own account, in the Currency Derivatives Segment of the Exchange. c. such bank can also act as member or an agent for any other person, client or customer in the Currency Derivatives Segment of an Exchange. d. such bank shall abide by circulars and directions issued by RBI and SEBI in respect of dealing of such banks in the Exchange. 5.2 Risk Management Measures In exchange traded derivative contracts, the Clearing Corporation acts as a central counterparty to all trades and performs full novation. The risk to the clearing corporation can only be taken care of through a stringent margining framework. Also, since derivatives are leveraged instruments, margins also act as a cost and discourage excessive speculation. A robust risk management system should therefore, not only impose margins on the members o .....

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..... ring the time period t. The formula would be as under: ( t ) 2 = ( t-1 ) 2 + (1 - ) (r t ) 2 where is a parameter which determines how rapidly volatility estimates changes. The value of is fixed at 0.94. i. (sigma) means the standard deviation of daily returns in the currency futures market. ii. The return is defined as the logarithmic return: r t = ln(C t /C t-1 ) where Ct is the Currency futures price at time t. The plus/minus 3.5 sigma limits for a 99% VAR based on logarithmic returns would have to be converted into percentage price changes by reversing the logarithmic transformation. The percentage margin on short positions would be equal to 100(exp (3.5 t )-1) and the percentage margin on long positions would be equal to 100(1-exp (-3.5 t )). 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 mar .....

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..... f ₹ 600 for a spread of 1 month; ₹ 1000 for a spread of 2 months and ₹ 1500 for a spread of 3 months or more for the Japanese Yen Indian Rupee (JPY-INR) contract. The benefit for a calendar spread would continue till expiry of the near month contract. For a calendar spread position, the extreme loss margin shall be charged on one third of the mark to market value of the far month contract. 5.2.6 Extreme Loss margin Extreme loss margin of 1% for the US Dollar Indian Rupee (US$-INR) contract, 0.3% for the Euro-Indian Rupee (EUR-INR) contract, 0.5% for the Pound Sterling Indian Rupee (GBP-INR) contract and 0.7% for the Japanese Yen Indian Rupee (JPY-INR) contract on the mark to market value of the gross open positions shall be deducted from the liquid assets of the clearing member on an on line, real time basis. 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 sha .....

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..... i At the time of opening a position, the member should indicate whether it is a client or proprietary position. ii Margins across the various clients of a member should be collected on a gross basis and should not be netted off. iii When a position is closed, the member should indicate whether it was a client or his own position which is being closed. iv In the case of default, the margins paid on the proprietary position would only be used by the Clearing Corporation for realising its dues from the member. 5.2.12 Periodic risk evaluation report The Clearing Corporation of the Exchange shall on an ongoing basis and atleast once in every six months, conduct back testing of the margins collected vis- -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 cod .....

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..... ositions and should submit detailed information pertaining to their trading activities whenever the information is sought by the exchange. The clearing member would be accountable for positions of all trading members and clients of trading members clearing through him. Similarly, the trading member would be accountable for the positions of his clients. The exchange may also call for information directly from the client itself. The following position limits would be applicable in the currency futures market: US Dollar Indian Rupee (US$-INR) Contract Client Level : The gross open positions of the client across all contracts should not exceed 6% of the total open interest or 10 million USD whichever is higher. The Exchange will disseminate alerts whenever the gross open position of the client exceeds 3% of the total open interest at the end of the previous day s trade. Trading Member level : The gross open positions of the trading member across all contracts should not exceed 15% of the total open interest or 50 million USD whichever is higher. However, the gross open position of a Trading Member, which is a bank, across all contracts, shall not exceed 15% of the tot .....

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..... ract Client Level : The gross open positions of the client across all contracts shall not exceed 6% of the total open interest or JPY 200 million whichever is higher. The Exchange will disseminate alerts whenever the gross open position of the client exceeds 3% of the total open interest at the end of the previous day s trade. Trading Member Level : The gross open positions of the trading member across all contracts shall not exceed 15% of the total open interest or JPY 1000 million whichever is higher. However, the gross open position of a Trading Member, which is a bank, across all contracts, shall not exceed 15% of the total open interest or JPY 2000 million, whichever is higher. Clearing Member Level : No separate position limit is prescribed at the level of clearing member. However, the clearing member shall ensure that his own trading position and the positions of each trading member clearing through him is within the limits specified above. 5.3.3 Surveillance system The surveillance systems of the exchanges should be designed keeping in view all the relevant aspects including the following - a. The alerts in the online surveillance system should autom .....

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..... tudy surveillance practices in various Global Forex Derivative Markets. Surveillance practices in commodities and bullion markets could also be studied where appropriate. Case studies on some market manipulations in various derivatives markets could be looked at to see what lessons could be drawn. Periodical benchmarking, at least once in every six months, against international practices, systems performance etc., must be performed and documented. The reporting of currency derivative transactions to the media and the newspapers should be in a uniform format. Accordingly, the Currency Derivative Exchanges/ Segments and their Clearing Corporations may be asked to report the following details for the transactions in derivative contracts, to the media/newspapers, on a daily basis: a. Contracts Description b. Number of contracts traded c. Notional Value d. Open e. High f. Low g. Close h. Open Interest (in number of contracts) 5.4 Eligibility Criteria of the Segment, Exchanges and Trading Members 5.4.1 Eligibility criteria of currency futures segment Recognized stock exchanges and their respective Clearing Corporations/Clearing Houses shall not dea .....

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..... s segment should have a separate Governing Council on which the representation of Trading/Clearing Members of the currency futures segment should not exceed 25%. Further, 50% of the public representatives on the Governing Council of the currency futures segment can be common with the Governing Council of the cash/equity derivatives segments of the Exchange. d. The Chairman of the Governing Council of the currency futures segment shall be a member of the Governing Council. If the Chairman is a Trading Member/Clearing Member, then he shall not carry on any trading/clearing business on any Exchange during his tenure as Chairman. e. No trading/clearing member should be allowed simultaneously to be on the Governing Council of the currency futures segment and the cash/equity derivatives segment. 5.4.2 Eligibility criteria for the Clearing Corporation of the currency futures segment A Clearing Corporation in the currency futures segment can function only after obtaining SEBI 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 distin .....

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..... orth of ₹ 5 crore. The definition of balance sheet net worth would be the same as that in the equity derivatives market. The clearing member would also be subject to a liquid net worth requirement of ₹ 50 lakhs as detailed above. The trading members and sales persons in the currency futures market must have passed a certification programme which is considered adequate by SEBI. The approved users and sales personnel of the trading member should have passed the certification programme. This requirement shall not be applicable in respect of a trading member in the currency derivatives segment, which is a bank, for a period of one year from August 06, 2008. 5.4.4 Regulatory and legal aspects Before the start of the currency futures segment, the exchange shall obtain prior approval of SEBI. In the case of existing exchanges, where equity derivatives are permitted for trading, the rules, regulations and bye-laws of the derivatives segment of the exchange/clearing corporation may be made applicable for the currency futures segment also. The exchange/clearing corporation shall make suitable changes to that effect. Any requirement which is specific to the currency fut .....

