7.2 7.2.

T eT h rade r W rk o statio n T eM h arke t W atc h W indow n screen:

The followin g window s are displa yed on the trade r w orkstatio Title bar Ticke r windo w of future s an d option s m ark et Ticke r windo w of underlyin g (capital ) m ket ar Toolbar M arke t watc h window Inquir y window S a p quote n O rder/trad e window

Syste m m essag e window

As m entione d earlie r, the bes t way to fam iliariz e onesel f w h the scree n an d it its variou s seg m ent s is to actuall y spen d som e tim e studyin g a live screen . In thi s sectio n we shal l restrict ourselve s to understandin g jus t two segm ent s of the w kstatio n screen , the m ket watch windo or ar The w an d the inquir y windo w.

mar ket watc h windo w is the thir d windo w fro m the top of the scree n or securitie s tha t ar e of specifi c interes t to

w h is alw ays visibl e to the use r. The purpos e of m hic arke t w h is to allo w atc continuou s monitorin g of contracts the use r. It display s tradin g inform atio n for con- tract s selecte d by the use r. The use r als o get s a broadcas t of all the cas h m arke t securitie s on the screen . This functio n als o will be availabl e if the use r select s the rele van t securitie s for displa y on the m arke t w h screen . D atc ispla y of tradin g inform atio n relate d to cas h m ark et securitie s will be on Rea d only format , i.e . the deale r ca n onl y vie w the informatio n on cash m rke t but , canno t trad e in the m throug h the a system . This is the mai n windo w fro m the deale rs perspectiv e. 7 . 2 .2 In u y w q ir indow

The inquir y windo w enable s the use r to vie w informatio n suc h as M arke t by Pric e (MBP), Previou s Trade s (PT) , Outstandin g Order s (OO) , Activit y log (AL), Sna p Quot e (SQ) , Order Statu s (OS) , M arke t Movemen t (MM), Mar ket Inquir y (MI) , Net Position , On line backup , Mul- tipl e inde x inquir y, M t activ e os securit y an d so on . Rele van t informatio n for the selecte d con- tract/securit Mar ket Inquir y (MI) screens. M arke t by pric e (M P) : The purpos e of the MBP is to enabl e the use r to vie w B passiv e orders in the m arke t aggregate d at eac h pric e an d ar e displa yed in orde r of bes t prices . The window ca n be invoked by pressin g the [F6 ] key. If a particula r cont rac t or securit y is selected , the detail s of the selecte d contrac t or securit y ca n be see n on thi s screen . Figur e 7. 1 give s the scree n sho t of the M ket by Pric e windo w in the NEAT F&O. ar M arke t inquir y (M : The m ket inquir y scree n ca n be invoked by usin g th e I) ar [F11 ] key. If a particular selected contract the current position contract or security defaults is selected, the details screen of the or else or selected security in the selection y ca n be viewed . We shal l loo k in detai l at the M arke t by Pric e (MBP) an d the

in the m arket

w atch defaults . The firs t line of the scree n tus , tota l trade d

give s th e Instrum en t type , sym bol , expir y, contrac t sta2

quantit y, life tim e hig h an d life tim e low. The secon d line display s the closing

price , ope n price , hig h price , low price , las t trade d pric e an d indicato r for ne t chang e from closin g price . The thir d line display s the las t trade d quantit y, las t trade d tim e an d the last trade d date . The fourt h line display s the closin g ope n interest , the openin g ope n interest , day hig h ope n interest , da y low ope n interest , curren t ope n interest , life tim e hig h ope n interest, im portan t inform ation life tim e low ope n interes t an d ne t chang e fro m closin g ope n interest . The fifth line display ver y , nam y the carryin g cos t in percentag e term . Figur e el s 7. 2 shows the M arke t Inquir y scree n of the NEAT F&O.

F igur e 7.1 : M arke t by pric e in NEA T F&O

F u e 7 : S c rity o tra t/p rtfo ig r .2 e u /c n c o li

o e tr y sc e n in NEA T F&O n re

7 . 3 .2

P in g o er s on th e trad lac rd in g sy m ste

For bot h the future s an d the option s m ket , whil e enterin g order s on the ar tradin g system , m ber s ar e require d to identif y order s as bein g proprietar y em order s shoul d be identifie d as Pro an d thos e of or clien t orders . Proprietary

client s shoul d be identifie d as Cli. Apar t from this , in the cas e of Cli trades , the clien t accoun t num r shoul d als o be pr ovided. be The future s m arke t is a zer o su m gam e i.e . the tota l num r of lon g in an y be contrac t alw ays equal s the tota l num r of shor t in an y contract . The tota l be num r of outstandin g cont racts (long/short be ) at an y poin t in tim e is calle d the exchanges , it is Ope n interes t. This Ope n interes t figur e is a goo d indicato r of the liquidit y in ever y contract . Base d on studie s carrie d ou t in international foun d tha t ope n interes t is maximu m in nea r m ont h expir y cont racts. 7 . 4 .2 The M rk t sp d o b a a e rea /c m in tio NEAT F&O n o e r e try rd n n

tradin g syste m als o enable s to ente r spread/com binatio n screen . This thre e orders sim ultaneousl

trades .

Figur e 7.3 show s the spread/com binatio

enable s the

use r to inpu t two or batch of orders finds

y int o the m ket . Thes e ar and until the whole not be traded. This shall

order s will ha ve the conditio n attache d to it tha t unless a counterm atch, they

facilitate s sprea d an d combinatio n tradin g strategie s wit h minimu m pric e risk . The combination s order s ar e trade d w h an IOC attribut e w it herea s sprea d order s ar e trade d w h day orde r attribute. it F u e 7 : M rk t sp ad o b a ig r .3 a e re /c m in tio n o e r e try rd n

7.3

F re s an d O tion s M e t In m n utu p ark stru e ts

The F&O segm en t of NSE provide s tradin g facilitie s for the followin g deri vativ e instrum ents: 1. 2. 3. 4. Inde x base d futures Inde x base d options Individua l stoc k options Individua l stoc k futures t sp ecificatio n s fo r in e x fu re d tu s

7 . 1 Cn .3 o trac

On NSE s platfor m on e ca n trad e in Nift y, CNX IT, BANK Nif ty, Mini Nifty etc . future s contracts havin g one-m onth , two-m ont h an d three-mont h expir y cycles . All contract s expir e on a Februar y a three-m onth the last Thursda y of ever y month . Thus , a the las t Thursda y of

Januar y expi ratio n contrac t woul d expir e on the las t Thurs- day of Januar y an d expir y cont rac t woul d ceas e tradin g on Februar y. On the Frida y followin g the las t Thursda y, a ne w contrac t havin g expir y woul d be introduce d for trading . Thus , as show n in Figur e the las t Thursda y of tha t m onth . On the 7. 4 at an y poin t in tim , three contract s woul d be availabl e for tradin g wit h the e firs t cont rac t expirin g on recom endation m s give n by the SEBI , Deri vative s Mar ket Revie w Commi t- tee ,

NSE als o introduce d the Long Term Option s Cont racts on S&P CNX Nifty for tradin g in the F&O segment . Ther e woul d be 3 quarterl y expiries , (M arch , June , Septembe r an d December) m onth s of the cycl e June/Decembe an d afte r these , 5 followin g sem i-annua l r woul d be avail- able . Now optio n cont ract s

wit h 3 yea r tenur e ar e als o available . D ependin g on the tim e period for w h hic yo u wan t to take an exposur e in inde x future s cont racts , yo u ca n plac e bu y an d sell order s in the respectiv e contracts . The Instrum en t typ e refer s to Future s contrac t on index an d Contrac t sym l - NIFTY denote s a Future s contrac t on bo Nifty index an d the Expir y date represent s the las t dat e on w h the cont rac t hic will be availabl e for trading . Eac h future s con- trac t ha s a sepa rat e lim t orde r i book . All passiv e order s ar e stacke d in the syste m in term s of price-tim e priorit y an d trade s tak e plac e at the passiv e orde r pric e (sim ila r to the existing capita l m arke t tradin g system . The ) bes t bu y orde r for a give n future s cont rac t will be the orde r to bu y the inde x at the highes t inde x leve l w herea s the bes t sell orde r will be the order to sell the inde x at the low t es inde x level . Tabl e 7. 1 give s the contrac t specification s for index future s tradin g
8

on the NSE. E ple xam : If tradin g is for a m inim m lot size of 50 unit s an d the inde x leve l is u the n the appropriat e valu e of a singl e inde x future s contrac t . The mini- mu m tick siz e for an inde x futur e contrac t is

aroun d 5000,

w oul d be Rs.250,000

0.0 5 units . Thu s a singl e move in the inde x value woul d impl y a resultan t gai n or los s of Rs.2.5 0 (i.e . 0.05*5 0 units ) on an ope n positio n of 50 units.

F r e 7 : Cn igu .4 o trac

t cycle

The

figur e 7. 4 show s the cont rac t cycl e for

future s cont ract s on

NSE s

deri vative s m arket . As ca n be seen , at an y give n poin t of cont ract s ar e availabl e for tradin g - a near- m onth , a m iddle-m ont m onth . As the Januar y contrac t expire s on the las t Thursday ne w three-m ont m akin g availabl e thre e inde x future s contract s for trading. 7 . 2 .3 Cn o trac t sp ecifica tio n fo r in e x o tio s d p n , two-m ont

tim , thre e e h an d a far-

of the m onth , a

h cont rac t start s tradin g fro m the followin g day, onc e m ore

On NSEs inde x option s m ket , ther e ar e one-m ar onth m ont h expiry trading . Hence , if ther e ar e three 3 x 13 x 2 (call and put options) index.

h an d three-

contract s wit h minimu m nin e differen t strik es availabl e for seria l m ont h contract s availabl e an d the i.e. 78 options contracts available on an

schem e of strike s is 6-1-6 , the n ther e ar e minimum Option contract s ar e specifie d as follows : DATE-EXPI RYMONTH-YEAR-

CALL/PU T-AMERICAN / EURO- PEAN-STRIKE . For exam e the Europea n styl e pl call optio n cont rac t on the Nifty inde x wit h a stri ke pric e of 500 0 expirin g on the 26t h N vem r 200 9 is specifie d as 26NOV200 9 500 0 CE. o be Jus t as in the cas e of future s contracts , eac h optio n produc t (fo r instance , the 26 NOV 2009 500 0 CE) ha s its ow n orde r boo k an d its ow n prices . All inde x option s contract s ar e cash settle d an d expir e on the las t Thursda y of the m onth . The clearin g corporatio n doe s the nova- tion . The minimu m tick for an inde x option s contrac t is 0.0 5 paise . Tabl e 5. 2 give s the cont ract specification s for option s tradin g on the NSE.
10

inde x

11

T abl e 7.1 : C ontrac t specificatio Underlyin g index Exchang e of trading Securit y descriptor Contrac t size Pric e steps Pric e bands Tradin g cycle

n of S P CNX N y F tu s & ift u re

S&P CNX Nifty Nationa l Stoc k Exchang e of Indi a Limited FUTIDX Permitte d lot siz e shal l be 50 (minimu m valu e Rs. 2 lakh) Re. 0.05 Operatin g rang e of 10 % of the bas e price The future s cont ract s will ha ve a m axim m of thre e u m ont h trad- ing cycl e - the nea r m ont h (one) , the nex t m ont h (two ) an d the far m ont h (three) . New contrac t will be introduce d on the next tradin g day contract. followin g the expir y of nea r m ont h

Expir y day Settlem en t basis Settlem en t price

The las t Thursda y of the expir y m ont h or the previou s trading day if the las t Thursda y is a tradin g holida y. M k to marke t an d final settlem ar en on T+1 basis. t will be cas h settle d

Daily settlem en t pric e will be the closin g pric e of the futures contract s for the tradin g da y an d the final be the closin g valu e of the settlem en t pric e shall contract.

underlyin g inde x on the las t trading day of suc h future s

12

T abl e 7.2 : C ontrac t specificatio Underlyin g index Exchang e of trading Securit y descriptor Contrac t size Pric e steps Pric e bands Trading cycle

n of S P CNX N y O & ift ptions

S&P CNX Nifty Nationa l Stoc k Exchang e of Indi a Limited OPTI DX Permitte d lot siz e shal l be 50 (minimu m valu e Rs. 2 lakh) Re. 0.05 A contrac t specifi c pric e rang e base d on its delt a valu e an d is com pute d an d update d on a dail y basis. The option s contract s will ha ve a m axim m of thre e u cycl e - the nea r m ont h (one) , the nex t

m ont h trading

m ont h (tw ) an d the far m o ont h (three) . New cont rac t will be introduce d on the next tradin g da y followin g the expir y of nea r m ont h cont ract . Also, Expir y day Settlem en t basis Styl e of option Stri ke pric e inter val Daily settlem en lon g ter m option s ha ve 3 quarterl y an d 5 hal f yearl y The las t Thursda y of the expir y m ont h or the previou s trading day if the las t Thursda y is a tradin g holida y. Cas h settlem en t on T+ 1 basis. European. Dependin g on the inde x lev el

t price Not applicable

Fina l settlemen t price Closin g valu e of the inde x on the las t tradin g da y. G eneratio n of strik s e

The exchang e ha s a polic y for introducin g stri ke price s an d determ inin g the stri ke pric e interan d index. Let us loo k at an exam e of ho w the variou s optio n strike s ar e gene rate d by pl the exchange. S uppos e the Nifty option s w h stri kes 5600 , 5500 , 5400 , 5300 , 5200 , it 5100 , 5000, 4900 , 4800 , 4700 , 4600 , 4500 , 440 0 ar e available.
13

vals . Tabl e 7.3 and Tabl e 7. 4 summarise s the polic y for ing the stri ke pric e inter val for stoc ks

introducin g strik e price s an d determ in-

It is to be noted

that w hen the Nifty index level is betw 4001 een

and 6000,

the exchang e com it s itsel f to an inter-strik e distanc e of sa y 10 0 m

an d the schem e of strike s of 6-1-6.

