Escolar Documentos
Profissional Documentos
Cultura Documentos
Project Title:
And USA
Submitted By:
Nikhil Chainani (13171)
Priya Sharma (13206)
Priyanka Bansal (13208)
Priyanka Goyal ( 13209)
BMS 2D
INDEX
Introduction
Participants
Functions
Types
Instruments in India
Futures
Options
Derivatives market in India
Comparison in Indian and global market
Trading volumes
Regulatory framework
Settlement
Types of derivatives allowed in India and USA
Conclusion
OBJECTIVES OF STUDY
DERIVATIVES
MEANING:
The emergence of the market for derivative products, most notably forwards,
futures and options, can be traced back to the willingness of risk-averse economic
agents to guard themselves against uncertainties arising out of fluctuations in asset
prices. By their very nature, the financial markets are marked very high degree of
volatility. Through the use of derivative products, it is possible to partially or fully transfer
price risks by locking-in asset prices. As instruments of risk management, these
generally do not influence the fluctuations in the underlying asset prices. However, by
locking-in asset prices, derivative products minimize the impact of fluctuations in asset
prices on the profitability and cash flow situation of risk-averse investors.
Derivatives are risk management instruments, which derive their value from an
underlying asset. The underlying asset can be bullion, index, share, bonds, currency,
interest etc. Annual turnover of the derivatives is increasing each year from 1986
onwards,
Year
Annual turnover
1986
146 millions
1992
453 millions
1998
2002 & 2003
1329 millions
it has reached to equivalent stage of cash market
Derivatives are used by banks, securities firms, companies and investors to hedge
risks, to gain access to cheaper money and to make profits Derivatives are likely to grow
even at a faster rate in future they are first of all cheaper to world have met the
increasing volume of products tailored to the needs of particular customers, trading in
derivatives has increased even in the over the counter markets.
In Britain unit trusts allowed to invest in futures & options .The capital adequacy
norms for banks in the European Economic Community demand less capital to hedge or
speculate through derivatives than to carry underlying assets. Derivatives are weighted
lightly than other assets that appear on bank balance sheets. The size of these offbalance sheet assets that include derivatives is more than seven times as large as
balance sheet items at some American banks causing concern to regulators
DEFINITION
Derivative is a product whose value is derived from the value of one or more basic
variables, called bases (underlying asset, index, or reference rate), in a contractual
manner. The underlying asset can be equity, forex, commodity or any other asset.
In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R) A)
defines derivative to include1. A security derived from a debt instrument, share, and loan whether secured or
unsecured, risk instrument or contract for differences or any other form of security.
2. A contract, which derives its value from the prices, or index of prices, of underlying
securities.
Derivatives are the securities under the SC(R)A and hence the trading of
derivatives is governed by the regulatory framework under the SC(R)A.
TYPES OF DERIVATIVES
Commo
dity
Financia
l
Basic
Instrum
ent
Complex
Instrum
ents
Futures
Options
Swa
ps
The most commonly used derivatives contracts are forwards, futures and options. Here
various derivatives contracts that have come to be used are given briefly:
1. Forwards
2. Futures
3. Options
4. Warrants
5. LEAPS
6. Baskets
7. Swaps
8. Swaptions
1. Forwards:
A forward contract is customized contract between two entities, where
settlement takes place on a specific date in the future at todays pre-agreed price
2. Futures:
A futures contract is an agreement between two parties to buy or sell an
asset at a certain time in the future at a certain price. Futures contracts are special
types of forward contracts in the sense that the former are standardized exchangetraded contracts.
3. Options:
Options are of two types calls and puts
Calls give the buyer the right but not the obligation to buy a given quantity
of the
underlying asset, at a given price on or before.a given future date.
Puts give the buyer the right, but not the obligation to sell a given quantity
of the
underlying asset at a given price on or before a given date.