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..... 1.8. 6.1.9 Final settlement day Same as that for currency future contracts as specified in Section 5.1.9. 6.1.10 Participants Same as that for currency future contracts as specified in Section 5.1.10. 6.1.11 Exercise at Expiry On expiry date, all open long in-the-money contracts, on a particular strike of a series, at the close of trading hours would be automatically exercised at the final settlement price and assigned on a random basis to the open short positions of the same strike and series. 6.2 Risk Management Measures In exchange traded derivative contracts, the Clearing Corporation acts as a central counterparty to all trades and performs full novation. The risk to the clearing corporation can only be taken care of through a stringent margining framework. Also, since derivatives are leveraged instruments, margins also act as a cost and discourage excessive speculation. A robust risk management system should therefore, not only impose margins on the members of the clearing corporation but also enforce collection of margins from the clients. 6.2.1 Initial Margin The Initial Margin requirement would be based on a worst scenario loss of a p .....

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..... returns of USD-INR futures price. For the purpose of calculation of option values, the following standard option pricing models - Black-Scholes, Binomial, Merton - would be used. The initial margin would be deducted from the liquid networth of the clearing member on an online, real time basis. 6.2.2 Portfolio based margining A portfolio based margining approach shall be adopted to take an integrated view of the risk involved in the portfolio of each individual client comprising his positions in options and futures contracts across different maturities. The client-wise margins would be grossed across various clients at the Trading/Clearing Member level. The proprietary positions of the Trading/Clearing Member would be treated as that of a client. 6.2.3 Real time computation Same as that for currency future contracts as specified in Section 5.2.4. 6.2.4 Calendar spread margins A long currency option position at one maturity and a short option position at a different maturity in the same series, both having the same strike price would be treated as a calendar spread. The margin for options calendar spread would be the same as specified for USD-INR currenc .....

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..... e as that for currency future contracts as specified in Section 5.3.2 The following position limits would be applicable in the currency options market: Client Level : The gross open positions of the client across all contracts (both futures and options contracts) shall not exceed 6% of the total open interest or USD 10 million whichever is higher. The Exchange will disseminate alerts whenever the gross open position of the client exceeds 3% of the total open interest at the end of the previous day s trade. Trading Member Level : The gross open positions of the trading member across all contracts (both futures and options contracts) shall not exceed 15% of the total open interest or USD 50 million whichever is higher. Bank : The gross open positions of the bank across all contracts (both futures and options contracts) shall not exceed 15% of the total open interest or USD 100 million whichever is 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 ab .....

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..... sing price = Weighted Average price of the futures for last half an hour). In the absence of last half an hour trading the theoretical price, to be determined by the exchanges, would be considered as Daily Settlement Price. The daily settlement price (DSP) shall be determined in the following manner: Step 1: The DSP is the volume weighted average price (VWAP) of the trades in the last 30 minute of trading, provided there are at least 5 trades for a minimum aggregate notional value of ₹ 10 crore. Failing which, trades during the last 60 minutes shall be used for the calculation of VWAP, subject to at least 5 trades for ₹ 10 crore. Failing which trades during the last 120 minutes shall be used for the calculation of VWAP, subject to at least 5 trades for ₹ 10 crore. Step 2: If the DSP cannot be calculated as above, a theoretical price shall be used. This theoretical price shall be the minimum of the theoretical futures prices of all the securities in the delivery basket chosen by the Exchange. The theoretical futures price of each security is the weighted average cash price of outright trades of that security during the day on the NDS Order Matching platform, .....

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..... the market participants the composition of the basket of deliverable grade securities and the associated conversion factors for each of the quarterly contracts. To the basket of deliverable grade securities disclosed upfront by the Exchange for each of the quarterly contracts, additions, if any, shall be made not later than 10 business days before the first business day of the delivery month. 7.1.12 Conversion Factor The Conversion Factor for deliverable grade security would be equal to the price of the deliverable security (per rupee of the principal), on the first day (calendar day) of the delivery month, to yield 7% with semiannual compounding. For deliveries into 10-Year Notional Coupon-bearing GoI security futures, the deliverable security s remaining term to maturity shall be calculated in complete three-month quarters, always rounded down to the nearest quarter. If, after rounding, the deliverable security lasts for an exact number of 6-month periods, the first coupon shall be assumed to be paid after 6 months. If, after rounding, the deliverable security does not last for an exact number of 6-month periods (i.e. there are an extra 3 months), the first coupon wou .....

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..... issue is not permissible). However, a selling CM making delivery for more than one futures contract, say two contracts, may deliver two deliverable securities for two different contracts (Rs.2,00,000 face value of one issue for one contract and ₹ 2,00,000 face value of another issue for the other contract). T + 2 day On the second business day following the receipt of the delivery notice, the CMs shall discharge their obligations and the CC shall complete the settlement accordingly. 7.1.15 Last Trading Day Exchange to set any day of the delivery month as last trading day. 7.1.16 Last Delivery Day Last business day of the delivery month. 7.1.17 Initial Margin Initial Margin requirement shall be based on a worst case loss of a portfolio of an individual client across various scenarios of price changes. The various scenarios of price changes would be so computed so as to cover a more than 99% VaR over a one day horizon. In order to achieve this, the price scan range may initially be fixed at 3.5 standard deviation One tailed standard normal variate corresponding to 99 % confidence interval is 2.33. However, simulation on the historical data show .....

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..... ntly being used in the equity derivatives market), the Committee, after considering the various aspects of the different models, decided that EWMA method would be used to obtain the volatility estimate every day fixing the price scan range at 3.5 standard deviation. During the first time-period on the first day of trading in 10-year Notional Coupon-bearing GoI security futures, the sigma would be equal to 0.8 %. 7.1.21 Formula for Determining Standard Deviation The EWMA method would be used to obtain the volatility estimate every day. The estimate at the end of time period t ( yt ) is arrived at using the volatility estimate at the end of the previous time period i.e. as at the end of t-1 time period ( yt-1 ), and the return (r yt ) observed in the futures market during the time period t. The formula would be as under: ( yt ) 2 = ( yt-1 ) 2 + (1 - ) (r yt ) 2 Where (lambda) is a parameter which determines how rapidly volatility estimates changes. The value of is fixed at 0.94. i. yt (sigma) is the standard deviation of daily logarithmic returns of yield of 10-year Notional Coupon-bearing GoI security futures at time t. ii. The return is def .....

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..... on-bearing GoI security futures z = One-tailed standard normal variate (value 3.5 as mentioned in footnote 5) Thus, the percentage margin on long positions would be equal to and the percentage margin on short positions would be equal to Alternatively, the exchanges can adopt uniform margins for both short and long positions, equivalent to the higher of the two values derived above. An illustration of the two methodologies discussed above is enclosed at Annex A. iii. The volatility estimation and margin fixation methodology should be clearly made known to all market participants so that they can compute the margin for any given closing level of the interest rate futures price. Further, the trading software itself should provide this information on a real time basis on the trading workstation screen. 7.1.22 Position Limits i. Client level : The gross open positions of the client across all contracts should not exceed 6% of the total open interest or ₹ 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. .....