14

If the Nifty close s at aroun d 505 1 to ensur e strik e schem e of 6-1-6 ,

on e m e strike w or oul d be require d at 5700. Co nversel y, if Nifty close s at aroun d 494 9 to ensur e strik e schem e of 6-

1-6 , on e m ore strik e woul d be require d at 4300. T abl e 7 : G .3 eneratio Pric e of underlying n of strik s fo r sto k o tio s e c p n Strik e Pric e inter val Schem e of stri kes to be introduced Les s tha n or equa l to Rs.50 > R s.5 0 = Rs.100 > Rs. 100 = Rs . 250 > R s.25 0 = Rs.500 > R s.50 0 = Rs.1000 > Rs.1000 T abl e 7 : G .4 eneratio Inde x Lev el Upt o 2000 Fro m 200 1 to 4000 Fro m 400 1 to 6000 > 6000 7.3 3 C ntrac . o t sp ecificatio n 2.5 5 10 20 20 50 n of strik s fo r In x o tio s e de p n Stri ke Inter val 50 10 0 10 0 10 0 s fo r sto k fu re c tu s Schem e of stri kes to be introduce d (ITM -ATM-OTM) 4-1-4 6-1-6 6-1-6 7-1-7 (ITM -ATM-OTM) 5-1-5 5-1-5 5-1-5 5-1-5 10-1-10 10-1-10

Tradin g in stoc k future s com ence d on the NSE fro m No vembe r 2001 . Thes e m contract s are cas h settle d on a T+ 1 basis . The expiratio n cycl e for stoc k future s is the sam e as for index futures , inde x option s an d stoc k options . A ne w contrac t is introduce d on the tradin g day followin g the expir y of the nea r mont h contract . Tabl e 7.5 give s the cont ract specification s for stoc k futures.

15

T abl e 7.5 : C ontrac t specificatio Underlying Exchang e of trading Securit y descriptor Contrac t size Pric e steps Pric e bands Tradin g cycle

n of S toc k fu re tu s

Individua l securities Nationa l Stoc k Exchang e of Indi a Limited FUTSTK As specifie d by the exchang e (minimu m valu e of Rs. 2 lakh) Re. 0.05 O ratin g rang e of 20 % of the bas e price pe The future s cont ract s will ha ve a m axim m of thre e u m onth tradin g cycl e - the nea r mont h (one) , the nex t mont h (two) an d the far m ont h (three) . New cont rac t will be introduced on the nex t tradin g day followin g the expir y of nea r m onth contract.

Expir y day Settlem en t basis Settlem en t price

The las t Thursda y of the expir y m ont h or the previous tradin g da y if the las t Thursda y is a tradin g holida y. marke t an d final settlem M k to ar en t will be cas h settled on T+ 1 basis. Daily settlem en t pric e will be the closin g pric e of the futures cont settlem en ract s for the tradin g da y an d the final t price shal l be the closin g pric e of the

underlyin g securit y on the las t tradin g da y. 7 . 4 Cn c .3 o tra t sp ecifica n tio s fo r sto k o tio s c p n 2001 . Currentl y

Tradin g in stoc k option s commence d on the NSE fro m July

thes e cont ract s are Europea n styl e an d ar e settle d in cash . The expi ratio n cycl e for stoc k option s is the sam e as for inde x future s an d inde x options . A ne w cont rac t is introduce d on the tradin g day followin g the expir y of the nea r m ont h cont ract . NSE pr ovide s a m inim m of eleve n strik e price s for ev er y u optio n typ e (i.e . call an d put ) durin g the tradin g m onth . Ther e ar e at leas t five in-the-m oney stoc k options.
16

contracts , five ou t-of-the-m one y contract s an d on e at-the-m one y

contrac t availabl e for trad- ing . Tabl e 7.6 give s the cont ract specification s for

17

T abl e 7.6 : C ontrac t specificatio Underlying Exchang e of trading Securit y descriptor Styl e of option Strik e pric e inter val Contrac t size Pric e steps Pric e bands Tradin g cycle

n of S toc k o tio s p n

Individua l securitie s availabl e for tradin g in cas h m ark et Nationa l Stoc k Exchang e of Indi a Limited OPTSTK European As specifie d by the exchange As specifie d by the exchang e (minimu m valu e of Rs. 2 lakh) Re. 0.05 Not applicable The option s contract s will ha ve a m axim m of thre e u m onth tradin g cycl e - the nea r mont h (one) , the nex t mont h (two) contract and the far m onth (three). New will be intro- duce d on the nex t tradin g day

followin g the expir y of near m ont h cont ract.

Expir y day Settlem en t basis Daily settlem en t price

The las t Thursda y of the expir y m ont h or the previous tradin g da y if the las t Thursda y is a tradin settlem y.t on T+ 1 basi s an d final optio n Daily g holida en exercise settlem en t on T+ 1 basis Premiu m valu e (net) Closin g pric e of underlyin g on exercis e da y or expir y day Las t tradin g day

Fina l settlemen t price Settlem en t day O e r P d ct th ro u

s in th e F&O S m t eg en

The yea r 200 8 w itnesse d the launc h of ne w product s in the F&O Segm en t of NSE. Th e Mini deri vativ e (Future s an d O ptions ) contract s on S&P CNX Nifty tradin g on Januar y 1 , 2008 . The contract m i cont ract s ha ve in an d exten d greate r wer e introduce d for

sm alle r contrac t siz e tha n the norm l Nifty a

affordabili ty to individua l investor s an d help s the individua l investo r to hedg e risk s of a sm alle r portfolio . The Long Term Option s Cont ract s on S&P CNX Nifty were launche d on M h 3, 2008 . The arc lon g ter m option s ha ve a life cycl e of m aximu m 5 years du ratio n an d offe r lon g ter m investor s to tak e a
18

vie w on prolonge d pric e change s over a longer du ration , withou t needin g to us e a com binatio n of shorte r ter m optio n contracts.

19

7.4

C riteri a fo r S tock s an d Inde x E ligibilit

y fo r T rading

7.4. 1 Eligibi lit y criteri a of sto s ck The stoc k is chose n fro m am ongs t the top 50 0 stock s in term s of n an d averag e dail y trade d valu e in the

averag e dail y m ark et capitalisatio

previou s six m onth s on a rolling basis. The stock s m edia n quarter-sigm a orde r siz e over the las t six m onth s a

shoul d be not les s tha n Rs. 5 lakhs . For thi s purpose , a stock s quarter-sigm chang e in the stoc k pric e equa l to one-quarte r of a standar d deviation.

orde r size shoul d m ean the orde r siz e (in valu e term ) require d to caus e a s

The marke t wid e positio n limi t in the stoc k shoul d no t be les s tha n

Rs.10 0 crores . The mar ke t wid e positio n limi t (numbe r of shares ) is value d takin g the closin g price s of stock s in the underlyin g cas h m arke t on the dat e of expir y of cont rac t in the m onth. The marke t wid e positio n limi t of ope n stock ) on future s an d optio n positio n (in term s of the num r of underlying be hel d by holding. For an existin g F&O stoc k, the continue d eligibilit y criteri a is tha t mar ket wid e positio n limi t in the stoc k shal l no t b e les s tha n Rs. m edia n quarter-sigm m onth s consecutivel 60 crore s an d stock s a orde r siz e over the las t six m onth s shal l be no t les s tha n y, the n no fres h m ont h contrac t will be issued on tha t non-prom oter s in

cont ract s on a particula r underlyin g stoc k shal l be 20 % of the num r of share s be the rele van t underlyin g securi ty i.e. free-floa t

Rs. 2 lakh . If an existin g securit y fails to m t the eligibili ty criteri a for thre e ee securit y. Howev er, the existin g unexpire d cont ract s ca n be permitte d to trad e till expiry an d ne w strike s ca n als o be introduce d in the existin g contrac t m onths. Furthe r, onc e the stoc k is exclude d fro m the F&O list , it shal l no t be considere d for re-inclusion for a perio d of on e year. (new ) securitie s w hic h

Future s & Option s contract s ma y be introduce d on

m t the ab ove mentione d eligibilit y criteria , subjec t to appro val by SEBI. ee 7.4. 2 E ligibilit y criteri a of indices

The exchang e m y conside r introducin g deri vativ e contract s on an inde x if the a stock s contrib- utin g to 80 % w eightag e of the inde x are individuall y eligibl e for deri vativ e trading . Howev er, no singl e ineligibl e stock s in the inde x shoul d
20

ha ve a weightag e of m e tha n 5% in the index. The ab ove criteri a is applie d or

ever y m onth , if the inde x fails to mee t the eligibilit y criteri a for thre e m onth s consecutivel y, the n no fres h mont h cont rac t woul d be issue d on tha t index, H e ver, the existin g unexpire d contact s will be perm ow itte d to trad e till expir y an d ne w stri kes ca n als o be introduce d in the existin g cont racts.

21

7.4.3

E ligibility

criteria

o sto s f ck

fo d ativ r eriv es

trad g in

o acco n n ut

o co o f rp rate

re c rin stru tu g

The eligibilit y criteri a for stock s for deri vative s tradin g on accoun t of corporat e restructurin I. g is as under: All the followin g condition s shal l be me t in the cas e of share s of a restructurin g throug h an y m ean s for eligibili ty to

com pan y undergoing the pos t restructure to as pos t restructure a) restructure) b)

reintroduc e deri vativ e cont ract s on tha t com pan y fro m the firs t da y of listin g of d com pany/(s ) (a s the cas e m y be ) stoc k (herei n referre d a d com pany ) in the underl y- ing m arket,

the Future s an d option s contract s on the stoc k of the origina l (pr e com pan y w e trade d on an y exchang e prio r to its restructuring; er d com pan y ha d a m arke t capitalisatio n of at leas t

the pr e restructure

Rs.1000 crore c)

s prio r to its restructuring; d com pan y woul d be treate d like a ne w stoc k an d if assets , or (wher e

the pos t restructure

it is, in the opinio n of the exchange , likel y to be at leas t one-thir d the size of the pre restructurin appropriate) d) suggest g compan y in term s of revenues , or analys t valuations ; and g doe s no t

in the opinio n of the exchange , the schem e of restructurin tha t the pos t restructure

d com pan y woul d ha ve any cha racteristi c fre e float ) tha t woul d rende r the compan y

(fo r ex- ampl e extrem y low el ineligibl e for deri vative s trading. II.

If the abo ve condition s are satisfied , the n the exchang e take s the d com- pa ny an d introductio n of fres h contract s on the pos t

followin g cours e of actio n in dealin g wit h the existin g deri vativ e cont ract s on the pre-restructure restructure a) to trade, d compa ny In the cont rac t m ont h in whic h the pos t restructure d com pan y begin s

the Exchang e introduc e nea r m onth , m iddl e m ont h an d far m ont h d compan y.

deri vative cont ract s on the stoc k of the restructure b) stocks

In subsequen t contrac t m onths , the norm l rule s for entr y an d exi t of a in term s of eligibilit y requirement s woul d appl y. If thes e test s ar e no t

m , the exchang e shal l no t perm t furthe r deri vativ e cont ract s on thi s stoc k et i an d future m ont h serie s shal l no t be introduced.
22

7 .5

C arg h es

The m axim m brok erag e chargeabl e by a tradin g m be r in relatio n to trade s u em effecte d in the contract s adm itte d to dealin g on the F&O Segm en t of NSE is fixe d at 2.5 % of the contract valu e exclusiv e of statutor y levies . Howev er, NSE ha s bee n periodicall y reviewin g an d reduc-

23

ing the transactio n charge s bein g levie d by it on its tradin g m bers . With em effec t fro m October 1st, 2009 , the transactio n charge s for trade s execute d on the future s segm en t is as pe r the tabl e give n below: T ta l trad d v o e alu e in a m n o th Up to Firs t Rs. 250 0 cores Mor e tha n Rs. 250 0 crore s up to Rs. 750 0 crores Mor e tha n Rs. 750 0 crore s up to Rs. 1500 0 crores Howe ver for instea d of on the transaction T sactio ran n C harges

(R . P r lak h of trad d s e e v lu ) a e Rs. 1.9 0 eac h side Rs. 1.8 5 eac h side Rs. 1.8 0 eac h side Rs. 1.7 5 eac h side

s in the option s sub-segm en

t the transactio n

charge s ar e levie d on the prem m valu e at the rat e of 0.05 % (eac h side ) iu the strik e pric e a s levied earlie r. Furthe r to this , tradin g the tradin g m bers em m ber s ha ve bee n advise d to charg e brok erag e fro m their client s on em Prem m pric e (trade d price ) rathe r tha n Strik e price . The iu Rs. 10 0 crores of the trade d valu e (eac h side).

contribut e to Investo r Protectio n Fun d of F&O segm en t at the rat e of Re. 1/ - pe r

24

CHAPTE R 8: C learin g an d S m n ettle e t Nationa l Securitie s Clearin g Corpo ratio n Limite d (NSCCL ) underta kes clearin g an d settlem ent of all trade s execute d on the future s an d option s (F&O) y to all trade s on the F&O This chapte r give s a procedur e an d risk segm en t of the NSE. It als o act s as lega l counterpart segm en t an d gua rantee s thei r financia l settlem ent. detaile d accoun t of m anagem en 8.1

clearin g m echanism , settlem en t

t system s at the NSE for tradin g of deri vative s cont racts.