4. Warrants:
Options generally have two lives of up to one year, the majority of options
traded on options exchanges having a minimum maturity of nine months. Longerdated options are called warrants and are generally traded over-the-counter.
5. Leaps:
The acronym LEAPS means Long-term Equity Anticipation Securities. These
are options having a maturity of up to three years.
6. Baskets:
Basket options are options on portfolios of underlying assets. The underlying
asset is usually a moving average of a basket of assets. Equity index options are a
form of basket options.
7. Swaps:
Swaps are private agreements between two parties to exchange cash flows
in the future according to a prearranged formula. They can be regarded as portfolios
of forward contracts. The two commonly used swaps are:
Interest rate swaps: These entail swapping only the interest related cash
flows between the parties in the same currency.
Currency swaps: These entail swapping both principal and interest between
the parties, with the cash flows in one direction being in a different currency
than those in the opposite direction.
8. Swaptions:
Swaptions are options to buy or sell that will become operative at the
expiry of the options. Thus a swaption is an option on a forward swap. Rather than
have calls and puts, the swaptions markets has receiver swaptions and payer
swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer
swaption is an option to pay fixed and receive floating.
of a contract value of Rs. 2 lakhs by Securities Exchange Board of India. A contract value
is contracting Index laid by its market lot. For e.g. If Sensex is 4730 then the contract
value of a futures Index having Sensex as underlying asset will Be 50 x 4730 = Rs.
2,36,500. Similarly if Nifty is 1462.7, its futures contract value will be 200 x 1462.7 =
Rs.2, 92,540/-.
Every transaction shall be in multiple of market lot. Thus, Index futures at NSE shall
be traded in multiples of 200 and at BSE in multiples of 50
CONTRACT PERIODS
At any point of time there will always be available near three months contract periods.
For e.g. in the month of June 2009 one can enter into either June Futures contract or July
Futures contract or August Futures Contract. The last Thursday of the month specified in
the contract shall be the final settlement date for that contract at both NSE as well BSE.
Thus June 29, July 27 and August 31 shall be the last trading day or the final settlement
date for June Futures contract, July Futures Contract and August Futures Contract
respectively.
When one futures contract gets expired, a new futures contract will get introduced
automatically. For instance, on 30th June, June futures contract becomes invalidated and
a September Futures Contract gets activated.
SETTLEMENT
Settlement of all Derivatives trades is in cash mode. There is Daily as well as Final
Settlement. Outstanding positions of a contract can remain open till the last Thursday of
that month. As long as the position is open, the same will be marked to Market at the
Daily Settlement Price, the difference will be credited or debited accordingly and the
position shall be brought forward to the next day at the daily settlement price. Any
position which remains open at the end of the final settlement day (i.e., last Thursday)
shall be closed out by the Exchange at the Final Settlement Price which will be the
closing spot value of the underlying (Nifty or Sensex, or respective stocks as the case
may be).
7. The trading members are required to have qualified approved user and sales person
who have passed a certification programme approved by SEBI.
While from the purely regulatory angle, a separate exchange for trading would be a
better arrangement. Considering the constraints in infrastructure facilities, the existing
stock (cash) exchanges may also be permitted to trade derivatives subject to the
following conditions.
I. Trading should take place through an on-line screen based trading system.
II. An independent clearing corporation should do the clearing of the derivative market.
III. The exchange must have an online surveillance capability, which monitors positions,
price and volumes in real time so as to deter market manipulation price and position
limits should be used for improving market quality.
IV. Information about trades quantities, and quotes should be disseminated by the
exchange in the real time over at least two information-vending networks, which are
accessible to investors in the country.
V. The exchange should have at least 50 members to start derivatives trading.
VI. The derivatives trading should be done in a separate segment with separate
membership; That is, all members of the cash market would not automatically
become members of the derivatives market.
VII. The derivatives market should have a separate governing council which should not
have representation of trading by clearing members beyond whatever percentage
SEBI may prescribe after reviewing the working of the present governance system of
exchanges.