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..... exchanges shall update the scenario contract values at least 6 times in the day, which may be carried out by taking the closing price of the previous day at the start of trading and the prices at 11:00 a.m., 12:30 p.m., 2:00 p.m., 3.30 p.m. and at the end of the trading session. The latest available scenario contract values would be applied to member/client portfolios on a real time basis. 7.2.4 Liquid Networth The initial margin and the extreme loss margin shall be deducted from the liquid assets of the clearing member. The clearing member s liquid net worth after adjusting for the initial margin and extreme loss margin requirements must be at least ₹ 50 Lakhs at all points in time. The minimum liquid networth shall be treated as a capital cushion for days of unforeseen market volatility. 7.2.5 Liquid Assets The liquid assets for trading in Interest Rate Futures would have to be provided separately and maintained with the Clearing Corporation. However, the permissible liquid assets, the applicable haircuts and minimum cash equivalent norms would be mutatis mutandis applicable from the equity/currency derivatives segment. 7.2.6 Mark-to-Market (MTM) Settl .....

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..... aring Corporation for realizing its dues from the member. 7.2.9 Periodic Risk Evaluation Report The Clearing Corporation of the Exchange shall on an ongoing basis and atleast once in every six months, conduct back testing of the margins collected vis- -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. 7.3 Regulatory and Legal aspects 7.3.1 Exchange: The Interest Rate Derivative contracts shall be traded on the Currency Derivative Segment of a recognized Stock Exchange. The members registered by SEBI for trading in Currency/Equity Derivative Segment shall be eligible to trade in Interest Rate Derivatives also, subject to meeting the Balance Sheet networth requirement of ₹ 1 crore for a trading member and ₹ 10 crores for a clearing member. Before the start of trading, the Exchange shall submit the proposal for approval of the contract to SEBI giving: i. The details of the proposed interest rate futures contract to be traded in the exchange; ii. The economic purposes it is intended to serve; iii. Its likely contribution to market development; .....

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..... o deliver the securities T+2 day : Buying CM pays-in funds and the selling CM fails to deliver the securities T+2 or T+3 day : CC shall conduct buy-in auction of the securities. In case of successful auction, the defaulting CM shall be debited by: the actual auction price, difference in invoice price and auction price, if the auction price is less than the invoice price, and a penalty of 2% of the face value of security short delivered. In case of unsuccessful auction, transaction shall be closed out wherein the defaulting CM shall be debited by: invoice price, and a penalty of 5% of the face value of security short delivered. In respect of the seller in an auction failing to honour the auction obligations, he shall be debited by: invoice price, and a penalty of 3% of the face value of security short delivered These penalties shall be passed on to the buying CM, who shall pass it on to the buying client. 7.4.3.2 Buying CM fails to pay-in funds T +0 day : Selling CM gives intention to deliver the securities T+2 day : Selling CM delivers securities and the buying CM fails to pay-in funds. The CC shall pay-out funds to the selli .....

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..... l be activated. The auction shall take place one business day prior to the last delivery date. 8 INTEREST RATE FUTURES ON 91-DAY GOVERNMENT OF INDIA (GOI) TREASURY-BILL (T-BILL) 8.1 Product Design, Margins and Position Limits 8.1.1 Underlying 91 - day GoI T-bill. 8.1.2 Trading hours 9 a.m. to 5 p.m. 8.1.3 Size of the contract ₹ 2 lakh. 8.1.4 Quotation 100 minus futures discount yield (i.e. for a yield of 5% the quote would be 100-5=95). The value of 1 basis point change in the futures discount yield would be ₹ 5. 8.1.5 Tenor of the contract The maximum maturity of the contract would be 12 months. 8.1.6 Contract months Three serial monthly contracts followed by three quarterly contracts of the cycle March/June/September/December. 8.1.7 Settlement mechanism The 91-day T-Bill future would be settled in cash in Indian Rupees. 8.1.8 Contract value ₹ 2000 * (100 0.25 * y) where y is the futures discount yield. For example, for a futures discount yield of 5%, the contract value would be 2000 * (100 0.25*5) = ₹ 197,500 8.1.9 Daily Contract Settlement value ₹ 2000 * .....

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..... rgin shall be 0.01% of the notional value of the far month contract. 8.1.15 Formula for determining standard deviation The exponential moving average method would be used to obtain the volatility estimate every day. The estimate at the end of time period t ( ydt ) is estimated using the volatility estimate at the end of the previous time period. i.e. as at the end of t-1 time period ( ydt-1 ), and the return (r ydt ) observed in the futures market during the time period t. The formula would be as under: ( ydt ) 2 = ( ydt-1 ) 2 + (1 - ) (r ydt ) 2 where is a parameter which determines how rapidly volatility estimates change. The value of is fixed at 0.94. v. ydt (sigma) means the standard deviation of daily logarithmic returns of discount yield of 91-day T-Bill futures at time t. vi. The return is defined as the logarithmic return: r ydt = ln(Y dt /Y dt-1 ) where Y dt is the discount yield of 91-day T-Bill futures at time t. The plus/minus 3.5 sigma limits for a 99% VAR based on logarithmic returns on discount yield of 91-day T-Bill futures would have to be converted into price changes through the following formula : pt =D* ydt * .....

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..... Interest Rate Futures, at any point in time. 8.2 Regulatory and Legal aspects 8.2.1 Exchange The Interest Rate Futures on 91-day T-Bill shall be traded on the Currency Derivative Segment of a recognized Stock Exchange. Eligible Stock Exchanges may introduce these contracts after obtaining prior approval from SEBI. 9 INTEREST RATE FUTURES ON 2 YEAR NOTIONAL COUPON BEARING GOVERNMENT OF INDIA (GOI) SECURITY 9.1 Product Design, Margins and Position Limits 9.1.1 Underlying Notional coupon bearing 2-year GoI security with a notional coupon of 7% paid semi-annually and face value of ₹ 100. 9.1.2 Trading hours The trading hours would be from 9 a.m. to 5.00 p.m. 9.1.3 Size of the contract ₹ 2 lakh. 9.1.4 Quotation The quotation would be similar to the quoted price of the GoI security. 9.1.5 Tenor of the contract The maximum maturity of the contract would be 12 months. 9.1.6 Contract months To begin with, three serial monthly contracts can be introduced. 9.1.7 Settlement mechanism The futures on notional GoI security would be settled in cash in Indian Rupees. The settlement price of the notional bond .....

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..... ed from the liquid assets of the clearing member on an on line, real time basis. 9.1.14 Calendar spread margin 2 Year Notional Coupon Bearing Government of India (GoI) Security futures position at one maturity hedged by an offsetting 2 Year Notional Coupon Bearing Government of India (GoI) Security futures position at a different maturity would be treated as a calendar spread. The calendar spread margin shall be at a value of ₹ 300 for spread of one month and ₹ 450 for spread of two months. The benefit for a calendar spread would continue till expiry of the near month contract. 9.1.15 Formula for determining standard deviation The exponential moving average method would be used to obtain the volatility estimate every day. The estimate of volatility ( t ) for the time period t is estimated using the volatility estimate ( t-1 ) for the previous time period and the return (r t-1 ) observed in the futures market during the previous time period. The formula would be as under: ( t ) 2 = ( t-1 ) 2 + (1 - ) (r t-1 ) 2 where is a parameter which determines how rapidly volatility estimates change. The value of is fixed at 0.94. ix. t .....