C learin g E tities n n by

Clearin g an d settlem en t activitie s in the F&O segm en t ar e undertake NSCCL w h the help of the followin g entities: it 8 1 .1. C learin g M bers em

In the F&O segm ent , som e m bers , calle d sel f clearin g m bers , clea r em em an d settl e their trade s execute d by the m onl y eithe r on thei r ow n accoun t or on accoun t of thei r clients . Some other s calle d tradin g m ber-cum em -clearin a specia l categor y of m bers, em g m be r, clea r an d settl e thei r ow n trade s as well as trade s of othe r tradin g em member s (TM . Besides , ther e is s) calle d professiona l clearin g member s (PCM) w o clea r an d settl e trade s execute d by h TMs. The m ber s clearin g thei r ow n trade s an d trade s of others , an d the PCMs em ar e require d to brin g in additiona l securit y deposit s in respec t of ever y TM w hos e trade s the y undertak e to clea r and settle. 8 2 C .1. learin g B anks Fund s settlem en t takes plac e throug h clearin g ban ks. For settlem en w h NSCCL it designate d clearin g bank for the purpos e of Clearin g an d

t all clearing m ber s ar e require d to ope n a separat e ban k accoun t em F&O segm ent . The

Settlem en t proces s comprise s of the followin g thre e main activities: 1) 2) 3) 8.2 Clearing Settlem ent Risk M anagement C learin g M echanism of clearin g (sel f-clearing/t rading-cum-clearing/professiona
25

The clearin g mechanis m essentiall y involve s workin g ou t ope n position s and obligation s l

clearing ) m embers . This positio n is considere d for exposur e an d dail y margi n purposes . The ope n position s of CMs ar e arrive d at by aggregatin g the ope n position s of all the TMs an d all custodia l participant s clearin g through sum ation m him , in contract s in whic h the y ha ve traded . A TMs ope n positio n is arrive d at as the of his proprietar y ope n positio n an d clients ope n positions , in the contract s in whic h he has

26

traded .

W e enterin g order s on hil

the tradin g system , TMs ar e require d to

identif y the orders.

Thes e order s ca n be proprietar y (if the y ar e thei r ow n y positions ar e calculate d on ne t

trades ) or clien t (if entere d on behal f of clients ) throug h Pro / Cli indicato r provide d in the orde r entr y screen . Proprietar basi s (bu y - sell ) for eac h cont ract . Clients position s ar e arrive d at by

sum in g togethe r ne t (bu y - sell ) position s of eac h individua l client . A TMs m ope n positio n is the su m of proprietar y ope n position , clien t ope n lon g positio n an d clien t ope n shor t position (as show n in the exam e below). pl Conside r the followin g exampl e give n fro m Tabl e 8.1 to Tabl e 8.4 . The

proprietar y ope n position on da y 1 is sim y = Buy - Sell = 20 0 - 40 0 = 20 0 pl short . The ope n positio n for clien t A = Buy (O) Sell (C) = 40 0 - 20 0 = 20 0 long , i.e . he ha s a lon g positio n of 20 0 units . The open positio n for Clien t B = Sell (O) Buy (C) = 60 0 - 20 0 = 40 0 short , i.e . he ha s a shor t position of 40 0 units . Now the tota l ope n positio n of the tradin g m embe r M adanbha i at en d of da y 1 is 800 , wher e 20 0 is his proprietar y ope n positio n on ne t basi s plu s 60 0 whic h is the clien t open position s on gros s basis. The proprietar y ope n positio n at en d of da y 1 is 20 0 short . We assum e her e tha t the position on da y 1 is carrie d forwar d to the nex t tradin g da y i.e . Day 2. On Day 2, the proprietary ne t ope n proprietar positio n of tradin g m be r for trade s execute d em on tha t da y is 20 0 (buy ) 40 0 (sell ) = 200 shor t (se e tabl e 8.3) . Henc e the y positio n at the en d of da y 2 is 40 0 short. Similarl y, Clien t As ope n positio n at the en d of day 1 is 20 0 lon g (tabl e 8.2) . The en d of day ope n positio n for trade s don e by Clien t A on da y 2 is 20 0 lon g (tabl e 8.4) . H enc e the ne t open positio n for Clien t A at the en d of da y 2 is 40 0 long . Clien t Bs ope n positio n at the en d of day 1 is 40 0 shor t (tabl e 8.2) . The en d of da y ope n positio n for trade s don e by Clien t B on da y 2 is 20 0 shor t (tabl e 8.4) . Henc e the ne t ope n positio n for Clien t B at the en d of da y 2 is 60 0 short. Therefor e the ne t ope n positio n for the tradin g m be r at the en d of da y 2 em is su m of the proprietar y ope n positio n an d clien t ope n positions . It w ork s ou t to be 40 0 + 40 0 + 600 , i.e. 1400. Tabl e 8.1 : Proprietar y positio n of tradin g membe r M adanbha i on Day 1 Tradin g membe r Madanbha i trade s in the future s an d option s segm en t for
27

himsel f an d two of his clients . The tabl e show s his proprietar y position . Note : A

buy positio n 200 @ 1000"m eans Tradin g membe r Madanbhai Proprietar y position

20 0 unit s bough t at the rat e of Rs. 1000.

Buy 200@ 1000

Sell 400@ 1010

28

Tb e 8 : C al .2 lien t p sitio n of trad o in g m b em e

r Md b a a an h

i on D y 1 a

Tradin g membe r Madanbha i trade s in the future s an d option s segm en t for himsel f an d two of his clients . The tabl e show s his clien t position. Tradin g membe r Madanbhai Clien t position Clien t A Clien t B

Buy Open 400@ 1109

Sell Close 200@ 1000

Sell Open

Buy Close

600@ 1100 T b e 8 : P p ta al .3 ro rie r 2 y p sitio n of trad o in g m b em e r Md n h aaba

200@ 1099 i on D y a

A ssum e tha t the positio n on Day 1 is carrie d forw d to the nex t tradin g da y ar an d the following trade s ar e als o executed. Tradin g membe r Madanbhai Buy Proprietar y position 200@ 1000 r Md b a a an h Sell 400@ 1010 i on D y 2 a

Tb e 8 : C al .4 lien t p sitio n of trad o in g m b em e

Tradin g membe r Madanbha i trade s in the future s an d option s segm en t for himsel f an d two of his clients . The tabl e show s his clien t positio n on Day 2. Tradin g membe r Madanbhai Clien t position Clien t A Clien t B

Buy Open 400@ 1109

Sell Close 200@ 1000

Sell Open

Buy Close

600@ 1100 The followin g tabl e 8. 5 illustrate s determ inatio clear s for two TMs havin g two clients. T abl e 8 : D .5 eterm inatio TMs clearing throug h CM Buy ABC PQR Total Sell Net Buy Sell Net Buy Sell Net 4000 2000 2000 3000 1000 2000 4000 2000 2000

200@ 1099

n of ope n positio n of a CM, wh o

n of o e n p sitio n of a clearin g m b p o em er Trades : Client 1 Trades : Client 2 Open position Long Short 6000 -

Proprietar y trades

2000 3000 (1000) 2000 1000 1000

29

1000 2000 (1000) 1000 2000

6000 5000 +2000 5000 2000 +3000 5000 4000 +2000 7000 2000

-1000

-1000

30

83 . The

S ttle e e mn underlying

t P ced re ro u for inde x futures/option s of the Nifty inde x canno t be

All future s an d option s contract s ar e cas h settled , i.e . throug h exchang e of cash . delivered . Thes e cont racts , therefore, option s on have to be settle d in cash . Future s an d

individua l securitie s ca n be delivere d as in the spo t m rket . a

H ev er, it ha s bee n currentl y m ow andate d tha t stoc k option s an d futures w oul d als o be cas h settled . The settlem en t am oun t for a CM is nette d acros s all thei r TMs/ clients , wit h respec t to thei r obligation s on MTM, prem m an d iu exercis e settlem ent. 8 . 1 S .3 ettlem en t of F tu u re s C n o tracts , the Mar k-to-Marke t (MTM)

Future s cont ract s ha ve two type s of settlem ents settlem en the final cont ract. MTM se m n ttle e t: settlemen t whic h happens on

t which happen s on a continuou s basi s at the en d of eac h da y, an d the las t tradin g da y of the future s

All future s contract s for eac h m be r ar e m ked-to-m em ar arke dail y settlem ent The profits/losse 1. s ar e com puted as the differenc e betw een:

t (MTM) to the

pric e of the rele van t future s contrac t at the en d of eac h da y.

The trad e pric e an d the day s settlem en t pric e for cont ract s execute d

durin g the day bu t no t square d up. 2. The previou s day s settlemen t pric e an d the curren t day s settlemen t forwar d cont racts.

pric e for brought

3. The bu y pric e an d the sell pric e for cont ract s execute d durin g the da y an d square d up. Tabl e 8.6 explain s the MTM calculatio n for a m be r. The settlem em en t pric e for the contrac t for toda y is assum d to be 105. e T abl e 8.6 : C putatio om T rad e d tails e n of MTM at th e e d of th e d n ay Q uantity b u h ld o g t/so S ettlem t en price MTM

31

Brough t forwar d fro m previou s day Trade d durin g da y Bough t Sold Ope n positio n (no t square d up)

100@ 100 200@ 10 0 100@ 102 100@ 100

105 10 2 105

500 20 0 500

T otal The tabl e 8. 6 abo ve give s the MTM on variou s positions . The contrac t is

10 20 MTM on the

brough t forward

the differenc e betwee n the previou s day s

settlem en t pric e of Rs.10 0 an d today s settlem en t pric e of Rs.105 . Henc e on accoun t of the positio n brough t forward , the MTM shows a profi t of Rs.500 . For cont ract s execute d durin g the day, the differenc e betw n the bu y price an d ee the sell pric e determ ine s the MTM. In thi s exam ple , 20 0 unit s ar e bough t @ Rs. 10 0 and

32

10 0 unit s sol d @ Rs. 10 2 durin g the da y. Henc e the MTM for the positio n close d durin g the day show s a profi t of Rs.200 . Finall y, the ope n positio n of cont ract s trade d durin g the da y, is m argine d at the day s settlem en t pric e an d the profi t of Rs.50 0 credite d to the MTM account. show s a profi t of Rs. 1200. The CMs w o ha ve a los s ar e require d to pa y the m k-to-m h ar arke t (MTM) los s am oun t in cash whic h is in tur n passe d on to the CMs w o ha ve m e a MTM h ad profit . This is know n as daily m k-to-m ar arke t settlem ent . CMs ar e responsibl e to collec t an d settl e the dail y MTM profits/ losse s incurre d by the TMs an d thei r client s clearin g and settlin g throug h them . Similarl y, TMs ar e responsibl e to collect/pa y losses/profit s from o thei r client s by the nex t da y. The pa y-in an d /t t settlem en t ar e effecte d on the day followin g the pa y-ou t of the m k-to-m ar arke durin g the las t hal f hou r, a theoretica l settlemen t price is compute d as pe r the followin g formula: SerT This form a ha s bee n discusse d in chapte r 3. ul Afte r completio n of dail y settlemen t computation for the nex t da y. F a l settlem in en t fo r fu re tu s: , all the ope n position s ar e F= So the MTM accoun t

trade da y. In cas e a future s contrac t is no t trade d on a da y, or no t trade d

rese t to the daily settlem en t price . Suc h position s becom e the ope n position s

On the expir y da y of the future s contracts , afte r the clos e of tradin g hours , NSCCL m ark s all position s of a CM to the final settlem en t pric e an d the loss/profi t amoun t is the day resultin g profit/los s is settle d in cash. Fina l settlemen t debited / credite d to the rele van t CMs followin g expir y da y of the contract. S ettlem en t p rice s fo r fu re tu s

clearin g bank accoun t on

Daily settlem en t pric e on a tradin g da y is the closin g pric e of the respectiv e future s contracts on suc h da y. The closin g pric e for a future s contrac t is currentl y calculate d as the las t hal f an hou r weighte d averag e pric e of the cont rac t in the F&O Segm en t of NSE. Fina l settlem en of the rele van t underlyin g index/securit
33

t price is the closin g pric e

y in the capita l m ket segm ar en t of NSE,

on the las t tradin g da y of the cont ract. 8.3 2 S . ettlem en t of o tio s c n c p n o tra ts , dail y prem m settlem iu en t an d

Option s contract s ha ve two type s of settlem ents final exercise settlem ent.

D y prem m se m n ail iu ttle e t Bu yer of an optio n is obligate d to pa y the prem m toward s the option s iu

purchase d by him. Sim ilarl y, the selle r of an optio n is entitle d to receiv e the prem m for the optio n sol d by him. The prem m pa yabl e am iu iu oun t an d the prem m recei vabl e am iu oun t ar e nette d to com put e the ne t prem m pa yabl e or iu recei vabl e am oun t for eac h clien t for eac h optio n contract.