VIII. The chairman of the governing council of the derivative division / exchange should
be a member of the governing council. If the chairman is broker / dealer, then he
should not carry on any broking or dealing on any exchange during his tenure.
IX. No trading/clearing member should be allowed simultaneously to be on the
governing council both derivatives market and cash market.
FUTURES
FUTURES
Futures contract is a firm legal commitment between a buyer & seller in
which they agree to exchange something at a specified price at the end of a designated
period of time. The buyer agrees to take delivery of something and the seller agrees to
make delivery.
STOCK INDEX FUTURES
Stock Index futures are the most popular financial futures, which
have been used to hedge or manage the systematic risk by the investors of Stock
Market. They are called hedgers who own portfolio of securities and are exposed to the
systematic risk. Stock Index is the apt hedging asset since the rise or fall due to
systematic risk is accurately shown in the Stock Index. Stock index futures contract is an
agreement to buy or sell a specified amount of an underlying stock index traded on a
regulated futures exchange for a specified price for settlement at a specified time future.
Stock index futures will require lower capital adequacy and margin
requirements as compared to margins on carry forward of individual scrips. The
brokerage costs on index futures will be much lower.
Savings in cost is possible through reduced bid-ask spreads where stocks
are traded in packaged forms. The impact cost will be much lower in case of stock index
futures as opposed to dealing in individual scrips. The market is conditioned to think in
terms of the index and therefore would prefer to trade in stock index futures. Further, the
chances of manipulation are much lesser.
The Stock index futures are expected to be extremely liquid given the
speculative nature of our markets and the overwhelming retail participation expected to
be fairly high. In the near future, stock index futures will definitely see incredible
volumes in India. It will be a blockbuster product and is pitched to become the most
liquid contract in the world in terms of number of contracts traded if not in terms of
notional value. The advantage to the equity or cash market is in the fact that they would
become less volatile as most of the speculative activity would shift to stock index
futures. The stock index futures market should ideally have more depth, volumes and act
as a stabilizing factor for the cash market. However, it is too early to base any
conclusions on the volume or to form any firm trend.
The difference between stock index futures and most other financial
futures contracts is that settlement is made at the value of the index at maturity of the
contract.
FUTURES TERMINOLOGY
Contract Size
The value of the contract at a specific level of Index. It is
Index level * Multiplier.
Multiplier
It is a pre-determined value, used to arrive at the contract size. It
Tick Size
It is the minimum price difference between two quotes
of similar nature.
Contract Month
The month in which the contract will expire.
Expiry Day
The last day on which the contract is available for trading.
Open interest
Total outstanding long or short positions in the market at any specific
point in time. As total long positions for market would be equal to total short
positions, for calculation of open Interest, only one side of the contracts is
counted.
Volume
No. Of contracts traded during a specific period of time. During a day,
Long position
Outstanding/unsettled purchase position at any point of time.
Short position
Outstanding/ unsettled sales position at any point of time.
Open position
Outstanding/unsettled long or short position at any point of time.
Physical delivery
Open position at the expiry of the contract is settled through delivery of
Cash settlement
Open position at the expiry of the contract is settled in cash. These
contracts Alternative Delivery Procedure (ADP) - Open position at the expiry of the
contract is settled by two parties - one buyer and one seller, at the terms other than
defined by the exchange. World wide a significant portion of the energy and energy
related contracts (crude oil, heating and gasoline oil) are settled through Alternative
Delivery Procedure.