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..... position in cash and Interest Rate Futures markets taken together should not exceed their individual permissible limit for investment in government securities and the total gross short (sold) position, for the purpose of hedging only, should not exceed their long position in the government securities and in Interest Rate Futures, at any point in time. 9.1.17 Settlement Mechanism a. Polling shall be carried out by the Fixed Income, Money Market and Derivatives Association, i.e., FIMMDA; b. The yields (Bid and Ask) of the GoI securities shall be polled from Primary Dealers (PDs) registered with the Reserve Bank of India; c. Each poll shall involve ten PDs who would be selected at random from the universe of PDs; d. Polling would be conducted at three instances, i.e., 11.00 am, 11.30 am and 12.00 pm daily; e. At each instance of polling, for each bond, out of the ten buy yields, two highest and two lowest yields would be treated as outliers and would be ignored. Similarly outliers from ten sell yields would be identified and ignored. f. After rejecting the outliers in above step, there will be [6 * 2 * 3 * Number of Bonds in Basket] number of remaining yields. .....

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..... 500 (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) .....

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..... 6.0600 6.0400 Dealer 5 (5.9800) 5.9600 (6.0225) 6.0025 (6.0625) 6.0425 Dealer 6 5.9750 (5.9550) 6.0200 6.0000 6.0600 (6.0400) Dealer 7 (5.9800) 5.9600 6.0200 (6.0000) 6.0600 (6.0400) Dealer 8 5.9800 5.9600 (6.0250) 6.0050 6.0625 6.0425 Dealer 9 5.9750 5.9650 (6.0150) 6.0050 (6.0550) 6.0450 Dealer 10 (5.9750) 5.9650 (6.0150) 6.0050 (6.0575) 6.0475 () : Outlier yields, which are two highest and two lowest values o .....

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..... on 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 * P f where P f 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 scenarios of price changes. The various scenarios of price changes would be so computed so as to cover a 99% VaR over a one day horizon. In order to achieve this, the price scan range may initially be fixed at 3.5 standard deviation. The initial margin so computed would be subject to a minimum of 0.7 % of the notional value of the contract on the first day of trading in Futures on 5 Year Notional Coupon Bearing GoI Security and 0.6 % of the notional value of the contract thereafter. The .....

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..... ompute 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 interest at the end of the previous day s trade. 10.1.16.2 Trading Member Level The gross open positions of the trading member across all contracts should not exceed 15% of the total open interest or ₹ 1000 crores whichever is higher. 10.1.16.3 Clearing Member Level No separate position limit is prescribed at the level of clearing member. However, the clearing member shall ensure that his own trading position and the positions of each trading member clearing through him is within the lim .....

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..... 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 .....

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..... 6.0050 6.0600 6.0400 Dealer 10 (5.9700) 5.9600 (6.0050) (5.9950) (6.0500) 6.0400 12:00 PM Bond 1 Bond 2 Bond 3 Dealer Buy Yields Sell Yields Buy Yields Sell Yields Buy Yields Sell Yields Dealer 1 5.9750 (5.9650) 6.0200 (6.0100) (6.0650) (6.0550) Dealer 2 5.9750 5.9600 6.0175 6.0025 6.0575 6.0450 Dealer 3 5.9750 (5.9650) 6.0175 (6.0075) 6.0575 (6.0475) Dealer 4 (5.9700) (5. .....

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..... Chicago Board Options Exchange (CBOE) 3. CME Group 4. ICE Futures U.S. 5. International Securities Exchange (ISE) 6. MexDer 7. Montr al Exchange 8. NASDAQ OMX PHLX Asia Pacific 1. Australian Securities Exchange 2. Bursa Malaysia 3. Hong Kong Exchanges 4. Korea Exchange 5. Osaka Securities Exchange 6. Singapore Exchange 7. TAIFEX 8. Tokyo Stock Exchange Group Europe, Africa, Middle East 1. Borsa Italiana 2. Eurex 3. Johannesburg SE 4. MEFF .....

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..... foreign stock indices and obtain requisite approvals from the concerned regulatory bodies. 11.9 Enforcement Any kind of market demeanor in the market for the derivatives on foreign stock indices shall be subject to the appropriate enforcement actions, as applicable to the market for any securities. 11.10 Trading Trading in derivatives on Foreign Stock Indices shall be restricted to residents in India. 12 MISCELLANEOUS 12.1 Corporate Action Adjustments: Options on common stock trade on both NSE BSE the corporate adjustment for the Option on the same underlying should be uniform across markets. While a uniform adjustment methodology could be adopted for certain corporate action, it would be difficult to specify any uniform policy for all corporate actions at this stage. For this purpose, it has been decided to constitute a group comprising NSE, BSE and other knowledgeable persons, which would decide a uniform course of action for adjusting stock option contracts on corporate actions, taking into account best practices followed internationally, where a uniform criterion cannot be laid down at present. However, certain adjustments for Corporate Actions fo .....

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..... shall be arrived at by multiplying the old strike price by the adjustment factor as under. Market Lot / Multiplier: The new market lot/multiplier shall be arrived at by dividing the old market lot by the adjustment factor as under. The above methodology may result in fractions due to the corporate action e.g. a bonus ratio of 3:7. With a view to minimizing fraction settlements, the following methodology is proposed to be adopted: a. Compute value of the position before adjustment b. Compute value of the position taking into account the exact adjustment factor c. Carry out rounding off for the Strike Price and Market Lot d. Compute value of the position based on the revised strike price and market lot The difference between a and d above, if any, shall be decided in the manner laid down by the group by adjusting Strike Price or Market Lot, so that no forced closure of open position is mandated. Dividends which are below 10% of the market value of the underlying stock would be deemed to be ordinary dividends and no adjustment in the Strike Price would be made for ordinary dividends. For extra-ordinary dividends, above 10% of the market value of the underlying .....

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..... rules for entry and exit of stocks in terms of eligibility requirements would apply. If these tests are not met, the exchange shall not permit further derivative contracts on this stock and future month series shall not be introduced. The Exchanges shall determine the manner of adjustment in derivative contracts at the time of corporate actions in conformity with the following principles:- a. The basis for any adjustment for corporate action shall be such that the value of the position of the market participants on cum and ex-date for corporate action shall continue to remain the same as far as possible. b. The exchanges shall take into account best practices followed internationally. c. The Exchanges shall consider the circumstances of a particular case and the general interest of investors in the market. d. The Exchanges shall ensure that the adjustment methodology for a corporate action is uniform across all exchanges. 12.2 Governance The Guidelines for appointment of the Governing Board of Derivative Exchange/Segment (which shall include Governing Council/Executive Committee), Clearing Council (which shall include the Clearing Council/Executive Committee .....

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..... ack office and General Ledger. In other words, STP allows electronic capturing and processing of transactions in one pass from the point of order origination to final settlement. STP thus streamlines the process of trade execution and settlement and avoids manual entry and re-entry of the details of the same trade by different market intermediaries and participants. Usage of STP enables orders to be processed, confirmed, settled in a shorter time period and in a more cost effective manner with fewer errors. Apart from compressing the clearing and settlement time, STP also provides a flexible, cost effective infrastructure, which enables e-business expansion through online processing and access to enterprise data. To resolve the issue of inter-operability between the STP Service Providers, a STP Centralised Hub would be setup in consultation with the stock exchanges and the STP Service Providers. Currently this STP Centralised Hub has been setup and made operational by NSE. NSE has obtained the necessary approvals from Department of Telecommunications (DoT) as an Internet Service Provider (ISP). Subsequently this STP Centralised Hub would be further developed jointly with BSE. .....