34

F ina l exercis e se m n ttle e t Fina l exercis e settlem en t is effecte d for all ope n lon g in-the-mone contract . All suc h lon g positions investo r wh o ha s lon g in-the-mone on the option. E xercis e p c ro ess The perio d durin g whic h an optio n is exercisabl e depend s on the styl e of the option . On NSE, inde x option s an d option s on securitie s ar e Europea n style , i.e . option s ar e onl y subjec t to autom ati c exercis e on the expiratio n da y, if the y ar e in-the-mone options y. Automati c exercis e m eans that all in-the-money would be exercised by NSCCL on the expi ration day of the contract . ar e exercise d an d autom aticall y strik e pric e y assigne d to

option s existing at the clos e of tradin g hours , on the expi ratio n da y of an optio n shor t position s in optio n cont ract s wit h the sam series , on a rando m basis . The e y option s on the expir y date will receiv e the exercis e settlem en t valu e pe r uni t of the optio n fro m the investo r wh o is short

The buye r of suc h option s nee d no t giv e an exercis e notic e in suc h cases. E ercis x e settlem en t co p tatio mu n y stri ke price s

In cas e of optio n contracts , all ope n lon g position s at in-the-m one ar e automatically exercise d on

the expiratio n da y an d assigne d to shor t y the

position s in optio n contract s wit h the sam e serie s on a rando m basis . Fina l exercis e is automaticall optio n contract . The y effecte d by NSCCL for all open lon g in-the-mone exercis e settlem en t pric e is the closin g pric e of position s in the expirin g m ont h optio n cont ract , on underlyin g (inde x or securi ty) on the expir y da y of the the rele van t optio n

the expir y da y of

cont ract . The exercis e settlem en t valu e is the differenc e betw n the stri ke ee pric e an d the final settlem en t pric e of the rele van t option contract . For call options , the exercis e settlem en t valu e recei vabl e by a buye r is the difference betw n the final ee settlem en t pric e an d the strik e pric e for eac h uni t of the the optio n cont ract , whil e for pu t option s it of is underlyin g con veyed by

differenc e betw n the strik e pric e an d the final settlem ee en t pric e for eac h uni t of the underlyin g con ve ye d by the optio n cont ract . Settlem ent exercise s of option s is currentl y by paym en t in cas h an d no t by deliver y of securities. The exercis e settlem en t valu e for eac h uni t of the exercise d cont rac t is

com pute d as follows: Call option s = Closin g pric e of the securit y on the da y of
35

exercis e Strik e price Put option s = Stri ke pric e Closin g pric e of exercise the securit y on the da y of

The closin g pric e of the underlyin g securit y is taken on the expiratio n da y. The exercise settlem en t valu e is debite d / credite d to the rele van t CMs clearin g ban k accoun t on T + 1 day (T = exercis e date). S ecia l facilit y fo r settlem p en t of in tio a stitu n l d als e Foreig n Institutiona l Investor s

NSCCL provide s a specia l facilit y to Institutions/ (FIIs)/M utual cleare d an d settle d by

Fund s etc . to execut e trade s throug h an y TM, w h m y be hic a thei r own CM. Suc h entitie s ar e calle d custodia l

participant s (CPs) . To avail of thi s facilit y, a CP is required

36

to registe r wit h NSCCL throug h his CM. A uniqu e CP cod e is allotte d to the CP by NSCCL. All trade s execute d by a CP throug h an y TM ar e require d to ha ve the CP cod e in the rele van t field on the tradin g syste m at the tim e of orde r entr y. Suc h trade s execute d on behal f of a CP are confirme d by thei r ow n CM (an d no t the CM of the TM throug h w m the orde r is entered), ho suc h tim e the trad e is confirme d by considere withi n the tim e n facilit y. Till t of suc h clients. specifie d by NSE on the trad e da y thoug h the on-lin e confirm atio d as a trad e of the TM an d the responsibilit

CM of concerne d CP, the sam e is y of settlem en

trad e vest s wit h CM of the TM. Once confirme d by CM of concerne d CP, suc h CM is responsibl e for clearin g an d settlem en t of deals of such custodial FIIs ha ve been prescribed perm itted to trade subject to com pliance of limit s prescribe d for the m an d thei r sub-accounts the positio n t of the code

, an d com plianc e wit h the

procedur e for settlem en t an d reporting . A FII/ a sub-accoun Participant

FII , a s the cas e m y be, intendin g to trad e in the F&O segm a en t of the exchange , is require d to obtai n a uniqu e Custodial allotted from the NSCCL. FII/sub-accounts (CP) of FIIs w hich ha ve been allotte d

a uniqu e CP cod e by NSCCL ar e onl y perm itte d to trad e on the F&O segm ent. 8.4 F&O R kM is anagem ent e ris k containm en t m easure s t m echanis m for the capita l adequac y e an d trac k segm ent. Risk containm en includ e

NSCCL ha s develope d a com prehensiv requirem ent

s of members , m onitorin g of membe r perform anc

record , stringen t m argi n requirem ents monitorin g of

, positio n lim s based on capital , onlin e it

mem r position s an d autom be ati c disablem en t fro m trading

w n lim s ar e breached . The salien t feature s of ris k containmen t mechanis m he it on the F&O segm en t are: There are stringent measured 1. requirem ents for m bers em in term s of capital adequacy

in term s of ne t wort h an d securit y deposits. NSCCL charge s an upfron t initia l m argi n for all the ope n position s of a the initia l margi n requirement s for eac h futures/option s

CM. It specifies

contrac t on a dail y basis . The CM in tur n collect s the initia l m argi n fro m the TMs an d thei r respectiv e clients. 2. Clien t m argins : NSCCL intim ate s all m ber s of the margi n liabilit y of em

eac h of their client . Additionall y member s ar e als o require d to repor t detail s

80

of m argin s collected

fro m client s to NSCCL, whic h hold s in trus t clien t m argi n by the m be r as havin g bee n collecte d for m em

m onie s to th e exten t reported thei r respectiv e clients. 3.

The ope n position s of the m ber s ar e m em arke d to m arke t base d on pric e for eac h cont ract . The differenc e is settle d in cas h on

contrac t settlem ent a T+ 1 basis. 4.

NSCC Ls on-lin e positio n m onitorin g syste m m onitor s a CMs ope n m onitorin g syste m gene rate s alert s wheneve r a by NSCCL. At 100 % the clearin g facili ty

position s on a real- tim e basis . Limit s are set for eac h CM base d on his capita l deposits . The on-lin e position CM reache s a positio n lim t se t up i

provide d to the CM shal l be withd rawn . Withdr awal of clearin g facilit y of a CM in cas e of a violatio n will lea d to withd rawal of tradin g facility

81

for all TMs and / or custodia l participant 5.

s clearin g an d settlin g throug h the CM

CMs ar e provide d a tradin g term ina l for the purpos e of m onitorin g the of all the TMs clearin g an d settlin g throug h him . A CM m y se t a

ope n positions

exposur e lim s for a TM clearin g an d settlin g throug h him . NSCCL assist s the it CM to m onito r the int ra-day exposur e lim s se t up by a CM an d w it heneve r a TM excee d the lim , it stop s that particula r TM fro m furthe r trading . Furthe r its tradin g m ber s ar e m em onitore d base d on position s limits . Tradin g facilit y is withdr awn whe n the ope n position s of positio n limit. 6. A m be r is alerte d of his em positio n to enabl e hi m to adjus t his the trading m be r exceed s the em

exposur e or brin g in additiona l capital.. 7. A separat e settlem en t gua rante e fun d for thi s segm en t ha s bee n

create d ou t of the capita l of m bers. em The mos t critica l componen t of ris k containmen t mechanis m for F&O segm en t is the margining monitorin g Managem en syste m an d on-lin e positio n monitoring . The marginin g is carried ou t on-lin e throug h actua l positio n Paralle l Risk Portfoli o Analysi s and

t Syste m (PRISM) . PRISM use s SPAN(r ) (Standard

of Risk ) syste m for the purpos e of computatio n of on-lin e m argins , base d on the pa ram eter s define d by SEBI. 8 .1 .4 The NSCCL-SPAN objectiv e of NSCC L-SPAN is to identif y overal l ris k in a portfoli o of all

future s an d options contract s for eac h m be r. The syste m treat s future s an d em option s cont ract s uniform y, while at the sam e tim e recognizin g the uniqu e l exposure s associate d w h option s portfolios , like extremel y dee p ou t-of-theit mone y shor t position s an d inter-m ont h risk . Its ove r-ridin g objective suffe r from on e da y to the nex t da y base d on 99 % VaR methodolog 8.4. 2 T ype s of m in arg s The m arginin g syste m for F&O segm en t is explaine d below: Initia l margin : Margi n in the F&O segm en t is com pute d by NSCCL upt o y. is to determ e the larges t los s tha t a portfoli o m in igh t reasonabl y be expecte d to

clien t leve l for ope n position s of CMs/TMs . Thes e ar e require d to be pai d upfron t on gros s basi s at individua l clien t leve l for clien t position s an d on ne t basi s for proprietar y positions. NSCCL collect s initia l margi n for all the ope n
81

position s of

a CM base d on

the m argins

com pute d by NSE- SPAN. A CM is fro m his TMs an d his

require d to ensur e collectio n of adequat e initia l margin fron t fro m his clients.

respectiv e clients . The TM is require d to collec t adequat e initial margin s up-

Prem m m iu argin : In additio n to initia l m argin , prem m m iu argi n is t is com plete.

charge d at client level . This margi n is require d to be pai d by a buye r of an optio n till the premium settlem en

82

 initial

A ssignm ent m argin

m argin:

A ssignm ent

m argin

is levied

in addition

to

and prem m m iu argin . It is require d to be pai d on assigne d settlemen t obligation s for optio n cont racts , till m argin is charge d on the ne t exercis e

position s of CMs tow ard s exercise

suc h obligation s are fulfilled . The settlem en t valu e pa yabl e by a CM. 8.5 M arginin g S stem y

NSCCL ha s develope d a com prehensiv

e ris k containm en

t m echanis m for the t

Future s & Options segm ent . The mos t critica l componen t of a ris k containm en

m echanis m is the onlin e position m onitorin g an d m arginin g system . The actua l marginin g an d positio n monitorin g is don e on- line , on an int ra-d ay basi s usin g PRISM (Paralle l Risk Managem en t System ) whic h is the real- tim e positio n t m essage s monitorin g an d ris k m anagem en t system . The ris k of eac h tradin g an d clearing

m be r is m em onitore d on a real-tim e basi s an d alerts/disablem en ar e generate d if the m be r crosse s the se t limits. em S n can in As g ris k c a e h rg in the table giving the sixteen standard price

shown

risk scenarios, and scans up

SPAN and

starts

at the last underlying

m arket

settlem ent

down three e ven inter vals of price change s (pric e sca n range) . At eac h pric e sca n point , the progra m als o scan s up an d dow n a range of probable from the underlying m ark ets current volatili ty volatili ty (volatili ty scan range) . SPAN

calculate s the probabl e prem m valu e at eac h pric e sca n poin t for volatili ty up iu an d volatilit y dow n scenario . It the n compare s thi s probabl e premiu m valu e to the theoretical prem m valu e (base d on las t closin g valu e of the underlying ) iu to determ e profi t or loss. in Deep-ou t-of-the-m one y identificatio n shor t option s position s pos e a specia l ris k

problem . As the y move toward s expiration , the y ma y no t be to move

significantl y expose d to normal pric e mo ves in the underlying . H owev er, unusuall y larg e underlyin g pric e change s m y caus e thes e options a into-the-m one positions . In orde r t o accoun t for scenario s in the ris k ar ray, Number 15 an d 16 , reflec t an extrem underlyin g pric e m vem e o ent , currentl y define d as doubl e the m axim m pric e sca n rang e for a give n underlying . H ev er, u ow
83

y, thu s creatin g larg e losse s to the holder s of shor t optio n thi s possibilit y, two of the standar d ris k

becaus e pric e change s of these m agnitude 35 % of the resultin g losses.

s ar e rare , the syste m onl y co ver s

Afte r SPAN ha s scanne d the 16 differen t scenario s of underlyin g m ket pric e ar an d volatility portfolio. C d alen a r sp rea d m in arg changes , it select s the larges t los s fro m am g thes e 16 on loss is the scannin g ris k charg e for the obser vations . This larges t reasonable

A calenda r sprea d is a positio n in an underlyin g wit h on e maturit y whic h is hedge d by m aturity: an offsetting position in the sam e underlying with a different for exam ple, a short positio n in a July future s contrac t on Relianc e on Relianc e is a calenda r

an d a lon g positio n in the A ugus t future s contract to m arke t ris k of the underlying

spread . Calenda r spread s attrac t low r m e argin s becaus e the y ar e not expose d . If the underlyin g rises , the July contrac t woul d m ake a los s w e the Augus t cont rac t woul d m ke a profit. hil a As SPAN scan s future s price s withi n a contrac t m onths do singl e underlyin g instrum ent , it

assum s tha t price moves correlat e perfectl y acros s contrac t months . Sinc e e pric e mo ves acros s no t gene rall y exhibi t perfec t h correlation , SPAN add s an calenda r sprea d charg e (als o called the inter-m ont option s cont ract . To pu t it in a differen t way, the co ver s the calendar an d option s wit h differen t expirations. For eac h future s an d option s contract , SPAN identifie s the delt a associate d eac h sprea d form , SPAN ed the calenda r sprea d

sprea d charge ) to the scannin g ris k charg e associate d wit h eac h future s and calenda r sprea d charg e basi s ris k tha t m y exis t for portfolio s containin g future s a

eac h future s and optio n position , for a contrac t m onth . It the n form s spread s usin g thes e delta s acros s contr act m onths . For charge. assesse s a specifi c charg e pe r sprea d whic h constitutes