Pay off for futures:
A Pay off is the likely profit/loss that would accrue to a market participant with
change in the price of the underlying asset. Futures contracts have linear payoffs. In
simple words, it means that the losses as well as profits, for the buyer and the seller of
futures contracts, are unlimited.
off for a person who holds an asset. He has potentially unlimited upside as well as
downside. Take the case of a speculator who buys a two-month Nifty index futures
contract when the Nifty stands at 1220. The underlying asset in this case is the Nifty
portfolio. When the index moves up, the long futures position starts making profits
and when the index moves down it starts making losses
The pay offs for a person who sells a futures contract is similar to the pay
off for a person who shorts an asset. He has potentially unlimited upside as well as
downside. Take the case of a speculator who sells a two-month Nifty index futures
contract when the Nifty stands at 1220. The underlying asset in this case is the Nifty
portfolio. When the index moves down, the short futures position starts making profits
and when the index moves up it starts making losses.
OPTIONS
An option agreement is a contract in which the writer of the option grants the
buyer of the option the right to purchase from or sell to the writer a designated
instrument at a specific price within a specified period of time.
Certain options are shorterm in nature and are issued by investors another group
of options are long-term in nature and are issued by companies.
OPTIONS TERMINOLOGY:
Call option:
A call is an option contract giving the buyer the right to purchase the
stock.
Put option:
A put is an option contract giving the buyer the right to sell the stock.
Expiration date:
It is the date on which the option contract expires.
Strike price:
It is the price at which the buyer of a option contract can purchase or sell
Premium:
Is the price the buyer pays the writer for an option contract.
Writer:
Holder:
The term holder is synonymous to the buyer of the option contract.
Straddle:
A straddle is combination of put and calls giving the buyer the right to
either buy or sell stock at the exercise price.
Strip:
A strip is two puts and one call at the same period.
Strap:
A strap is two calls and one put at the same strike price for the same
period.
Spread:
A spread consists of a put and a call option on the same security for the
same time period at different exercise prices.
The option holder will exercise his option when doing so provides him a benefit
over buying or selling the underlying asset from the market at the prevailing price. These
are three possibilities.
1. In the money: An option is said to be in the money when it is
advantageous to exercise it.
2. Out of the money: The option is out of money if it not advantageous to exercise it.
3. At the money: IF the option holder does not lose or gain whether he exercises his
option or buys or sells the asset from the market, the option is said to be at the money.
The exchanges initially created three expiration cycles for all listed options and each
issue was assigned to one of these three cycles.
January, April, July, October.
February, March, August, November.
March, June, September, and December.
In India, all the F and O contracts whether on indices or individual stocks are
available for one or two or three months series and they expire on the Thursday of the
concerned month.
CALL OPTION:
An option that grants the buyer the right to purchase a designated
instrument is called a call option. A call option is a contract that gives its owner the right,
but not the obligation, to buy a specified price on or before a specified date.
An American call option can be exercised on or before the specified date only.
European options can be exercised on the specified date only.
PUT OPTION:
An option contract giving the owner the right, but not the obligation, to sell a
specified amount of an underlying security at a specified price within a specified time.
This is the opposite of a call option, which gives the holder the right to buy shares.
A put becomes more valuable as the price of the underlying stock
depreciates relative to the strike price. For example, if you have one Mar 09 Taser 10 put,
you have the right to sell 100 shares of Taser at $10 until March 2008 (usually the third
Friday of the month). If shares of Taser fall to $5 and you exercise the option, you can
purchase 100 shares of Taser for $5 in the market and sell the shares to the
option's writer for $10 each, which means you make $500 (100 x ($10-$5)) on the put
option. Note that the maximum amount of potential proft in this example ignores
the premium paid to obtain the put option.
FACTORS DETERMINIG OPTION VALUE:
Stock price
Strike price
Time to expiration
Volatility
Dividend
FUTURES
OPTIONS
perform.
2) With options, the buyer pays the seller a
premium.
3) The buyer of an options contract can
exercise any time prior to expiration date.
4) The buyer limits the downside risk to the
option premium but retain the upside
potential.
5) In options premiums to be paid. But they
are very less as compared to the margins.
Risk management: put option allow investors holding shares to hedge against a
possible fall in their value. This can be considered similar to taking out insurance
against a fall in the share price.