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..... face with the STP centralized hub would be through this utility / client software. The PKI (Public key infrastructure) system for the interface shall be implemented at a later stage. The block diagram of the entire STP System is enclosed in Annexure II. SEBI in order to regulate the STP service has issued the SEBI (STP centralised hub and STP service providers) Guidelines, 2004 (herein referred to as STP Guidelines ) which also prescribes the model agreement between the STP centralised hub and the STP service providers. The STP guidelines prescribes the eligibility criteria and conditions of approval for the STP centralised hub and the STP service providers, obligations and responsibilities of the STP centralized hub and the STP service providers and code of conduct for the STP service providers. The STP centralised hub and the STP service providers shall abide by these Guidelines. The guidelines are given as Annexure III. To prescribe contractual obligations between the STP centralised hub and the STP service providers and to facilitate standardisation of service, a model agreement between the STP centralised hub and the STP service providers has also been prescribed .....

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..... essary to provide for necessary fields in the appropriate messaging standards. After deliberation with the STP centralised hub and the STP service providers, it has been decided to make the following modifications in the prescribed messaging formats: a. Message Types that shall be modified are IFN515, IFN540, IFN541, IFN542 and IFN543 b. A Qualifier shall be used to identify Securities Transaction Tax Amount: COUN , Country, National Federal Tax. c. The change in the ISO Structure for the impacted message types shall be as follows: M 16R AMT Start of block M 19A Amount :4!c//3!a11d To identify the Securities Transaction Tax Amount Format: (Qualifier) //(Currency Code) (Amount) For: Securities Transaction tax Amount Qualifier: COUN (4 Upper case Characters) Narrative: INR (3 Upper Letters) Amount: Up to 10 digits (only Integer value allowed) followed by a comma (used as decimal sign) . Comma is mandatory. Amount can be zero or greater than zero. M .....

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..... Document and obtain a copy of the same duly signed by the client. The model formats of the Client Application Form, Client Agreement, Clearing Member - Trading Member Agreement and the Risk Disclosure Document are given as Annexure VI. The given format stipulates the mandatory clauses to be incorporated in the respective documents. These clauses should be part of these documents, however, exchanges may prescribe any additional clauses over and above these as considered necessary by them. 12.7 Introduction of Volatility and Bond Index 12.7.1 Volatility Index Exchanges shall construct a Volatility Index and disseminate the same. The Exchanges are free to decide whether they want to adopt any of the Volatility Index computation models available globally or may like to develop their own model for computation of Volatility Index. The detailed methodology for computing the Volatility Index shall be disseminated by the Exchange for the benefit of the market participants and investors. 12.7.2 Derivatives on Volatility Index Stock Exchanges are permitted to introduce derivative contracts on Volatility Index, subject to the conditions that: The underlying Volatility .....

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..... nge wishes to allow trading members to modify client codes of non-institutional trades, it shall: a. Set up a mechanism to monitor that the trading members modify client codes only to rectify a genuine error. b. Ensure that modification of client codes is covered in the internal audit of trading members prescribed by SEBI through its circular No. MRD/DMSCir-29/2008 dated October 21, 2008. 12.8.2 Penalty Structure i. The Stock Exchanges shall levy a penalty from trading members and credit the same to its Investor Protection Fund as under: a as % of b Penalty as % of a 5 1 5 2 Where, a = Value (turnover) of non-institutional trades where client codes have been modified by a trading member in a segment during a month. b = Value (turnover) of non-institutional trades of the trading member in the segment during the month. ii. The Stock Exchange shall conduct a special inspection of the trading member to ascertain whether the modifications of client codes are being carried out only to rectify genuine errors as mentioned abo .....

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..... of 1% or more in the USD-INR currency pair (close to close settlement price of the near month currency futures) on a given day then the penalty for short collection shall be imposed only if shortfall continues to T+2 day. The currency pair being considered for this movement would be only the USD-INR and the condition of two days of continued shortfall shall be applicable for all currencies. e. All instances of non-reporting shall amount to 100% short collection and the penalty as applicable shall be charged on these instances in respect of short collection. f. If during inspection it is found that a member has reported falsely the margin collected from clients, the member shall be penalized 100% of the falsely reported amount along with suspension of trading for 1 day in that segment. g. The penalty shall be collected by the Stock Exchange within five days of the last working day of the trading month and credited to its Investor Protection Fund. h. The margin statement which is forwarded on a daily basis by the broker to the clients shall include a column stating the margin charged by the Exchange/Clearing Corporation. i. When penalty is being collected by a broker .....

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..... eyond the period of LES of the former stock Exchange. 5. The incentives under LES shall be transparent and measurable. These may take either of the two forms: a. Discount in fees, adjustment in fees in other segments, cash payment; b. Shares, including options and warrants, of the Stock Exchange. 6. If a Stock Exchange chooses the form specified in Para 5a above, the incentives under all LES, during a financial year, shall not exceed 25% of the net profits or 25% of the free reserves of the Stock Exchange, whichever is higher, as per the audited financial statements of the preceding financial year. If, however, a Stock Exchange chooses the form specified in Para 5b above, the shares, including the shares that may accrue on exercise of warrants or options, given as incentives under all LES, during a financial year, shall not exceed 25% of the issued and outstanding shares of the Stock Exchange as on the last day of the preceding financial year. 7. The Stock Exchange shall submit half-yearly reports on the working of its LES for review of SEBI. Implementation of LES shall be covered in the inspection of the Stock Exchange conducted by SEBI. 13 ANNEXURES 13 .....

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..... iii. Not less than 60% of the members on the Governing Board of the Derivative Exchange/Segment shall be public representative, Board nominees or any other person appointed with the approval of the Board. Provided that not more than 50% of such members shall be common with the Governing Board / Executive Committee of the underlying securities exchange. Further, such members shall be from amongst the persons of integrity having necessary professional competence and experience in the areas related to securities / derivatives markets. iv. One-third of the elected members under clause 1(i) shall retire at each annual general meeting and shall be eligible to offer themselves for re-election. Provided, that where a person has been a member elected for two consecutive terms on the governing board of the derivatives exchange / segment, he shall not offer himself for re-election for a further period of two years. v. The Executive Director or the Managing Director of the Exchange shall assume all responsibility for the duties specified for CEO. vi. The members appointed under clause (iii) above shall not be subject to retirement by rotation and shall hold office at the pleasure o .....

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..... ng given an opportunity of being heard against such termination. 6) The Rules or Articles of Association, as the case may be, shall provide that not more than forty percent of the trading or clearing members of the derivatives exchange / segment and its clearing house / corporation shall be appointed on the arbitration, disciplinary and default committees. Atleast sixty percent shall be nominated on the said committees from persons other than members of the derivatives exchange / segment and its clearing house / corporation. The appointment of member on the statutory committees shall be with the prior approval of the Board. The Default Committee shall function under the supervision of Clearing Council. 13.2 ANNEXURE II 13.3 ANNEXURE III SECURITIES AND EXCHANGE BOARD OF INDIA (STP CENTRALISED HUB AND STP SERVICE PROVIDERS) GUIDELINES, 2004 1) PRELIMINARY (1) These Guidelines shall be called the Securities and Exchange Board of India (STP Centralised Hub and STP Service Providers) Guidelines, 2004. (2) These Guidelines are being issued under section 11 of the Securities and Exchange Board of India Act, 1992 to promote the development of the securities .....