84

The

margi n for calenda r sprea d is calculate d on the basi s of delt a of the

portfoli o in each month . Thu s a portfoli o consistin g of a nea r m ont h optio n w h a delt a of 10 0 an d a far m it onth optio n w h a delt a of 10 0 w it oul d bea r a sprea d charg e equi valen t to the calenda r spread charg e for a portfoli o whic h is lon g 10 0 nea r m ont h future s contrac t an d shor t 10 0 far m onth future s contract . A calenda r sprea d positio n on Exchang e trade d equit y deri vative s ma y be grante d calenda r sprea d treatm en t till the expir y of the nea r m ont h cont ract. Margi n on calenda r spread s is levie d at 0.5 % pe r m ont h of sprea d on the far m ont h contrac t of the sprea d subjec t to a m inim m m u argi n of 1% an d a m axim m m u argi n of 3% on the far m ont h cont rac t of the spread. S o t o tio n m u m marg hr p inim in Shor t option s position s in extrem y deep-ou t-of-the-m el one y strike s m y appea r a to ha ve little or no ris k acros s the entir e scannin g range . Howev er, in the even t tha t underlyin g m ark et condition s chang e sufficientl y, thes e ma y move into-the-m one y, thereb y generating larg e losse s for option s the shor t

position s in thes e options . To cover the risk s associate d wit h deep- ou t-of-them one y shor t option s positions , SPAN assesse s a m inim m m u argi n for eac h short optio n positio n in the portfoli o calle d the shor t optio n minimu m charge , whic h is se t by the NSCCL. optio n contract. For exam ple , suppos e tha t the shor t optio n m inim m charg e is Rs.5 0 pe r u shor t position . A portfoli o containin g 20 shor t option s will requirem en 500. The shor t optio n m inim m m u argi n equa l to 3% of the notiona l valu e of all shor t inde x options is charge d if su m of the wors t scenari o los s an d the calenda r stoc k is on the previou s day s sprea d m argi n is lowe r tha n the shor t optio n m inimu m m argin . For option s it is equa l to 7.5 % of the notiona l valu e based t of at leas t Rs. 1,000, calenda r sprea d charg e on the positio n is onl y Rs. ha ve a m argi n eve n if the scannin g ris k charg e plu s the The shor t optio n m inim m charg e serve s as a u requirem ent s for eac h shor t positio n in an m inim m charg e toward s margin u

closin g valu e of the underlyin g stock . Notiona l valu e of optio n positions the rele vant underlying.
85

calculate d on the shor t optio n position s by applyin g the las t closin g pric e of

N t op e tio n v e alu The ne t optio n valu e is calculate d as the curren t m arke t valu e of the optio n tim s the num e ber of optio n unit s (positiv e for lon g option s an d negativ e for shor t options ) in the portfolio. Net optio n valu e is adde d to the liqui d ne t wort h of the clearin g m be r. This em m ean s tha t the curren t m ket valu e of shor t option s ar e deducte d fro m the ar liqui d ne t w h an d the m ket valu e of lon g option s ar e adde d thereto . Thu s ort ar m k to m ar arke t gain s an d losse s on option position s ge t adjuste d agains t the availabl e liqui d ne t worth.

86

N t bu y p iu e rem m To cover the on e da y ris k on lon g optio n position s (fo r whic h premiu m shal l be pa yabl e on T+1 day) , ne t bu y prem m to the exten t of the ne t lon g option s iu positio n valu e is deducte d from the Liqui d Networt h of the m be r on a rea l em tim e basis . This woul d be applicabl e onl y for trade s don e on a give n da y. The ne t bu y prem m m iu argi n shal l be release d toward s the Liquid Networt h of the m be r on T+ 1 da y afte r the com em pletio n of pa y-in toward s prem m settlem iu ent. 8.5 3 O . veral l p ortfoli The o m argi n re u q irem t en s for a m be r for a portfoli o of future s an d em

tota l m argi n requirem ent

option s contract 1. 2.

woul d be compute d by SPAN as follows:

Add s up the scannin g ris k charge s an d the calenda r sprea d charges. Com pare s thi s figur e to the shor t optio n m inim m charg e an d select s u

the large r of the two. This is the SPAN ris k requirem ent. 3. Tota l SPAN m argi n requirem en t is equa l to SPAN ris k requirem en t les s

the ne t option value , whic h is m k to m ar arke t valu e of differenc e in lon g optio n position s and short optio n positions. 4. Initia l m argi n requirem en Buy Premium. 8.5 4 C . ros s M argining Cros s marginin g benefi t is pr ovide d for of f-settin g position s at an individua l clien t level in equity benefit a. b. is provided and equity deri vatives segm ent. The cross margin on following offsettin g positionst = Tota l SPAN m argi n requirem en t + Net

Inde x Future s an d constituen t Stoc k Future s position s in F&O segm ent Inde x future s positio n in F&O segm t an d constituen t stoc k position s en c. Stoc k future s positio n in F&O segm en t an d stoc k

in CM segm ent

position s in CM segm ent 1. In orde r to exten d the cros s m arginin g benefi t as pe r (a) an d (b )

above , the baske t of constituen t stoc k futures / stoc k position s need s to be a com plet e replic a of the inde x futures. 3. The position s in F&O segm en t for stoc k future s an d inde x future s of
87

the sam e expiry m ont h ar e eligibl e for cros s marginin g benefit.

4. The positio n in a securit y is considere d onl y onc e for providin g cros s marginin g benefit. E.g. Positions in Stock Futures of securi ty A used to se t-off against index futures position s is no t considere d agai n if ther e is a of f-settin g position s in the securit y A in Cas h segm ent. 5. benefit. spread Position s in optio n cont ract s ar e no t considere d for cros s marginin g

The position s whic h are eligibl e for offse t ar e subjecte d to sprea d m argins . The m argin s shal l be 25 % of the applicabl e upfron t m argin s on the offsettin g positions.

88

Prio r to the im plem entatio bein g trade d on

n of a cros s m arginin g m echanis m position s in the underlyin g securitie s in bot h the segm ents . For A in the capita l m ket ar

equit y an d equity deri vative s segm en t wer e bee n treate d separatel y, despit e the common exam ple , Mr. X bough t 10 0 share s of a security the F&O segment . segm ents M argin s wer e pa yabl e in

segm en t an d sol d 10 0 share s of the sam e securit y in singl e stoc k future s of the capita l m ket an d F&O ar separatel y. If the m argin s pa yabl e in the capita l m arke t segm en t is

Rs.10 0 an d in the F&O segm en t is Rs. 140 , the tota l m argi n pa yabl e by MR. X is Rs.240 . The ris k arisin g ou t of the ope n positio n of Mr. X in th e capita l mar ket segm en t is significantl y mitigate d by for Mr. X fro m Rs. 24 0 to onl y Rs. 60. the correspondin g of f-settin g the m argi n positio n in the F&O segm ent . Cros s marginin g m echanis m reduces

89

CHAPTE R 9: R u r eg lato The

y F ew ram ork the provision s containe d in the

tradin g of deri vative s is go verne d by

SC(R)A , the SEBI Act, the rule s an d regulation s fram d unde r tha t an d the rule s e an d byel aws of the stoc k exchanges. detai l the recom endatio m deri vative s in India. 91 S . ecuritie s C ontract s (R egulation ) A ,15 ct 96 y n of This Chapte r take s a loo k at the lega l trading of an d regulator y fram or k for deri vative s tradin g in India . It also , discusse s in ew the LC Gupt a Committe e for

SC(R) A regulate s transaction s in securitie s market s alon g wit h deri vative s mar kets . The original ac t wa s introduce d in 1956 . It w s subsequentl a am ende d in 1996 , 1999 , 2004 , 200 7 and 2010 . It no w govern s the tradin g of securitie s in India . The ter m securities ha s bee n defined in the am ende d SC(R) A unde r the Sectio n 2(h ) to include: Shares , scrips , stocks , bonds , debentures , debentur e stoc k or othe r

m arketable

securitie s of a like natur e in or of an y incorpo rate d com pan y or

othe r bod y corpo rate. schem e Derivative. U nits or any other instrum ent issued by an y collective investm ent to the investor s in suc h schem es.

Securit y receip t as define d in claus e (zg ) of sectio n 2 of th e Securitisatio n and Reconstructio n of Financia l Asset s an d Enforcemen t of Securit y Interes t Act , 2002 Unit s or an y othe r suc h instrum en t issue d to the investo r unde r an y m utua l fun d schem e1. Any certificat e or instrum en t (by w hateve r nam e called) , issue d to an investo r by an issue r bein g a specia l purpos e distinc t entit y w h possesse s hic an y deb t or recei vable, includin g mortgag e debt , assigne d to suc h entit y, an d acknowledgin g beneficia l interest of suc h investo r in suc h deb t or recei vable , includin g mortgag e deb t as the cas e ma y be. Governm en t securities s as m y be declare d by the Cent ral G vernm a o en t
90

Suc h othe r instrum ent to be securities.

Right s or interest s in securities.

Deri vative is define d to include: , share , loa n w hethe r secure d

A securit y derive d fro m a deb t instrum ent

or unsecured, securi ty.

ris k instrum en t or cont rac t for difference s or an y othe r for m of

A cont rac t whic h derive s its valu e fro m the prices , or inde x of prices , of underlying securities. 1 Securitie s shal l no t includ e any uni t linke d insu ranc e polic y or scrip s or any suc h instrum en t or unit , by whate ver nam e called , whic h pr ovide s a combine d benefi t risk on the life of the person s an d investm ent s by suc h persons an d issue d by an insure r referre d to in claus e (9) of sectio n 2 of the insu ranc e Act, 193 8 (4 of 1938)

91

Sectio n 18A of the SC(R) A provide s tha t notwithstandin an d vali d if suc h contract s are: Trade d on a recogni zed stoc k exchange

g anythin g containe d in

an y othe r law for the tim e bein g in force , contract s in deri vativ e shal l be lega l

S ettle d on the clearin g hous e of the recognize d stoc k exchange , in

accordanc e with the rule s an d byel aws of suc h stoc k exchanges. 9.2 S ecuritie s an d E xchang eB oar d of Indi a A , 1 9 ct 92 t of Securitie s an d Exchang e Boar d of t of the securitie s m ket an d (c) ar jurisdictio n extend s over

SEBI Act, 199 2 provide s for establishm en in securitie s (b) promoting

Indi a (SEBI) wit h statutor y power s for (a ) protectin g the interest s of investor s the developm en regulatin g the securitie s m arket . Its regulatory all interm ediarie

corpo rate s in the issuanc e of capita l an d transfe r of securities , in additio n to s an d person s associate d wit h securitie s m arket.

SEBI ha s bee n obligate d to perfor m the aforesai d function s by suc h m easure s as it think s fit. In particula r, it ha s pow s for: er m arkets. etc. m arkets. regulatin g the busines s in stoc k exchange s an d an y othe r securitie s registerin g an d regulatin g the workin g of stoc k brokers , subbroker prom otin g an d regulatin g sel f-regulator y organizations. s

prohibitin g fraudulen t an d unfai r trad e practice s relatin g to securitie s callin g for inform atio n from , undertakin g inspection , conductin g s an d sel f

inquirie s an d audit s of the stoc k exchanges , m utua l fund s an d othe r person s associate d wit h the securitie s m ark et an d othe r interm ediarie regulator y organization Governm ent. 9.3 R egulatio n fo r D erivative s T rading p of Dr. L. C. Gupt a deri vative s tradin g in s in the securitie s m arket.

perform in g suc h function s an d exercisin g accordin g to Securitie s Act, 1956 , as m y be delegate d to it by the Cent ral a

Contract s (Regulation)

SEBI se t up a 24-m be r com itte e unde r the Chairm em m anshi to develo p the appropriat e regulator y fram ewor k for
92

India . On

May

11 , 199 8 SEBI accepte d the recom endation m

s of

the

com itte e an d appro ved the phase d introductio m Indi a beginnin g wit h stoc k inde x futures. Accordin g to thi s fram ework:

n of deri vative s tradin g in

Any Exchang e fulfillin g the eligibili ty criteri a can appl y to SEBI for gran t under The Section 4 of n the SC(R)A, t 1956 to start trading derivativ es exchange/segm en shoul d ha ve a sepa rat e g member s shal l be of the go vernin g council .

of recognition deri vatives.

governin g counci l an d representatio

of trading/clearin

limite d to m aximu m of 40 % of the tota l m bers em

The exchang e w oul d ha ve to regulat e the sale s practice s of

93

its member s an d woul d ha ve to obtai n prio r appro val of SEBI befor e star t of tradin g in any deri vativ e cont ract. The Exchang e shoul d ha ve minimu m 50 m bers. em y

The m ber s of an existin g segm em en t of the exchang e woul d no t automaticall becom e

the m ber s of deri vativ e segm em ent . The m ber s seekin g adm em issio n in

the deri vative segm en t of the exchang e woul d nee d to fulfill the eligibilit y conditions. SEBI The clearin g an d settlem en t of deri vative s trade s woul d be throug h a appro ved clearin g corpo ration/house . Clearin g corporations/house s

complyin g wit h the eligibility condition s as laid dow n by the com itte e ha ve to m appl y to SEBI for appro val. D vati ve brokers/dealer eri s an d clearin g m ber s ar e require d to em

see k registration

fro m SEBI . This is in additio n to thei r regist ratio n as broker s of The minimu m networt h for clearin g m ber s of the em hous e shal l be Rs.30 0 Lakh . The networt h of

existin g stoc k exchanges.

deri vative s clearin g corporation/

the m be r shal l be com em pute d as follows: (b) (c) (d) deliveries (f ) (g) (h) (i) introduce. The initia l margi n requirement , exposur e limit s linke d to capita l The Doubtfu l debt s an d ad vances Prepai d expenses Intangibl e assets 30 % mar ketabl e securities minimu m cont rac t valu e shal l no t be les s tha n Rs. 2 Lakh . the future s cont rac t the y propos e to C apita l + Fre e reserv es Les s non-allowabl e asset s viz ., (a) Fixe d assets

Pledge d securities Membe rs card Non-allowabl e securitie s (unliste d securities) (e) Bad

Exchange s ha ve to subm t detail s of i

adequac y an d m argin dem and s relate d to the ris k of los s on the positio n will be prescribe d by SEBI/Exchange fro m tim e to tim e.
94

Ther e will be stric t enforcem en

t of Kno w you r custome r rul e an d

require s tha t ev er y clien t shal l be registere d wit h the deri vative s brok er. The m ber s of the deri vativ es segm em en t ar e als o require d to m e thei r client s ak awar e of the risk s inv olve d in deri vativ es tradin g by issuin g to the clien t the Risk Disclosur e Documen t and obtai n a copy of the sam e dul y signe d by the client.