Time to decide: By taking a call option the purchase price for the shares is locked
in. This gives the call option holder until the Expiry day to decide whether or
exercised the option and buys the shares. Likewise the taker of a put option has
time to decide whether
Speculations: The ease of trading in and out of option position makes it possible
to trade options with no intention of ever exercising them. If investor expects the
market to rise, they may decide to buy call options. If expecting a fall, they may
decide to buy put options. Either way the holder can sell the option prior to expiry
to take a profit or limit a loss. Trading options has a lower cost than shares, as
there is no stamp duty payable unless and until options are exercised.
Leverage: Leverage provides the potential to make a higher return from a smaller
initial outlay than investing directly however leverage usually involves more risks
than a direct investment in the underlying share. Trading in options can allow
investors to benefit from a change in the price of the share without having to pay
of the share.
Summary of options
Call option buyer
Pays premium
Receives premium
share
neutral
unlimited gain
Put option buyer
gain
Put option writer (seller)
Pays premium
Receives premium
neutral
Derivatives trading commenced in Indian market in 2000 with the introduction of Index
futures at BSE, and subsequently, on National Stock Exchange (NSE). Since then,
derivatives market in India has witnessed tremendous growth in terms of trading value
and number of traded contracts. Here we may discuss the performance of derivatives
products in India markets as follows.
Derivatives Products Traded in Derivatives Segment of BSE
The BSE created history on June 9, 2000 when it launched trading in Sensex based
futures contract for the first time. It was followed by trading in index options on June 1,
2001; in stock options and single stock futures (31 stocks) on July 9, 2001 and
November 9, 2002, respectively. Currently, the number of stocks under single futures
and options is 1096. BSE achieved another milestone on September 13, 2004 when it
launched Weekly Options, a unique product unparalleled worldwide in the derivatives
markets. It permitted trading in the stocks of four leading companies namely; Satyam,
State Bank of India, Reliance Industries and TISCO (renamed now Tata Steel). Chhota
(mini) SENSEX 7 was launched on January 1, 2008. With a small or 'mini' market lot of 5,
it allows for comparatively lower capital outlay, lower trading costs, more precise
hedging and flexible trading. Currency futures were introduced on October 1, 2008 to
enable participants to hedge their currency risks through trading in the U.S. dollar-rupee
future platforms. Table summarily specifies the derivative products and their date of
introduction on the BSE
Products Traded in Derivatives Segment of the BSE
S.no
1
2
3
Introduction
Date
June 9,2000
June 1,2001
July 9, 2001
November
9,2002
September
13,2004
January 1,
2008
N.A.
October
1,2008
product introduction by launching Mini Index Futures & Options with a minimum
contract size of Rs 1 lac. NSE crated history by launching currency futures contract on
US Dollar-Rupee on August 29, 2008 in Indian Derivatives market. Table 3 presents a
description of the types of products traded at F& O segment of NSE.