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..... prescribed from time to time. ii. whether the applicant has adequate infrastructure facilities setup in India like office space, equipment and manpower with adequate experience in dealing in securities market and adequate expertise in providing necessary services and software solutions. 4) OBLIGATIONS AND RESPONSIBILITIES OF STP CENTRALISED HUB (1) The STP centralised hub shall comply with the following:- i. The STP centralised hub shall at all times comply with the requirement of eligibility criteria, specified by SEBI. ii. The STP centralised hub shall abide by all the provisions of the Act, Rules, Regulations, Guidelines, Resolutions, Notifications, Directions, Circular, etc. as may be issued by the Government of India / TRAI / Department of Telecommunications and SEBI from time to time as may be applicable to the STP centralised hub. iii. The STP centralised hub shall obtain such approval/s from such authorities as may be necessary to function as a centralised hub. iv. The STP centralised hub shall obtain a digital signature certificate from a Certifying Authority and shall ensure that such digital signature certificate is valid and in force at all times. .....

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..... provider shall provide the necessary details of the STP users connected with it and all its details to the STP centralised hub for the purpose of creating and maintaining a directory of STP service providers and STP users. iv. The STP service provider shall comply with the minimum specifications specified by the STP centralised hub and as may be mutually agreed upon. v. The STP service provider shall abide by the service standards as may be specified by SEBI and / or the STP centralised hub in consultation with the STP service providers. vi. The STP Service Provider shall obtain a digital signature certificate from a Certifying Authority and submit a copy of the Certificate to the STP centralised hub. vii. The STP Service Provider shall ensure that the digital signature certificate is valid and in force. viii. The STP service providers shall deliver a consistent and secure communication platform and shall establish continuous connectivity with the STP centralised hub to the best of its ability. ix. The STP service provider shall ensure that the message sent to the STP centralised hub is in the prescribed messaging standard. x. The STP service provider shall ve .....

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..... of five years for STP centralised hub and for a period of three years for STP service providers and must be renewed periodically. ii. The STP centralised hub and STP service provider must ensure continuous validity of approval by SEBI in order to function as a STP service provider. iii. The Board shall have the right to suspend / cancel the approval of the STP centralised hub and/or STP service provider in case of violation of the terms of the guidelines. 7) CODE OF CONDUCT FOR STP SERVICE PROVIDERS Every STP service provider shall abide by the Code of Conduct as specified in Schedule I. 8) MODEL AGREEMENT The STP centralised hub shall enter into an agreement with every STP service provider on the lines of the Model Agreement given in Schedule II. SCHEDULE I CODE OF CONDUCT FOR STP SERVICE PROVIDERS (Clause 7 of the Guidelines) a. The STP service provider shall render at all times high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment. b. The STP service provider shall disclose to the clients its possible sources or potential areas of conflict of duties and interest and provide unbi .....

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..... legal heirs, legal representatives and assigns as the case may be) of the Second Part. WHEREAS 1. The Securities and Exchange Board of India has mandated Straight Through Processing (hereinafter referred to as STP ) for facilitating settlement of institutional trades. 2. In terms of the Securities and Exchange Board of India (STP Centralised Hub and STP Service Providers) Guidelines, 2004 an agreement has to be entered into between the STP Centralised Hub and the STP Service Provider. 3. The STP centralised hub has obtained such approval/s as may be necessary to function as a centralised hub. NOW THIS AGREEMENT WITNESSETH AND IT IS HEREBY AGREED BY AND BETWEEN _____________ AND ______________ AS UNDER: A. DEFINITIONS 1. DoT means Department of Telecommunications, India, Government of India and /or its successors. 2. EFFECTIVE DATE: The date on which this Agreement is entered into. 3. EMERGENCY means an emergency of any kind, including any circumstances whatever resulting from major accidents and natural disasters. 4. INTERNET: Internet is a global information system that: is logically linked together by a globally unique address, .....

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..... ware. 6. The STP Service Provider shall not attempt to modify, translate, disassemble, decompile or reverse engineer Centralized the STP Centralized hub client software or create any derivative product based on that software. 7. The STP Service Provider shall have a non-exclusive right to access STP Centralized Hub through the STP Centralized hub client software. This right is not transferable under any circumstances and shall be used by the STP Service Provider itself or by its authorized agent as may be mutually agreed. 8. The STP Service Provider shall not use the infrastructure or the facilities provided by STP centralised hub for any other purpose other than those mentioned in this Agreement. 9. The STP Service Provider shall indemnify STP centralised hub against any damage, loss, expenses, costs etc incurred by it due to negligence (intentional or unintentional) of the STP Service Provider. 10. The STP Service Provider shall ensure that by using the Hub client software provided by STP centralised hub a. No damage will be caused to the STP Centralized hub, and that it does not propagate virus infected information b. It will pass on only relevant informatio .....

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..... the STP service provider against any damage, loss, expenses, costs etc incurred by it due to its negligence (intentional or unintentional). STP centralised hub shall not use the infrastructure or the facilities provided by STP service provider for any other purpose other than those mentioned in this Agreement. 13. Hub client software provided by STP centralised hub will ensure that : a. No damage will be caused to the service providers system. b. It will not propagate virus infected information c. It will pass on only relevant information to be exchanged with the other STP service provider. d. It will not try to probe any other information available on the STP Service Providers setup e. It will not try to modify, translate, disassemble, de-compile or reverse engineer the software to gain access to restricted information or create any derivative product based on STP service provider s system. E. COMPLIANCE WITH LAWS 1. Both the parties represent that they have taken all necessary corporate action to authorise the execution and consummation of this agreement and shall furnish satisfactory evidence of the same upon request to other party. 2. Both the part .....

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..... technical issues. The notice of termination shall specify the termination is at whose instance, the extent to which performance of the agreement is suspended, and the date upon which such suspension becomes effective. F. FORCE MAJEURE If the performance of any obligations by any party as specified in this agreement is prevented, restricted, delayed or interfered by reason of force majeure then notwithstanding anything hereinbefore contained, the party affected shall be excused from its performance to the extent such performance relates to such prevention, restriction, delay or interference and provided the party so affected uses its best efforts to remove such cause of non-performance and when removed the party shall continue performance with utmost urgency. For the purpose of this clause Force Majeure means includes fire, explosion, cyclone, floods, war, revolution, blockage or embargo, any law, order, demands or requirements of any Government or statutory authority, strikes, which are not instigated for the purpose of avoiding obligations herein or anyother circumstances beyond the control of the party affected. G. AMENDMENT TO THE AGREEMENT The rights and obl .....

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..... ny time during its term, be terminated by either party, by a written notice of 90 days to the other party. 5. The provisions contained hereinabove shall not preclude the other party from recourse to any other remedies available to itself by statute or otherwise, at law or in equity. 6. In order to maintain the security and integrity of its infrastructure STP service provider may also suspend the STP hub client software access to its system at any time without notice. I. NOTICE Any notice to be given by one party to the other pursuant to this agreement shall be sent by registered post A.D., speed post or facsimile transmission to the address mentioned below: 1. _________________ (NAME OF THE STP CENTRALISED HUB) ____________________(ADDRESS) 2. __________________________(NAME OF STP SERVICE PROVIDER) ________________________________(ADDRESS) J. WAIVER OF RIGHTS No forbearance, delay or indulgence by any party in enforcing any of the provisions of this agreement shall prejudice or restrict the rights of that party nor shall any waiver of its rights operate as a waiver of any subsequent breach and no rights, powers, remedies herein conferred upon or r .....