95

 SEBI.

The tradin g m ber s ar e require d to ha ve qualifie d appr oved use r an d em

sale s person w o shoul d ha ve passe d a certificatio n prog ram e appro ved by h m

9 . 1 F rm s of co .3 o llateral

s accep l tab

e at NSCCL certai n requirem ent com ponen t an d s an d

M ber s an d authorize d dealer s ha ve to fulfill em collate ral deposit s ar e com ponent segregate d into cas h

provid e collater al deposit s to becom e m ber s of em

the F&O segm ent . All non-cas h fixe d deposi t

. Cas h com ponen t m ean s cash , ban k gua rantee,

receipts , T-bill s an d date d go vernm en t securities . N on-cas h com ponen t m n ea all othe r form s of collatera l deposit s like deposi t of appro ved dem t securities. a 9 . 2 .3 R u eq irem n et s to b o ec m e F&O se m n g e t m b em er

The eligibilit y criteri a for m bershi em 9.1 . Requirem ents tak e m bershi em for professiona

p on the F&O segm en t is as give n in tabl e l clearin g membershi p ar e pr ovide d in tabl e p of F&O segm en t is require d to of F&O

9.2 . Anybod y intereste d in taking m bershi em

p of CM an d F&O segm en t or CM, WDM an d F&O segm en t. m eetin g

An existin g m embe r of CM segm en t ca n als o tak e m bership em segm ent . A tradin g m be r ca n als o be a clearin g m be r by em em additional requirem ents . Ther e ca n als o be onl y clearin g m bers. em

96

T abl e 9.1 : (c rp ra s) o o te P articu lars

E ligibilit

y criteri a

fo r m bershi em

on F&O

se m n g e

CM an d F&O se m n g et 10 0 (M embershi segm en t an d Trading/ Trading an d sel fclearin g m bership em F&O segm ent) in p in CM

(a l v lu s in R . l a e s L ) akh Net wort h1

CM, WD M a d F&O n se m n g et 20 0 (M embershi p in WDM segm ent , CM segm ent an d trading/t radin g and sel f clearin g m bership em in F&O segm ent)

30 0 (M embershi

p in CM

30 0 (M embershi segm ent

p in

segm en t an d tradin g and clearin g membershi p in F&O Segm ent) Interes t fre e security deposi t (IFSD ) wit h NSEIL t fre e security Interes deposi t (IFSD ) wit h NSCCL ral securi ty Collate deposi t (CSD )3 Annua l subscription 25** 1 15 * 11 0

WDM segm ent , CM and Tradin g and p in clearing m bershi em 26 0 15 * 25** 2

97

N ote s fo r T abl e 9 : .1 1 No additiona l networt h is require d for sel f clearin g members . Howev er, a networt h of Rs. 300 Lak h is require d for TM-CM an d PCM. * Additiona l IFSD of 25 lakh s wit h NSCCL is require d for Tradin g and Clearin g (TM-CM) an d for Tradin g and Self clearin g m embe r (TM/SCM). ** Additiona l Collatera l Securit y Deposi t (CSD ) of 25 lakh s wit h NSCCL is require d for Trading an d Clearin g (TM-CM) an d for Tradin g and Self clearin g membe r (TM/SCM). In addition , a m be r clearin g for other s is require d to brin g in IFSD of Rs . 2 em lak h an d CSD of Rs. 8 lakh pe r tradin g m be r he underta kes to clea r in the F&O segm em ent. T l e 9.2 : R ab equirem ent M bership em s fo r P rofessio na l C learin g (Amoun t in Rs. lakh) CM S m t eg en F&O S g en em t

P articu lars Eligibility Net Worth Interes t Fre e Security Deposi t (IFSD)* Collate ral Security Deposi t (CSD) Annua l Subscription

Tradin g M embe r of NSE/SEB I Registere d C ustodians/ Recognise d Banks 30 0 30 0 25 25 2.5 25 25 Nil

*Th e Professiona l Clearin g Membe r (PCM) is require d to brin g in IFSD of Rs. 2 lak h an d CSD of Rs. 8 lak h pe r tradin g m be r whos e trade s he undertake s to em clea r in the F&O segm en t and IFSD of Rs. 6 lak h an d CSD of Rs. 17. 5 lak h (Rs . 9 lak h an d Rs. 25 lak h respectivel y for corporat e M bers ) pe r tradin g em m be r in the CM segm em ent. 9 . 3 R u .3 eq irem n et s to b co e m e au o th rize d / ap ro e p v d u r se

Tradin g member s and participant s are allowe d to appoint , wit h the appro val of the F&O segm ent of the exchange , authorize d person s an d appro ved user s to Thes e authori zed user s ca n be individuals ,
98

ope rat e the tradin g workstation(s).

registere d

partnershi p

firm s or

corpo rat e bodie s as

define d unde r the

Com panie s Act, 1956. Authorize d person s canno t collec t an y commissio n or an y am oun t directl y fro m the client s he introduce s to the tradin g mem r wh o appointe d him . Howeve r be he ca n receiv e a commission or an y suc h am oun t fro m the tradin g m be r w o em h appointe d hi m as pr ovide d unde r regulation. Appr oved user s on the F&O segm en t ha ve to pas s a certificatio whic h ha s been appr oved by identificatio n progra m

SEBI . Eac h appro ved use r is give n a uniqu e

n numbe r throug h which he will hav e acces s to the NEAT system .

The appr ove d use r ca n acces s the NEAT system

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throug h a passwor d an d ca n chang e suc h passwor d fro m tim e to tim e. 9.3 4 P sitio n lim . o its Positio n limit s ha ve bee n specifie d by SEBI at tradin g m be r, client , m em arke t an d FII levels respectiv ely. T radin g m b r p sitio n lim em e o its Tradin g membe r positio n limit s are specifie d as give n below: 1. Tradin g membe r positio n limit s in equit y inde x optio n contracts : The positio n limit s in equit y inde x optio n contract s is highe r of on ope n position s in all optio n cont ract s

tradin g m ber em

Rs.50 0 cror e or 15 % of the tota l ope n interes t in the m ket in equit y inde x ar optio n contracts . This limi t is applicable on a particula r underlyin g index. 2. Tradin g membe r positio n limit s in equit y inde x future s contract s: The positio n limit s in equit y inde x future s cont ract s is highe r of limi t is applicable on ope n position s in all future s

tradin g m ber em

Rs.50 0 cror e or 15 % of the tota l ope n interes t in the m arke t in equi ty inde x future s cont racts . This cont ract s on a particula r underlyin g index. 3. positio n: crores futures Tradin g membe r positio n limit s for combine d future s an d option s

For stock s havin g applicabl e mark et- wis e positio n limi t (MWPL) of Rs.50 0 or m ore , the com bine d future s an d option s positio n lim t is 20 % of i MWPL or Rs.30 0 crores , whicheve r is lowe r an d withi n whic h stoc k applicabl e MWPL or Rs.15 0 crores ,

applicable

positio n canno t excee d 10 % of

whichev er is lowe r. Rs.500 applicable For stock s havin g applicabl e mar ket- wis e positio n limi t (MWPL) les s tha n crores , the combine d future s an d option s positio n lim t is i 20 % of MWPL an d future s positio n canno t excee d 20 % of applicabl e MWPL position limits on the last trading day m onth w hich

or Rs.50 cror e whic h eve r is lowe r. The Clearin g Corpo ratio n shal l specif y the trading member -wise shall be reckone d for the purpos e durin g the nex t m onth. C lien t leve l positio n lim its The gros s ope n positio n for eac h client , acros s all the deri vativ e contract s on an underlying, shoul d no t excee d 1% of the fre e floa t m arke t capitalizatio
100

n (in

term s of num r of shares ) or be

5% of the ope n interes t in all deri vativ e contract s in the sam e underlyin g stoc k (in term s of num r of shares ) whicheve r is highe r. be M arke t w e p id ositio n lim its The mar ket wid e limi t of ope n positio n (in term s of the num r of underlyin g be stoc k) on futures an d optio n cont ract s on a particula r underlyin g stoc k is 20 % s in the rele van t underlyin g of the num r of share s hel d by non-prom be oter

securit y i.e . 20 % of the freefloa t in term s of no . of

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share s of a com pan y. This

limi t is applicabl e on

all ope n position s in all t

future s an d option contract s on a particula r underlyin g stock . The enforcem en of the marke t wid e lim s is done in the followin g m it anner:

At en d of the da y the exchang e test s w hethe r the m arke t w e ope n id

interes t for any scri p exceed s 95 % of the marke t wid e positio n limi t for tha t scrip . In cas e it doe s so, the exchang e takes not e of ope n positio n of all client/TM s as at end of tha t da y for that scri p and fro m nex t da y on ward s the y ca n trad e onl y to decreas e thei r position s through forc e for offsettin g positions.

At the en d of eac h da y durin g whic h the ba n on fres h position s is in an y scrip, the exchang e test s w hethe r an y m be r or em clien t ha s or ha s create d a ne w positio n in tha t scrip . If

increase d his existin g positions

so , tha t clien t is subjec t to a penalty equa l to a specifie d percentag e (or basi s points ) of the increas e in the positio n (in term s of notiona l value) . The penalt y is reco vere d befor e tradin g begin s nex t da y. The exchang e specifie s the percentag e or basi s points , whic h is se t hig h enoug h to deter violation s of the ba n on increasin g positions. The norm l tradin g in the scri p is resum d afte r the ope n outstandin g a e dow n to 80 % or belo w of the m arke t w e positio n lim . id it a significan t par t of the

positio n com es

Furthe r, the exchang e also check s on a m onthl y basis , w hethe r a stoc k ha s rem aine d subjec t to the ba n on m ont h consistentl y for new positio n for thre e m onths . If so, then the exchang e phase s ou t

deri vativ e cont ract s on tha t underlying. F I / MF s po I sitio n lim its FII an d MFs positio n lim s ar e specifie d as give n below: it 1. The FII an d MF positio n limit s in all inde x option s cont ract s on a inde x ar e Rs. 50 0 crore s or 15 % of the tota l ope n a particula r

particula r underlying limi t is applicabl e on underlyin g index. 2.

interes t of the m arke t in index options , whicheve r is highe r, pe r exchange . This ope n position s in all optio n cont ract s on

FII an d MF positio n limit s in all inde x future s cont ract s on a particula r This limi t is applicabl e on ope n position s in all future s index.
102

underlyin g index is the sam e as m entione d abo ve for FII an d MF positio n limit s in inde x optio n contracts. cont ract s on a particula r underlying

In additio n to the abo ve, FII s an d MFs ca n take exposur e in equit y inde x deri vativ es subjec t to the followin g limits: a. Shor t position s in inde x deri vative s (shor t futures , shor t call s an d lon g puts) no t exceedin g (in notiona l value ) the FIIs/MF s holdin g of stocks. b. Long position s in inde x deri vative s (lon g futures , lon g call s an d shor t puts ) not

103

ex ceedin g (in notiona l value ) the FIIs/MF s holdin g of cash , go vernm ent securities , T-bill s and simila r instrum ents. In thi s regards , if the ope n position s of the FII/M F exceed s the lim s as state d it in point no. (a) an d (b) abo ve, suc h surplu s is deem d to com e pris e of shor t an d lon g positions in the sam e proportio n of the tota l ope n position s individuall y. Suc h shor t an d long position s in exces s of the sai d limit s are compare d wit h the FIIs/MF s holdin g in stocks, cas h et c in a specifie d form at. 3. For stock s havin g applicabl e mark et- wid e positio n limi t (MWPL) of Rs.