Products Traded in F&O Segment of NSE
S.n
o
Product Traded with underlying asset
1
Index Futures- S&P CNX Nifty
2
Index Options- S&P CNX Nifty
3
Stock Option on 233 Stocks
4
Stock futures on 233 Stocks
5
Interest Rate Futures- T Bills and 10 Years Bond
6
CNX IT Futures & Options
7
Bank Nifty Futures & Options
8
CNX Nifty Junior Futures & Options
9
CNX 100 Futures & Options
10
Nifty Midcap 50 Futures & Options
11
Mini index Futures & Options - S&P CNX Nifty index
12
long Term Option contracts on S&P CNX Nifty Index
13
Currency Futures on US Dollar Rupee
14
S& P CNX Defty Futures & Options
Source: Complied from NSE website
Introduction
Date
June 12,2000
June 4,2001
July 2, 2001
November 9,2001
June 23,2003
August 29,2003
June 13,2005
June 1,2007
June 1,2007
October 5,2007
January 1, 2008
March 3,2008
August 29,2008
December 10,
2008
Year
Index
Futures
Stock
Futures
Index
Options
Stock
Options
Intere
st
Rate
Future
Average
Total
Daily
Turnove
r
7650896.8 46938.0
0
2
13090477. 52153.3
75
0
7356242 29543
4824174 19220
2546982 10107
2130610 8388
439862
1752
101926
410
2365
11
149498.40 0.00
359136.55 0.00
193795
0
180253
0
168836
0
217207
202
100131
25163
-
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
Index
Futures
Stock
Futures
Index
Options
1364767
47
1565985
79
814874
24
585378
86
216354
49
171916
68
212676
3
102558
8
14915999
7
116790708
20358795 55366038
2
10495540 25157438
1
80905493 12935116
47043066 3293558
32368842 1732414
10676843 442241
1957856
175900
Derivatives
Segment
13090477.75
7356242
4824174
2546982
2130610
439862
101926
2365
Stock
Optio
ns
78262
31
94606
31
52833
10
52407
76
50451
12
55830
71
35230
62
10375
29
(Rs. in
Cr.)
Interest
Rate
Futures
0
0
0
0
0
10781
-
Total
410253
683
425013
200
216883
573
157619
271
7701718
5
5688677
6
1676890
9
419687
3
2000-01
90580
Source:
from NSE
complied
website
Average Daily Transaction at NSE in Derivatives
and Cash Segment
Derivatives
Year
Segment
200708
52153.30
200629543
07
200519220
06
200405
10107
2003838
04
8
2002175
03
2
200102
410
200011
01
Source: Complied from NSE website and NSE
fact book 2008
Table 8:BSE Derivatives Segment
Turnover
Year
Index
Futures
Stock
Futures
Cash
Segment
14,148
7,812
6,253
4,506
4,328
2,462
2,078
5,337
Index
Options
Call
Put
200708
234660
7609
31
8
200607
55491
3515
0
0
20055
1
3
0
06
200405
13600
213
1471
827
20036572
5171
0
0
04
20021811
644
1
0
03
200102
1276
452
39
45
20001673
01
Source: Complied from BSE website & various issues of
90580
Stock
Options
Call
Put
Total
242309
0
0
0
0
59006
9
2
174
0
157
16112
12452
21
2478
79
-
35
-
1922
1673
SEBI bulletins
Index
Stock
Index
Stock
Total
Futures
Futures
200708
7157078
295117
200607
1638779
142433
200506
89
12
200405
449630
6725
200304
246443
128193
200203
111324
25842
200102
79552
17951
200001
77743
Source: Complied from BSE website &
SEBI bulletin
Options
Call
Put
Options
Call
Put
951
210
7453371
1545169
100
4806
5
03
27210
72
17
531719
4391 3230
382258
41
783
138037
1139
1276
3605 1500
105527
77743
19
(Rs. in
Cr.)
Derivatives
Segment
2423
09
5900
6
9
1611
2
1245
2
2478
1922
1673
Despite of encouraging growth and developments, industry analyst feels that the
derivatives market has not yet, realized its full potential in terms of growth & trading.
Analysts points out that the equity derivative markets on the BSE and NSE has been
limited to only four products- index futures, index options and individual stock futures
and options, which in turn, are limited to certain select stocks only. Although recently
NSE and BSE has added more products in their derivatives segment (Weekly Options,
Currency futures, Mini Index etc.) but still it is far less than the depth and variety of
products prevailing across many developed capital markets.
Non- US
Year
US Exchanges
Exchanges
2000
1313.65
1675.80
2001
1578.62
2768.70
2002
1844.90
4372.38
2003
2172.52
5990.22
2004
2795.21
6069.50
2005
3525.00
6448.67
2006
4616.73
7245.48
2007
6137.20
9049.47
2000-07 23983 (35.48)
43620 (64.52)
Source: FI Futures Industry, March/April 2008
(in
millions
)
Global
2989.45
4347.32
6217.28
8162.54
8864.71
9973.67
11862.21
15186.67
67604 (100)
Latin
America
Other 39.74%
4.84%
Europe
Asia
Pacific
28.18
%
23.61%
North America
39.63%
Source: Newedge
Difference on the following parameters volume , settlement ,
regulatory framework and types of derivatives allowed and not allowed.