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..... lawfully appropriated; 2) is already in the possession of the other party without any breach of this Agreement ; 3) is obtained by the other party from a third party without any breach of this Agreement . 4) is required to be produced before a judicial authority and only where the other party is compelled to do so by such an authority, provided that the said authority ( or individual representing such authority ) has the authority, under the laws in force, to compel such disclosure. Notwithstanding the foregoing, before making any use or disclosure on any of the foregoing exceptions, the Party disclosing such information shall intimate the Other Party as soon as practicable the applicable exceptions (s) and circumstances giving rise thereto. 13.3.1 ANNEXURE III(A) STP centralised hub shall charge a fee of Rs. -----------------. The fees shall be charged to the sending service provider. The billing shall be on a -------------------- basis. One message shall mean and include the following One ISO message sent by a service provider to the STP centralised hub Acknowledgement message sent by the STP centralised hub to the Sending service provider The .....

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..... ier)//(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 should contain DUMMY Format: (Qualifier) //(Reference) Qualifier: PREV (4 Uppercase Characters) Reference: The reference no. as given in field SEME of the earlier contract note that is be .....

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..... nt must contain atleast one digit. M 94B Place :4!c//4!c/30x To identify the exchange Format:(Qualifier)/ /(Place Code)/(MAPIN code / Narrative) Qualifier: TRAD (4 Uppercase Characters) Place Code: EXCH (4 Uppercase Characters) M 22H Indicator :4!c//4!c To indicate whether the trade is Buy [BUYI] / Sell [SELL] Format: (Qualifier)//(Indicator) Qualifier: BUSE (4 Uppercase Characters) Indicator: BUYI or SELL (4 Uppercase Characters) M 22H Indicator :4!c//4!c To indicate where the trades is against payment [APMT] or free of payment [FREE] Format: (Qualifier) //(Indicator) Qualifier: PAYM (4 Uppercase Characters) Indicator: FREE for clearing house trades or APMT for DVP trades(4 Uppercase Characters) Mandatory Sub Block C1 (Confirmation Parties) .....

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..... tity 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: ISIN which will always be present. (ISIN of the security). Additionally, the first line (35 characters) of the description may be used if required and may contain the scrip code (4 lines of 35 Characters) . The contract descriptor shall be provided in the first line of 35 characters M 70E Narrative :4!c//10*35x To identify Segment Type i.e. Rolling (DR) or Inter FII (DI) or Auction Rolling (AR) or Trade to Trade (TT) or Others (OT) /Settlement Number Format: (Qualifier) //(Narrative) Qualifier: TPRO (4 Upper Characters) Narrative: Line 1: DR or DI or AR or TT or .....

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..... the contracting broker O 70C Narrative :4!c//4*35x To provide additional broker contact details Format: (Qualifier) //(Narrative) Qualifier: PACO (4 Uppercase Upper Characters) Narrative: Broker Exchange Broker code (140 Characters) O 70E Narrative :4!c//10*35x To provide for Declaration Format: (Qualifier) //(Narrative) Qualifier: DECL (4 Uppercase Upper Characters) Narrative: Arbitration Clause(10 lines of 35 char each) Line 1:This contract is subject to Rules, Line 2:Byelaws and Regulations and Line 3:usages of (name of the exchange). In event Line4: of any claim (whether admitted or Line 5:not), difference or dispute arising Line 6:between you and me/us out of these Line 7:transactions, the matter shall be 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 .....

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..... ding decimal places and decimal sign) comma has to be used as decimal sign and is mandatory. Integer part of amount must contain atleast one digit. Deal amount = trade quantity * trade rate M 16S AMT End of block M 16R AMT Start of block M 19A Amount :4!c//3!a15d To identify the brokerage For Brokerage: Qualifier: EXEC (4 Upper case Characters) Narrative: INR (3 Upper Letters) Amount: upto 15 digits (including decimal places and decimal sign) comma has to be used as decimal sign and is mandatory. Integer part of amount must contain atleast one digit. .....

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..... 16R AMT Start of block M 19A Amount :4!c//3!a15d To identify the settlement amount For Settlement Amount Qualifier: SETT (4 Upper case Characters) Narrative: INR (3 Upper Letters) Amount: upto 15 digits (including decimal places and decimal sign) comma has to be used as decimal sign and is mandatory. Integer part of amount must contain atleast one digit. M 16S AMT End of block End of Mandatory Subsequence D3 (Amounts) .....

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..... 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 s .....

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..... ontract notes are being defined. The possible options are MTCH//MACH: The contract note matches with the trade instruction received from client MTCH//NMAT: The contract note has not been matched Optional Subsequence A2a Reason M 16R REAS Start of Block M 24B Reason. :4!c//4!c To display the reason for the status of the contract note [in case the contract note is not matched]. Format:(Qualifier)//(Reason Code) This block is optional and can be omitted in case the status codes is match. CADE - Disagreement Repurchase Call Delay The instruction has not been matched because the repurchase call delay does not match. CLAT - Counterparty too late for Matching The instruction has not been matched. Counterparty's instruction was too late for matching. CMIS- Matching Instruction Not Found .....

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..... or matching. NARR- Narrative Other (see narrative reason). NCRR- Disagreement Currency Settlement Amount The instruction has not been matched; the counterparty disagrees with the currency of the settlement amount. NMAS- No Matching Started The instruction has not been matched; the matching process did not yet start. PHYS- Disagreement Physical settlement The instruction has not been matched. The counterparty is for physical settlement, your instruction is not, or vice versa. PLCE- Disagreement Place of Trade Place of trade does not match. PODU- Possible Duplicate Instruction The instruction has not been matched. It is a possible duplicate instruction. REGD- Disagreement Registration Details The instruction has not been matched; there are discrepancies in the registrations details linked to the transaction. REPA- Disagreement Repurchase Amount Repurchase amount does not match. REPO- Disagreement Repurchase Rate Repurchase rate does not match. REPP- Disagreement Repurchase Premium Amount Repurchase premium amount does not match. RERT- Disagreement Repurchase Rate Type Repurchase rate type does not match. RSPR- Disagreement Repurchase Spread Rate Repurchase spread rate does not .....

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..... 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 the security). Additionally, the first line (35 characters) of the description may be used if required and may contain the scrip code (4 lines of 35 Characters) . The contract descriptor shall be provided in the first line of 35 characters. M 36B Quantity of Financial Instrument :4!c//4!c/15d Quantity of Financial Instrument to be Settled Format: (Qualifier)//(Quantity Type Code) /(Quantity) Qualifier: SETT (4 Uppercase Characters) Quantity Type Code: UNIT or FAMT (4 Uppercase Characters) Quantity: 15 digits (including decimal comma) FAMT indicates Quantity into Face Value. O 19A .....

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..... Mandatory Subsequence B1 (Settlement Parties)* M 16R SETPRTY Start of block M 95Q Party :4!c//4*35x Indicates the SEBI Reg. No. / MAP-IN id of contracting broker. This tag should contain the same information as was uploaded in the corresponding contract note message. 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 .....

