Derivative Exchanges

Equity Derivatives in India - An Overview Derivatives Markets Derivatives markets broadly can be classified into two categories, those that are traded on the exchange and the those traded one to one or over the counter. They are hence known as Exchange Traded Derivatives OTC Derivatives (Over The Counter)

OTC Equity Derivatives Traditionally equity derivatives have a long history in India in the OTC market. Options of various kinds (called Teji and Mandi and Fatak) in un-organized markets were traded as early as 1900 in Mumbai The SCRA however banned all kind of options in 1956.

Derivative Markets today The prohibition on options in SCRA was removed in 1995. Foreign currency options in currency pairs other than Rupee were the first options permitted by RBI. The Reserve Bank of India has permitted options, interest rate swaps, currency swaps and other risk reductions OTC derivative products. Besides the Forward market in currencies has been a vibrant market in India for several decades. In addition the Forward Markets Commission has allowed the setting up of commodities futures exchanges. Today we have 18 commodities exchanges most of which trade futures. e.g. The Indian Pepper and Spice Traders Association (IPSTA) and the Coffee Owners Futures Exchange of India (COFEI). In 2000 an amendment to the SCRA expanded the definition of securities to included Derivatives thereby enabling stock exchanges to trade derivative products. The year 2000 will herald the introduction of exchange traded equity derivatives in India for the first time.

Equity Derivatives Exchanges in India In the equity markets both the National Stock Exchange of India Ltd. (NSE) and The Stock Exchange, Mumbai (BSE) have applied to SEBI for setting up their derivatives segments. The exchanges are expected to start trading in Stock Index futures by mid-May 2000.

BSE's and NSEs plans Both the exchanges have set-up an in-house segment instead of setting up a separate exchange for derivatives. BSEs Derivatives Segment, will start with Sensex futures as its first product. NSEs Futures & Options Segment will be launched with Nifty futures as the first product.

Product Specifications BSE-30 Sensex Futures Contract Size - Rs. 50 times the Index Tick Size - 0.1 points or Rs. 5 Expiry day - last Thursday of the month Settlement basis - cash settled Contract cycle - 3 months Active contracts - 3 nearest months

Product Specifications S&P CNX Nifty Futures Contract Size - Rs. 200 times the Index Tick Size - 0.05 points or Rs. 10 Expiry day - last Thursday of the month Settlement basis - cash settled Contract cycle - 3 months Active contracts - 3 nearest months

Membership Membership for the new segment in both the exchanges is not automatic and has to be separately applied for. Membership is currently open on both the exchanges. All members will also have to be separately registered with SEBI before they can be accepted.

Membership Criteria NSE Clearing Member (CM) Networth - 300 lakh Interest-Free Security Deposits - Rs. 25 lakh Collateral Security Deposit - Rs. 25 lakh

In addition for every TM he wishes to clear for the CM has to deposit Rs. 10 lakh. Trading Member (TM) BSE Clearing Member (CM) Networth - Rs. 100 lakh Interest-Free Security Deposit - Rs. 8 lakh Annual Subscription Fees - Rs. 1 lakh

Networth - 300 lacs Interest-Free Security Deposits - Rs. 25 lakh Collateral Security Deposit - Rs. 25 lakh Non-refundable Deposit - Rs. 5 lakh Annual Subscription Fees - Rs. 50 thousand

In addition for every TM he wishes to clear for the CM has to deposit Rs. 10 lakh with the following break-up. Cash - Rs. 2.5 lakh Cash Equivalents - Rs. 25 lakh Collateral Security Deposit - Rs. 5 lakh

Trading Member (TM) Networth - Rs. 50 lakh Non-refundable Deposit - Rs. 3 lakh Annual Subscription Fees - Rs. 25 thousand

The Non-refundable fees paid by the members is exclusive and will be a total of Rs.8 lakhs if the member has both Clearing and Trading rights. Trading Systems NSEs Trading system for its futres and options segment is called NEAT F&O. It is based on the NEAT system for the cash segment. BSEs trading system for its derivatives segment is called DTSS. It is built on a platform different from the BOLT system though most of the features are common.

Settlement and Risk Management systems Systems for settlement and risk management are required to satisfy the conditions specified by the L.C. Gupta Committee and the J.R. Verma committee. These include upfront margins, daily settlement, online surveillance and position monitoring and risk management using the Value-at-Risk concept.

Certification Programmes The NSE certification programme is called NCFM (NSEs Certification in Financial Markets). NSE has outsourced training for this to various institutes around the country. The BSE certification programme is called BCDE (BSEs Certification for the Derivatives Exchnage). BSE conducts its own training run by its training institute. Both these programmes are approved by SEBI.

Rules and Laws Both the BSE and the NSE have been give in-principle approval on their rule and laws by SEBI. According to the SEBI chairman, the Gazette notification of the Bye-Laws after the final approval is expected to be completed by May 2000.

Trading is expected to start by mid-June 2000.