50 0 crore s or more , the combine d future s an d option s positio n lim t is 20 % of i applicabl e MWPL or Rs. 30 0 crores , whicheve r is lowe r and withi n whic h stoc k future s positio n cannot whicheve r is lowe r. For stoc ks havin g applicabl e mar ket-wid e positio n limi t of les s tha n Rs. 50 0 crores , the combine d future s an d option s positio n limi t is 20 % of applicabl e MWPL an d futures positio n canno t excee d 20 % of the applicabl e MWPL or Rs. 50 cror e whicheve r is lowe r. The FII s shoul d repor t to the clearin g m be r (custodian ) the exten t of the em FII s holdin g of stocks , cash , governm en t securities , T-bill s an d sim r ila instrum ent s befor e th e en d of the da y. The clearin g m be r (custodian ) in tur n em exchange m onitor s the FII positio n limi t for sub-accoun t is sam e as tha t of client shoul d repor t the sam e to the exchange . The positio n limits . The level positio n limits. At th e lev l of th e F I su -acco n e I b u t /M F sc e e hm excee d 10 % of applicabl e MWPL or Rs. 15 0 crores ,

Mutua l Fund s are allowe d to participat e in the derivative s mar ket at pa r wit h Foreig n Institutional treate d futures, index options, Investor s stock (FII) . Accordingl y, mutua l fund s shal l be of position futures limits in index M utua l FII s an d the s of FIIs. options and stock contracts . at pa r wit h a registere d FII in respect

fund s will be considere d as tradin g m ber s like em

registere d

schem s of mutua l fund s will be treate d as client s like sub-account e

The positio n limit s for M utua l Fund s an d its scheme s shal l be as under: 1. Positio n lim t for M s in in e x fu re s an d o tio s c n c i F d tu p n o tra ts

A disclosur e is require d fro m an y perso n or person s actin g in concer t wh o together ow n 15 % or m e of the ope n interes t of all future s an d option s or
104

contract s on a particular is a violatio n of disciplinar y action. 2.

underlyin g inde x on the Exchange . Failin g to do so , penal ty an d

the rule s and regulation s an d att ract s

Positio n lim t for M s in sto k fu re s an d o tio s i F c tu p n

The gros s ope n positio n acros s all future s an d option s cont ract s on a particula r underlying securit y, of a sub-accoun t of an F , / MF schem e shoul d no t II excee d the highe r of: 1% of the fre e floa t m arke t capitalisatio shares) , OR n (in term s of num r of be

105

 underlying underlying

5% of the ope n interes t in the deri vativ e contract s on a particula r stoc k (in term s of num r of cont racts) . Thes e positio n limit s ar e be securit y on the Exchange. g of clien t m in arg

applicabl e on the com bine d positio n in all future s an d option s cont ract s on an

9.3 5 R . eportin

Clearin g Member s (CMs ) and Tradin g Member s (TMs ) are require d to collec t upfron t initial margin s fro m all thei r Tradin g Members / Constituents. CMs ar e require d to com pulsoril y report , on a dail y basis , detail s in respec t of s clearin g

suc h margin am oun t du e an d collected , fro m the TMs/ Constituent of the TMs/ Constituents

an d settlin g throug h them w h respec t to the trade s executed / ope n position s , it , w h the CMs have pai d to NSCCL, for the purpos e hic of m eetin g m argi n requirem ents. Similarl y, TMs ar e require d to repor t on a dail y basi s detail s in respec t of suc h margi n am ount constituents du e an d collecte d fro m the constituent s clearin g an d settlin g throug h them , w h respec t to the trade s executed / ope n position s of the it , whic h the tradin g mem ber s ha ve paid to the CMs, an d on whic h the CMs ha ve allowe d initia l margi n limi t to the TMs. 9. 4 A ju en d stm t s fo r C rp rat o o e A ctions

Adjustm ent corporate will

s for corporat e action s for stoc k option s w oul d be as follows:

The basi s for an y adjustm en t for corpo rat e actio n shal l be suc h tha t of the m arket participants on cum and ex-date for action shall continu e to rem n the sam e as far ai retainin g the relativ e statu s of as possible . This

the valu e of the position facilitat e in

position s nam y in-theel

m one y, at-the-m one y an d ou t-of-m one y. This will als o addres s issue s relate d to exercis e an d assignm ents. A djustm en t for corpo rat e action s shal l be carrie d ou t on the las t da y on

whic h a security is trade d on a cu m basi s in the underlyin g cas h m arket. specification adjustment positions. The corpo rat e action s m y be broadl y classifie d unde r stoc k benefit s a
106

Adjustment s shal l mea n modification s namely strik

s to position s and/o r contrac t

e price , position , m ket lot , m ar ultiplie r. Thes e

s shal l be carrie d ou t on all open , exercise d a s well as assigne d

an d cas h benefits. The variou s stoc k benefit s declare d by the issue r of capita l ar e bonus , rights , m erger/ demerge r, amalgamation , splits , consolidations , hiveof f, warrant s an d secured prem m note s an d dividends. iu y for adjustm en t of corpo rat e action s suc h as bonus ,

The methodolog

stoc k split s and consolidation strike

s is as follows:

Strik e price : The ne w strik e pric e shal l be arrive d at by dividin g the old

107

pric e by the adjustm en M arket lot/m ultiplier:

t facto r as unde r. lot/m ultiplier shall be arrived

The new m arket

at by multiplyin g the old m arke t lot by the adjustm en t facto r as unde r. specified Position : The ne w positio n shal l be arrive d at by multiplyin g the old methodolog y. s is arrive d at

positio n by th e adjustmen t facto r, whic h will be compute d usin g th e pre-

The adjustm en t facto r for bonus , stoc k split s an d consolidation as follows: (A+B)/B Bonus : Rati o - A:B ; Adjustmen t factor : (A+B)/B Stoc k split s and consolidations Right : Rati o - A:B Prem ium : C Face value : D Existin g strik e price : X New strik e price : ((B * X) + A * (C + D))/(A+B)

: Rati o - A:B ; Adjustmen t factor : B/A

Existin g marke t lot / multiplie r / position : Y ; New issu e si ze : Y * y m y resul t in fraction s du e to the corpo rat e actio n e.g . a a vie w to minimizin g fractio n settlem ents to be adopted: , the

The abo ve m ethodolog

a bonu s ratio of 3:7 . With

followin g methodolog y is proposed 1.

Com put e valu e of the positio n befor e adjustm ent.

2. Com put e valu e of the positio n takin g int o accoun t the exac t adjustm en t facto r. 3. Carr y ou t roundin g off for the Strik e Pric e an d M ket Lot. ar

4. Com put e valu e of the positio n base d on the revise d strik e pric e an d m arke t lot. The differenc e betwee n 1 an d 4 ab ove, if an y, shal l be decide d in the m anne r laid dow n by the grou p by adjustin g stri ke pric e or m ket lot , so tha t no ar force d closur e of ope n positio n is m andated. Dividend s whic h are belo w 10 % of the m arke t valu e of the underlyin g t in the for ordinar y dividends . For
108

stock , woul d be deem d to be ordinar y dividend s an d no adjustm e en strik e pric e woul d be m ade

ext ra-ordinar y

dividends , abo ve 10 % of the m arke t value of the underlyin g stock , the strik e pric e w oul d be adjusted. guidelines. The exchang e will on a cas e to cas e basi s carr y ou t adjustm ent s for

othe r corporate

action s as decide d by the grou p in conformit y wit h the abo ve

109

CHAPTE R 10 : A ccountin

g fo r D erivativ es

This chapte r give s a brie f overvie w of the proces s of accountin g of deri vativ e contract s nam y, inde x futures , stoc k futures , inde x option s an d stoc k options . el The chapte r take s a quic k relook at the term s use d in deri vative s m ket s an d ar discusse s the principle s of taxatio n for these cont racts . It woul d howe ver be pertinen t to kee p onesel f update d wit h the change s in accounting deri vative s by Chartered 10. 1 regularl y cros s checkin g the websit e of Accountant s of Indi a (ww w.icai.org.). A ccountin g fo r fu re tu s s of Indi a (ICAI ) has issue d guidanc e note s as buyer s or sellers . For othe r partie s clearing is sim r ila norm s for the Institut e of

The Institut e of Chartere d Accountant on accounting involve d in m bers em ente r int o suc h future s cont racts and clearing corpo rations,

of inde x future s contract s fro m the vie w poin t of partie s w o h the tradin g process , like bro kers , trading m bers, em

a trade in equi ty index futures

to a trad e in, say shares , an d doe s no t pos e an y peculia r accountin g problem . s Hence in thi s sectio n we shal l largel y focu s on the accountin g treatm en t of equit y inde x future s in the book s of the client. A u tin cco n g at th e in tio cep n of a c n ct o tra g m be r, the em

Ever y clien t is require d to pa y to the tradin g m ber/clearin em initia l m argin law s/regulation determ ine d by s of

the clearin g corpo ratio n as pe r the byemargin -

the exchang e for enterin g int o equit y inde x future s accoun t. Additional margins, if an y, should also be

contracts . Initia l margi n paid/pa yabl e shoul d be debite d to Initial Equi ty index futures

accounte d for in the sam e m anne r. It m y be m a entione d tha t at the tim e w n he the contrac t is entere d int o for purchase/sal e of equit y inde x futures , no entr y shee t date , the balanc e in the separatel y is passe d for recordin g the contrac t becaus e no paym en t is m e at tha t tim e ad excep t for the initia l margin . On the balance Initia l margi n - Equit y inde x future s accoun t shoul d b e shown pai d in exces s of the initial/additiona sepa ratel y as a deposit

unde r the hea d curren t assets . In thos e case s w her e an y am oun t ha s bee n l m argin , the exces s shoul d be disclose d unde r the hea d curren t assets . In case s w her e

instea d of payin g initia l margi n in cash , the clien t provide s ban k gua rantee s or lodge s securitie s wit h the m be r, a disclosur e shoul d be m e in the note s to em ad
110

the financia l statem ent A u tin cco n

s of the client.

g at th e tim e of d y se m n ail ttle e t receive d on accoun t of dail y settlemen t by the clien t g debi t

Paym ent s m e or ad woul d be credited/ or credi t for

debite d to the ban k accoun t an d the correspondin

the sam e shoul d be mad e to an accoun t title d as M k-toar

mar ket margi n - Equit y inde x future s accoun t. The clien t m y als o deposi t a lum p su m am a oun t w h the broker/tradin it in respec t of m k-to-m ar arke t m argi n m one y instea d g m k-to-marke t margi n m ar one y on g of

m be r em

receiving/payin

111

dail y basis . The am oun t so pai d is in the natur e of a deposi t an d shoul d be debite d to an appropriat e account , say, Deposi t for m k-to-m ket m ar ar argi n accoun t. The am oun t of mar k- to-m arke t m argin received/pai accoun t shoul d be credited/debite future s accoun t wit h a correspondin m k- to-marke t ar g debit/credi t to Deposit d fro m suc h for m k-toar d to Mar k-to- m ke t margi n - Equi ty inde x ar

m ket m ar argi n accoun t. At the yea r-end , an y balanc e in the Deposi t for margi n accoun t shoul d be show n as a deposi t unde r the hea d curren t assets . A ccou ntin g fo r ope n p sitio s o n t

Positio n left ope n on the balanc e shee t dat e m t be accounte d for. D us ebit/credi balanc e in the m k-to-m ar arke t m argi n - Equit y inde x represent s the ne t am oun t paid/ up price s of inde x future s to the balanc e shee t date.

future s accoun t, Keepin g in vie w , provision

receive d on the basi s of m vem t in the o en

prudence as a conside ratio n for prepa ratio n of financia l statem ents broke r (represented by

for anticipate d loss , whic h ma y be equi valen t to the ne t paymen t mad e to the the debi t balanc e in the mar k-to-marke t margi n d by credit balanc e in the m k-toar profi t Equit y inde x future s accoun t) shoul d be create d by debitin g the profi t an d los s account . Net am oun t receive d (represente m ark et m argi n - Equi ty inde x future s accoun t) bein g anticipated

shoul d be ignore d an d no credi t for the sam e shoul d be take n in the profi t an d loss account . The debi t balanc e in the sai d m k-to-m ar arke t m argi n Equit y inde x future s accoun t, i.e ., ne t paym en t m e to the bro ker, m y be ad a show n unde r the hea d curren t assets , loan s and ad vances in the balanc e shee t an d the provisio n create d there-agains t shoul d be show n as a deductio n therefrom . On the othe r hand , the credi t balanc e in the sai d account , i.e ., the net amoun t receive d fro m the bro ker, shoul d be show n as a curren t liabilit y unde r the hea d current A u tin cco n liabilitie s an d pr ovision s in the balanc e shee t.

g at th e tim e of fin l se m n a ttle e t a serie s of equit y inde x futures , the profit/loss , on t price an d contrac t price s of g debit/credi all final the

At the expir y of settlem en t of

the contract s in settlem en

the series , shoul d be calculate d as the

differenc e betw n final ee

contract s in the series . The profit/loss , so computed , shoul d be recognize d in the profi t an d los s accoun t by correspondin
112

t to m k-to-m ar ark et

margi n - Equit y inde x future s accoun t. Howev er, wher e a balanc e exist s in

the provision

accoun t create d for anticipate d loss , an y los s arisin g on

suc h

settlem en t shoul d be firs t charged

to suc h provisio n account , to the exten t of treatm en t

the balanc e availabl e in the pr ovisio n account , and the balanc e of loss , if an y, shoul d be charge d to the profi t an d los s account . Sam e accounting shoul d be m e w n a cont rac t is squared-u p by ad he inde x future s contracts. pertain s is outstandin enterin g int o a revers e

cont ract. It appear s that , at present , it is no t feasibl e to identi fy the equit y Accordingl y, if m e tha n on e contrac t in respec t of the or to whic h the squared-u p contrac t the squarin g of the contract , the g at the tim e of serie s of equit y inde x future s cont racts

cont rac t pric e of the cont rac t so squared-u p shoul d be determ ine d usin g Firs tIn, Firs t-Ou t (FIFO ) metho d for calculatin g profit/los s on squaring-up.