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..... derivatives segment). Broker-Client relationship (Rights and obligations). Accounting standards for derivatives. 3. Fully automated testing environment: The administration of the test and its subsequent evaluation should be computerised. The test should be online computer based where the candidate is required to answer multiple choice questions and forward them electronically. In such an environment the candidate s performance is also known instantaneously. Procedure for dispatch of Computerised test also avoid certain malpractices which may arise. 4. Nationwide access: The test should be conducted in all regions of the country including all metros. The test should progressively be conducted in other cities to provide wider access to the participants. 5. Flexibility of test dates: Test dates should be announced in advance and should be held atleast once every quarter. Candidates should be allowed to state their preference of date and test centre. 6. Random generation of questions and Degree of difficulty: The certifying institute should have a rich database of questions which are randomly picked for each candidate taking the test. The questi .....

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..... 77; 500000 Above ₹ 500000 Income Tax PAN No. : __________ Whether registered with any other broker - member : Name of Broker : __________ Name of Exchange : __________ Client Code No. : __________ References/ Introducing Client: Name and Client code __________ Date:__________ Signature:______________ For Office Purposes: Name of the Salesperson : Account approved by : Date : Note : 1. Copy of any one of the following proof of identity should be submitted - Passport/ Driving License/ Ration Card/ Voters Identity Card 2. Each client has to use one registration form. In case of joint names/family members please submit separate form for each person. 3. In case of partnership firm/ corporate entities the above mentioned details should be obtained for the partners/ directors/ authorized persons. Such entities shall also provide copies of partnership deed/ Memorandum, Article of Association, Board resolution authorizing any person to trade derivatives and Annual Report/ Accounts o .....

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..... d be indicated that if the broker finds it necessary, he is authorised to levy and collect additional margin over and above those imposed by the exchange/ clearing corporation and the client shall be liable to pay the margins within the stipulated time. 7. Liquidation/close-out of positions : The broker shall have the authority to liquidate/close-out positions of the client for non-payment of margins, outstanding debts etc. Any amount of loss caused would be charged to the client in such an event. 8. Liability to reimburse losses : The agreement shall specify the liability of the client to reimburse any losses or financial charges arising from liquidation/close-out of positions by the member as mentioned above. 9. Segregation of client money : The money deposited by the client shall be kept in a separate account by the member, distinct from his own account and cannot be used by the broker for himself or for any purpose other than the purpose mentioned by the client. 10. Provisions in case of Default : In the event of a default of a trading/clearing member on his own account, the client money will not be utilised to meet the brokers liabilities. In such cases the cli .....

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..... itial margin. However, if prices move against you it can produce large losses in relation to your initial margin - sometimes wiping away your principal investment. You should therefore completely understand the following statements before actually trading in stock index futures and also trade with caution after taking into account one s circumstances, financial resources, etc. A. If the futures price moves against you, you may lose a part or whole of the margin amount in a relatively short period of time. Moreover, the loss may exceed the original margin amount. B. Futures trading involve daily settlement of all positions. Every day the open positions are market to market based on the closing level of the index. If the index has moved against you, you will be required to deposit the amount of loss (notional) resulting from such movement. This margin will have to be paid within a stipulated time frame, generally before commencement of trading next day. C. In order to maintain market stability, the following steps may be adopted sometimes - changes in the margin rate, increases in the cash margin rate, decrease in position limits etc. These new measures may be applied to .....

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..... use and/or Member firms. Such limits may vary; you should ask the firm with which you deal for details in this respect. Investors must keep in mind that the aforementioned statements cannot disclose all the risks and the characteristics of futures trading. Therefore, investors contemplating trading in the futures market should do so after understanding the mechanisms and the relevant provisions of such trading. The Derivative Exchange/Segment is not commenting on the merits of participating in this trading Segment nor has the Derivative Exchange/Segment passed the adequacy or accuracy of this disclosure document. This brief statement does not disclose all of the risks and other significant aspects of trading. In light of the risks, you should undertake such transactions only if you understand the nature of the contracts (and contractual relationships) into which you are entering and the extent of your exposure to risk. Risk of loss in trading in derivatives can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. Futures trading thus require not only .....

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..... taken in case of an exposure limit violation e.g. the agreement may empower the clearing member to close-out open positions of the trading member or withdraw/disable the trading facility of the trading member by intimation to the exchange/clearing corporation. 3. Commissions, Brokerage, other fees : The agreement shall indicate the rate of brokerage/ commission/ fee charged by the clearing member in respect of various services provided by him. 4. Types of services offered : The agreement shall specify the nature of services provided by the clearing member e.g. clearing service, advisory services, portfolio management services etc. 5. Payment of margins: The clearing member shall collect margins from the trading member as prescribed by the relevant authority from time to time. However, if the clearing member finds it necessary, he shall be authorized to levy and collect additional margin over and above those imposed by the exchange/ clearing corporation and the trading member shall be liable to pay the margins within the stipulated time. Also, the clearing member shall ensure that the trading member collects margins from his clients on a gross basis. 6. Liquidation .....

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..... case a trading member has defaulted in his payments. 15. Arbitration: In case of disputes between the clearing member and trading member, the case shall be referred for arbitration as per the Stock Exchange/ clearing corporation bye-laws/regulations/procedures. 16. The agreement shall elaborate the Clearing member s rights and responsibilities vis- -vis trading members and derivatives exchange/ clearing corporation. 17. Any other clauses: The agreement may contain any other additional provisions as considered necessary by the broker / exchanges/clearing Corporation. 13.7 ANNEXURE VII List of Circulars issued by Derivatives and New Products Department 1. December 30, 2011 Interest Rate Futures on 2-year and 5-year Government of India Security 2. Aug 10, 2011-Short-collection/Non-collection of client margins (Derivatives Segments) 3. Jul 05, 2011-Modification of Client Codes of Non-institutional Trades Executed on Stock Exchanges (All Segments) 4. Jun 02, 2011-Liquidity enhancement schemes for illiquid securities in equity derivatives segment 5. May 13, 2011-Self Clearing Member in the Currency Derivatives Segment 6. March 7, 2011-Futures on 91-d .....

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..... gibility criteria of stocks for derivatives trading especially on account of corporate restructuring 36. Sep 14, 2005- Trading by Mutual Funds in Exchange Traded Derivative Contracts 37. Nov 22, 2004- Clarification on the definition of institutional trades and use of physical contract note 38. Sep 28, 2004- Modifications in the STP messaging formats on account of implementation of the Securities Transaction Tax STT 39. Jul 16, 2004- Risk containment measures, position limits and the broad eligibility criteria of Stocks and Index on which futures and options could be introduced 40. Jul 08, 2004- Clarification for circular no. DNPD/Cir-25/04 dated June 10, 2004 41. Jun 10, 2004- Transaction work flow for the system of Straight Through Processing in the Indian Securities Market and standardisation of the messaging formats 42. May 26, 2004- Straight Through Processing Service in the Indian Securities Market 43. Apr 01, 2004- Mandatory use of STP system for all institutional trades executed on the stock exchanges 44. Mar 09, 2004- Trading by FIIs and NRIs in Exchange Traded Interest Rate Derivative Contracts 45. Feb 25, 2004- Issuance of Electronic Contract .....

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