Regulation for Derivatives

Trading

By:
Aashi Sehrawat (00216659317)
Gajender Kumar Kushwah (01516659317)
Kamesh Bansal (02316659317)
 Introduction
• What are Derivatives?
• History

Set-up 24 member committee

under Dr. L. C. Gupta

On may 11, 1998 SEBI accepted

the recommendations.

Beginning with “STOCK INDEX

FUTURES”
 Features:-
SEBI has also framed suggestive bye-law for Derivative
Exchanges/Segments and their Clearing Corporation/House which lay
down the provisions for trading and settlement of derivative contracts.

SEBI has also laid the eligibility conditions for Derivative

Exchange/Segment and its Clearing Corporation/House.

The eligibility conditions have been framed to ensure that Derivative

Exchange/Segment & Clearing Corporation/House provide:

• a transparent trading environment,

• safety and integrity
• provide facilities for redressal of investor grievances.
 Some of the important eligibility conditions are:

On-line screen based Trading System

Separate governing council

Minimum 50 members.

The clearing and settlement of derivatives trades would be through a SEBI approved clearing
corporation/house.

Derivative brokers/dealers and clearing members are required to seek registration from SEBI.

minimum contract value shall not be less than Rs. 2 Lakhs.

The initial margin requirements

strict enforcement of “Know your customer”

 1. Requirements to become F&O
member
1. Anybody interested in taking membership of F&O segment is required
to take membership of “CM and F&O segment” or “CM, WDM and F&O
segment”. An existing member of CM segment can also take membership
of F&O segment. A trading member can also be a clearing member by
meeting additional requirements. There can also be only clearing
members.

2. The eligibility criteria for membership on the F&O segment is given in

the next slide along with the requirements for professional clearing
membership.
Table 1. Eligibility criteria for membership on F&O segment
Table 2. Requirements for Professional Clearing Membership
 2. Requirements to become
authorised/approved user
Trading members and participants are allowed to appoint.

These authorized users can be individuals, registered partnership firms or corporate bodies as defined
under the Companies Act, 1956.

Authorized persons cannot collect any commission or any amount directly from the clients.

Approved users on the F&O segment have to pass a certification program which has been approved by
SEBI.

The approved user can access the NEAT system

 3. Position Limits
• What is position limit?
• Types of position limit:-

Trading member position limit

Client level position limit

Market wide position limit

FII/ MFs position limit

• Trading member position limits (in equity index option
and futures contracts):

– The trading member position limits in equity index option

contracts is higher of Rs.500 crore or 15% of the total open
interest in the market in equity index option contracts. This limit
is applicable on open positions in all option contracts on a
particular underlying index.

– The trading member position limits in equity index futures

contracts is higher of Rs.500 crore or 15% of the total open
interest in the market in equity index futures contracts. This
limit is applicable on open positions in all futures contracts on a
particular underlying index.
• Trading member position limits for combined futures and
options position:

– For stocks having applicable market-wise position limit (MWPL)

of Rs.500 crores or more, the combined futures and options
position limit is 20% of applicable MWPL or Rs.300 crores,
whichever is lower and within which stock futures position
cannot exceed 10% of applicable MWPL or Rs.150 crores,
whichever is lower.

– For stocks having applicable market-wise position limit (MWPL)

less than Rs.500 crores, the combined futures and options
position limit is 20% of applicable MWPL and futures position
cannot exceed 20% of applicable MWPL or Rs.50 crore which
ever is lower. The Clearing Corporation shall specify the trading
member-wise position limits on the last trading day month
which shall be reckoned for the purpose during the next month.
• CLIENT LEVEL POSITION LIMITS

– The gross open position for each client, across all the derivative
contracts on an underlying, should not exceed 1% of the free float
market capitalization (in terms of number of shares) or 5% of the open
interest in all derivative contracts in the same underlying stock (in
terms of number of shares) whichever is higher.

• MARKET WIDE POSITION LIMITS

– The market wide limit of open position (in terms of the number of
underlying stock) on futures and option contracts on a particular
underlying stock is 20% of the number of shares held by non
promoters in the relevant underlying security i.e. 20% of the free–float
in terms of no. of shares of a company.
– This limit is applicable on all open positions in all futures and option
contracts on a particular underlying stock.
 4. Reporting of Client Margin

Clearing Members (CMs) and Trading Members (TMs) are required to collect upfront
initial margins from all their Trading Members/ Constituents.

CMs are required to compulsorily report, on a daily basis, details in respect of such
margin amount due and collected, from the TMs/ Constituents clearing and settling
through them, with respect to the trades executed/ open positions of the TMs/
Constituents, which the CMs have paid to NSCCL, for the purpose of meeting margin
requirements.

TMs are required to report on a daily basis details in respect of such margin amount
due and collected from the constituents clearing and settling through them, with
respect to the trades executed/ open positions of the constituents, which the trading
members have paid to the CMs, and on which the CMs have allowed initial margin limit
to the TMs.
Thank you