1. Types of derivatives allowed and not allowed
Types of derivatives allowed in inida vs rest of the world
countries
Index
Futures
Options
Stock
Futures
Options
currency
Futures
Options
Australi
a
China
Hong
kong
india
japan
korea
Usa
yes
yes
no
no
yes
yes
yes
yes
yes
yes
yes
yes
yes
yes
yes
yes
no
no
yes
yes
yes
yes
no
yes
no
yes
yes
no
yes
no
no
no
no
no
yes
no
yes
no
yes
yes
no
no
Interest
rate
Future
Options
Bonds
Futures
Options
Commoditit
ies
Futures
options
yes
yes
no
no
yes
no
yes
no
yes
yes
yes
no
yes
yes
yes
yes
yes
no
yes
no
no
no
yes
yes
yes
yes
yes
yes
yes
yes
yes
no
no
no
yes
no
yes
no
yes
no
yes
no
2. volume
Trading Volumes
After recording a staggering year-on-year growth of 60.43 percent in trading
volumn in 20092010, the NSEs derivatives market continued its momentum in
20102011 by clocking a growth of 65.58 percent (Table 6-5). The NSE further
strengthened its dominance in the derivatives segment in 20102011 with a
share of 99.99 percent of the total turnover in this segment. The share of the BSE
in the total derivatives market turnover fell from 0.0013 percent in 20092010 to
0.0005 percent in 20102011. The total turnover of the derivatives segment
jumped by 26.56 percent during the first half of 20112012 compared to the
turnover in the corresponding period in the previous fiscal year.
The index options segment was the clear leader in the product-wise turnover of
the futures and options segment in the NSE in 20102011 (Table 6-6 and Chart 61). The turnover in the index options category was 62.79 percent of the total
turnover in the F&O segment of the NSE, followed by the stock futures and index
futures that saw a year-on-year growth of 18.79 percent and 14.90 percent,
respectively. This trend continued in the first half of 20112012, with index
options constituting around 72.89 percent of the total turnover in this segment.
The turnover of index optionszoomed by 59.93 percent during the first half of
20112012, compared to the turnover in the corresponding period in the previous
fiscal year.
FIA Volume Report: Global Futures and Options Volume Rose 2.1% to 21.64 Billion
in 2013
FIA released its annual report on global trends in the trading of futures and
options. According to statistics gathered by FIA from 84 exchanges worldwide,
21.64 billion futures and options contracts were traded in 2013, an increase of
2.1% from the previous year, but still well below the number of contracts traded
in 2011 and 2010.
Futures trading accounted for 12.22 billion contracts, just over 56% of total
industry volume. Trading of options accounted for the other 44%. By category,
contracts based on equity indices and individual stocks accounted for 11.77
billion, 54% of total volume. Interest rate futures and options accounted for 3.33
billion, 15% of total volume.
The trends in North America and Asia-Pacific moved in opposite directions.
Exchanges in North America reported 7.9 billion contracts traded in 2013, up
9.9% from the previous year. Exchanges in Asia-Pacific reported 7.29 billion
contracts, down 3.1% from the previous year.
Final Settlement
On the expiry of the futures contracts, NSCCL marks all positions of a CM to
the final settlement price and the resulting profit / loss is settled in cash.
The final settlement of the futures contracts is similar to the daily settlement
process except for the method of computation of final settlement price. The final
settlement profit / loss is computed as the difference between trade price or the
previous day's settlement price, as the case may be, and the final settlement
price of the relevant futures contract.
