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TMI BlogRisk containment measures for Stock OptionX X X X Extracts X X X X X X X X Extracts X X X X ..... tainment measures for Exchange traded Index Futures and Index Option Contracts. SEBI has setup a Technical Group headed by Prof. J.R Varma to prescribe risk containment measures for new derivative products. The group has recommended the introduction of Exchange traded Options on Stocks, which is also in conformity with the sequence of introduction of derivative products recommended by Dr. L.C Gupta Committee. The Technical Group has recommended the risk containment measure for Exchange traded Options on Stocks. While SEBI would not mandate any particular risk management product, the framework shall be consistent with the risk management guidelines mandated by the L. C. Gupta Committee. The Exchanges are free to decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng member shall also be on net basis. 6. A portfolio based margining approach shall be adopted which will takes an integrated view of the risk involved in the portfolio of each individual client comprising of his positions in Derivative Contracts. The parameters for such a model should include the following A. Worst Scenario Loss The worst case loss of a portfolio would be calculated by valuing the portfolio under several scenarios (as specified in SEBI Circular No. IES/DC/CIR-5/00 dated December 11, 2000) of changes in the Stock prices and changes in the volatility of the Stock. The price range for generating the scenarios for Stock Option Contracts would be three and a half standard deviation (3.5 Sigma). T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 stock option positions also. D. Cash Settlement of Premium For the Stock 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. E. Exercise Assignment The Exchanges are free to set exercise limits, if any, for the Stock Option Contracts. The assignment of all exercise shall be done randomly at the client level by the Exchange and its Clearing House. F. Unpaid Premium ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a particular stock shall be lesse r of 20 times the average number of shares traded daily, during the previous calendar month, in the cash segment of the Exchange, or 10% of the number of shares held by non-promoters i.e. 10% of the free float, in terms of number of shares of a company. When the total open interest in a contract reaches 80% of the market wide limit in that contract, the exchanges would double the price range and volatility range as specified in Point No. (A) in this circular. The exchanges are required to continously review the impact of this measure and take further proactive risk containment measures as may be appropriate, including, further increases in the scan range ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be less than ₹ 5 Crore in the underlying cash market. iii. The stock should be traded on at least 90% of the trading day in the last six months, with the exception of cases in which a stock is unable to trade due to corporate actions like de-mergers etc. iv. The non promoter holding in the company should be at least 30%. v. The ratio of the daily volatility of the stock vis- -vis the the daily volatility of the Index (either BSE-30 Sensex or S P CNX Nifty) should not be more than 4, at any time during the previous six months. For this purpose the volatility would be computed as per the Exponentially Weighted Moving Average formula specified in the Prof. J. R Varma Committee Report on the risk containmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which options is permitted continues to comply with the aforementioned criterion. The eligibility criterion would be reviewed after a period of six months to examine whether, in light of the experience, the list of eligible stocks could be expanded. 8. The Derivative Exchange/Segment shall submit their proposal for approval of the stock option contract to SEBI which shall include: a. the details of proposed derivative contract to be traded on the exchange which would include: i. Symbol ii. Underlying giving details of the calculations mentioned above and ensuring that the stock fulfills the eligibility criterion specified. iii. Lot Size / Multiplier iv. Strike Price Intervals ..... X X X X Extracts X X X X X X X X Extracts X X X X
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