113

On the settlem en

t of equit y inde x future s cont ract , the initia l margi n pai d in g debi t shoul d be give n to

respec t of the contrac t is release d whic h shoul d be credite d to Initia l margi n Equit y inde x future s accoun t, an d a correspondin the ban k accoun t or the deposi t accoun t (where the am oun t is no t received). A u tin cco n g in cas e of a d fau e lt ,

W n a clien t default s in makin g paymen t in respec t of a dail y settlem he ent the contrac t is close d out . The am oun t no t pai d by

the Clien t is adjuste d

agains t the initia l m argin . In the boo ks of the Client , the am oun t so adjuste d shoul d be debite d to m k-to-m ket - Equity inde x future s accoun t wit h a ar ar correspondin agains t the g credi t to Initia l margi n - Equit y inde x futures m k-to-m ket ar ar m argi n no t paid , will be accoun t. released . The The am oun t of initia l margi n on the cont ract , in exces s of the am oun t adjusted accountin g treatm en t in thi s regar d will be the sam e as explaine d abo ve. In case , the am oun t to be pai d on daily settlem en t exceed s the initia l m argi n the exces s is a liabilit y an d shoul d be show n as such unde r the hea d curren t liabilitie s an d provisions , if it continue s to exis t on the balanc e sheet date . The am oun t of profi t or los s on the contrac t so close d ou t shoul d be calculate d and recognize d in the profi t an d los s accoun t in the m anne r deal t wit h abo ve. D isclosur e req irem ts u en

The am oun t of ban k guarante e an d boo k v alu e as als o the m arke t valu e of securitie s lodged shoul d be disclose d in respec t of cont ract s havin g ope n position s at the yea r end , w her e initial m argi n m one y ha s bee n pai d by way of ban k gua rante e and/o r lodgin g of securities. Tota l numbe r of contract s entere d an d gros s num r of unit s of equit y inde x be future s traded (separatel y for buy/sell ) shoul d be disclose d in respec t of eac h serie s of equit y inde x futures. The num r of equit y inde x future s contract s havin g ope n position , numbe r of be unit s of equity inde x future s pertainin g to thos e cont ract s an d the dail y shee t dat e shoul d be disclose d sepa ratel y settlem en t pric e as of the balance

for lon g an d shor t positions , in respec t of each serie s of equit y inde x futures. 10. 2 A ccountin The g fo r o tio s p n s of Indi a issue d guidanc e not e on

Institut e of Chartere d Accountant

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accountin g for

index option s an d stoc k option s fro m the vie w poin t of the sellers/w riters .

partie s wh o ente r int o suc h cont ract s as bu yers/holde r or inde x option s an d stoc k options: A u tin cco n The g at th e in tio cep n of a c n ct o tra

Followin g are the guideline s for accountin g treatm en t in case of cas h settle d

seller/write

r of the optio n is require d to pa y initia l margi n for enterin g

int o the option contract . Suc h initia l margi n pai d woul d be debite d to Equit y Inde x Optio n Margi n Accoun t or to Equit y Stoc k Optio n Margi n Accoun t, as the cas e m y be . In the balanc e sheet , such accoun t shoul d be show n a separatel y unde r the hea d Curren t Assets . The buyer/holde r of the

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optio n is no t require d to pa y an y m argin . He is require d to pa y the prem ium . In his books, suc h premiu m woul d be debite d to Equi ty Inde x Optio n r, suc h premium receive d shoul d be credite d Premiu m Accoun t or Equit y Stock Optio n Premiu m Accoun t, as the cas e m y a be . In the book s of the seller/w rite Accoun t as the cas e m y be. a A ccountin g at th e tim e of p m n ay e t/rec ip e receive d by t of m in arg r for the m argi n shoul d b e g debit/credi t for to Equit y Inde x Optio n Premiu m Accoun t or Equi ty Stoc k Option Premiu m

Paym ent s m e or ad credited/debite

the seller/w rite

d to the ban k accoun t an d the correspondin or

the sam e shoul d als o be m e to ad Equit y Inde x Optio n Margi n Accoun t Accoun t, am oun t w h the trading/clearin it paying/receivin paid/receive g m ber em to Equit y Stoc k Optio n Margi n , the clien t deposi t a lum p sum as the case may be . Som etim es

in respec t of the m argi n instea d of d to the

g margi n on dail y basis . In suc h case , the am oun t of m argi n

d from /int o suc h account s shoul d be debited/credite

Deposi t for Margi n Accoun t. At the en d of the yea r the balanc e in thi s accoun t woul d be shown as deposi t unde r Curren t Assets . A u tin cco n g fo r o e n p sitio p o n s as on b c e sh t d te alan ee a s

The Equi ty Inde x Optio n Premiu m Accoun t an d the Equit y Stoc k Optio n Premiu m Accoun t shoul d be show n unde r the hea d Curren t Assets or Curren t Liabilities , as the cas e m y be. a In the book s of the buyer/holde r, a provisio n shoul d be m e for the am ad oun t shoul d be credite d to provision mad e as

by whic h the premiu m pai d for the optio n exceed s the prem m pre vailin g on iu the balanc e shee t date . The pr ovisio n so create d Provisio n for Los s on Equi ty Inde x Optio n Accoun t to the Pr ovisio n for Los s on Equit y Stoc k Option s Accoun t, as the cas e m y be . The a abo ve shoul d be show n as deductio n fro m Equit y Inde x Optio n Premium or Equity Stoc k Optio n Premium whic h is show n unde r Curren t Assets . In the books am ount of the seller/write r, the provision This should be m ade for the

by which premiu m pre vailin g on the balanc e shee t dat e exceed s the tha t option. provisio n shoul d be credite d to debi t

prem m receive d for iu

Provisio n for Los s on Equit y Inde x Optio n Accoun t or to the Pr ovisio n for Los s on Equit y Stoc k Optio n Accoun t, as the cas e ma y be , wit h a corresponding
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to profi t an d los s account . Option s Accoun t or Provision

Equi ty Inde x Option s Premiu m Accoun t for Los s on

or

Equit y Stock Option s Premiu m Accoun t and Provisio n for Los s on Equit y Inde x Equit y Stoc k Option s Accoun t shoul d be show n unde r Curren t Liabilitie s and Provisions . In cas e of an y openin g balanc e in the Provisio n for the sam e shoul d be adjuste d against require d to be made/exces Los s on Equit y Stoc k

Option s Accoun t or the Pr ovisio n for Los s on Equit y Inde x Option s Accoun t, the pr ovisio n require d in the curren t yea r wit h th e balanc e provisio n an d the profi t an d los s accoun t be debited/credited s provisio n writte n back.

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A u tin cco n On

g at th e tim e of fin l se m n a ttle e t r will recogniz e prem m as an iu creditin g Equi ty Inde x

exercis e of the option , the buyer/holde

expens e an d debit the profi t an d los s accoun t by Optio n Premiu m Accoun t or betw n the final ee the seller/writer fro m the abo ve, the buyer/holde

Equity Stoc k Optio n Premiu m Accoun t. A par t r will receiv e favo rable difference , if an y, y dat e an d the the exercise/expir

settlem en t pric e as on

stri ke price , whic h will be recognize d as incom . On exercis e of the option , e will recogni ze prem m as an incom e an d credi t the profi t an d iu Equit y r will los s accoun t by debitin g Equity Inde x Optio n Premiu m Accoun t or Stoc k Optio n Premiu m Accoun t. Apar t fro m the abo ve, the seller/w rite pa y the advers e difference , if an y, betw n the final settlem ee ent the exercise/expir as a loss. As soo n as an optio n get s exercised , m argi n pai d toward s suc h optio n w oul d be release d by the exchange , whic h shoul d be credite d to Equit y Inde x Optio n Margi n Accoun t or to Equity Stoc k Optio n Margi n Accoun t, as the cas e m y a be , an d the ban k accoun t will be debited. A u tin cco n The g at th e tim e of sq arin g of f an op u tio n co tra n ct the square d off Followin g

pric e as on

y dat e an d the stri ke price . Suc h paym en t will be recognize d

differenc e betw n the prem m pai d an d receive d on ee iu

transaction s should be transferre d to the profi t an d los s account . are the guideline s for accounting paym ent/receip settlem ent, option s an d stoc k options : The accountin g entries

treatm en t in cas e of deliver y settle d inde x at the tim e of inception ,

t of m argi n an d ope n option s at the balanc e sheet dat e will be d the n the accountin g entrie s will be

the sam e as thos e in cas e of cas h settle d options . At the tim e of final if an optio n expire s un-exercise the sam e as thos e in case of cas h settle d options . If the optio n is exercise d the n share s will be transferre d in conside ration for cas h at the stri ke price . For a call optio n the buyer/holde was entere d int o. The equity share s for r will receiv e equit y share s for whic h the call buyer/holde optio n r shoul d debi t the rele van t equi ty share s r will delive r buyer/holde r

accoun t an d credi t cash/bank . For a pu t option , the buyer/holde w h the pu t optio n wa s entere d into . The hic shoul d credi t the rele vant equit y share s Sim ilarl y, for a call optio n the seller/write
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accoun t an d debi t cash/bank .

r will delive r equit y share s for whic h

the call optio n w s entere d into . The seller/write r shoul d credit the rele van t a

equit y share s accoun t an d debi t cash/bank . For a pu t optio n the seller/w rite will receiv e equit y share s for seller/write r shoul d debit

w h the pu t optio n w s entere d into . The hic a paid/receive d will be

the rele van t equit y share s accoun t an d credi t

cash/bank . In additio n to thi s entr y, the premium

transferre d to the profi t an d los s account , the accountin g entrie s for w hic h shoul d be the sam e as thos e in cas e of cas h settle d options.

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10. 3 T axatio n of D erivativ 1 .3 0 .1 T atio n of P fit/L s ax ro o

eT ransactio

n in S rities ecu e tran sactio n in secu rities

s on d ativ eriv

Prio r to Financia l Yea r 200506 , transactio n in deri vative s wer e considere d as speculative transaction s for the purpos e of determ inatio n of tax liabilit y x unde r the Income-ta x Act. This is in vie w of sectio n 43(5 ) of the Incom e-ta for purchas e or sal e of any commodi ty, includin g stock s

Act whic h define d speculativ e transactio n as a transactio n in w hic h a cont rac t and shares , is periodicall y or ultim atel y settle d otherw e tha n by is the actua l deliver y or

transfe r of the com modi ty or scrips . Howev er, suc h transaction s entere d int o by hedger s an d stoc k exchange transaction. In vie w of the ab ove pr ovisions , m t of the transaction os deri vative s by investors transactions . The deri vativ e transaction an d speculator tax pr ovision s provide d for differentia s entere d int o in l treatm en t w h it m ber s in cours e of jobbin g or arbit rag e activit y em of definitio n of speculativ e wer e specificall y exclude d fro m the purview

s wer e considere d as speculativ e suc h transactions. Los s on

respec t to se t off an d carr y forwar d of los s on

s coul d be se t off onl y agains t othe r speculativ e incom e

an d the sam e coul d no t be se t off agains t an y othe r incom . This resulte d in e paym en t of highe r tax es by an assessee. Financ e Act, 200 5 ha s am ende d sectio n 43(5 ) so as to exclud e transaction s in

deri vative s carried ou t in a recogni zed stoc k exchange for thi s purpose . This implie s tha t incom e or los s on deri vativ e transaction s whic h are carrie d out in a recogni zed stoc k exchange is no t taxe d as speculativ e incom e or loss . Thus , los s on deri vati ve transaction s ca n be se t off agains t an y other incom e durin g the yea r. In cas e the sam e canno t be set of f, it ca n be carrie d forwar d to subsequent subsequen assessm en assessm en t yea r an d se t off agains t an y othe r incom e of the a perio d of 8 transactio n tax pai d on t yea r. Suc h losse s can be carrie d forwar d for t years . It m y als o be note d tha t securities a

suc h transaction s is eligibl e as deductio n unde r Incom e-ta x Act, 1961. 1 .3 0 .2 S u ec ritie s tran sactio n ta x on d ativ eriv e s tra sa tio s n c n

As pe r Chapte r VII of the Financ e (N . 2) Act, 2004 , Securitie s Transactio n Tax o (STT) is levied on all transaction unit s of recognize d stoc k exchange.
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s of sal e and/o r purchas e of equit y share s an d deri vative s entere d int o in a

equi ty oriente d fund an d sal e of

As pe r Financ e Act 2008 , the followin g STT rate s ar e applicabl e w.e. f. 1st June , 200 8 in relatio n to sal e of a deri vative , w her e the transactio n of suc h sal e in entere d int o in a recogni zed stoc k exchange. Sl . N o. 1 2. 3. T ab e secu ax l ritie s tra sa tio n c n R ate 0.017% 0.125% 0.017% P ab e by ay l Seller Purchaser Seller

Sal e of an optio n in securities Sal e of an optio n in securities, wher e optio n is exercised Sal e of a future s in securities

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Conside r an example . Si ze: 1000 ) expiring shar e is Rs. calculate d as follows: 1.

Mr. A. sell s a future s cont rac t of M/s . XYZ Ltd. (Lo t 5 for Rs. 300 . The spo t pric e of the tax thereo n woul d be securitie s transaction

on 29-Sep-200

290 . The

Tota l future s contrac t valu e = 100 0 x 30 0 = Rs. 3,00,000

2. Securitie s transactio n tax pa yabl e thereo n 0.017 % = 3,00,00 0 x 0.017 % = Rs. 51

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