Final settlement loss/ profit amount is debited/ credited to the relevant
CMs clearing bank account on T+1 day (T= expiry day).
Open positions in futures contracts cease to exist after their expiration day
Settlement Procedure
Daily MTM settlement on T+0 day
Clearing members who opt to pay the Daily MTM settlement on a T+0 basis would
compute such settlement amounts on a daily basis and make the amount of funds
available in their clearing account before the end of day on T+0 day. Failure to do
so would tantamount to non payment of daily MTM settlement on a T+0 basis.
Further, partial payment of daily MTM settlement would also be considered as non
payment of daily MTM settlement on a T+0 basis. These would be construed as
non compliance and penalties applicable for fund shortages from time to time
would be levied.
A penalty of 0.07 % of the margin amount at end of day on T+0 would be levied
on the clearing members. Further, the benefit of scaled down margins shall not be
available in case of non payment
of daily MTM settlement on a T+0 basis from the day of such default to the end of
the relevant quarter.
Settlement of options contracts on index and individual securities
Settlement Schedule
Product
Settlement
Schedule
(T is trade day)
Futures Contracts on Index
&
Individual Securities
Final Settlement
Final Settlement
Options Contract on
Individual
Securities
Interim Exercise
Settlement
Options Contract on
Individual
Securities
Settlement Price
Product
Settlement
Settlement Price
Futures Contracts
on Index or
Individual Security
Daily
Settlement
Un-expired illiquid
futures contracts
Daily
Settlement
Futures Contracts
on Index or
Individual
Securities
Final
Settlement
segment of NSE).
Options Contracts
on Individual
Securities
Interim
Exercise
Settlement
Options Contracts
on Index and
Individual
Securities
Final
Exercise
Settlement
an Appendix to this report. In the future, new and evolving types of financial
products,
transactions and instruments could lead to new payment, clearing, and
settlement systems and
activities.
FMUs Designated by the FSOC
On July 18, 2012, FSOC voted unanimously to designate eight FMUs as
systemically important.
Each was assigned a supervisory agency on the basis of the types of activities
that they perform.
The eight systemically important FMUs are:
The Clearing House Payments Company, on the basis of its role as operator of
the Clearing House Interbank Payments System (CHIPS).8
In the future, FSOC may add or remove PCS systems from the designated list, as
conditions
warrant.
Regulatory framework
Regulatory objectives
ii.
iii.
iv.
India
The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions. The regulation is needed to create
competitive conditions. In the absence of regulation, unscrupulous participants
could use these leveraged contracts for manipulating prices. This could have
undesirable influence on the spot prices, thereby affecting interests of society at
large.. Regulation is also needed to ensure that the market has appropriate risk
management system. In the absence of such a system, a major default could
create a chain reaction. The resultant financial crisis in a futures market could
create systematic risk. Regulation is also needed to ensure fairness and
transparency in trading, clearing, settlement and management of the exchange
so as to protect and promote the interest of various stakeholders, particularly
non-member users of the market.
The Commission has powers of deemed civil court for (a) Summoning and
enforcing the attendance of any person and examining him on oath; (b) Requiring
the discovery and production of any document; (c) Receiving evidence on
affidavits, and (d) Requisitioning any public record or copy thereof from any office.
The following powers are vested in the Central Government, most of which are
delegated to the Commission:
The powers of approving memorandum and articles of association and Bye-laws;
powers to direct to make or to make articles (Rules) or Byelaws; powers to
suspend governing body of recognised association, and, powers to suspend
business of recognised association.
The F.C(R) Act provides that clients position cannot be appropriated by the
member of the Exchange, except a written consent is taken within three days
time. Forward Markets Commission is persuading increasing number of Exchanges
to switch over to electronic trading, clearing and settlement, which is more
customer-friendly. Commission has also prescribed simultaneous reporting system
for the Exchanges following open out-cry system. These steps facilitate audit trail
and make it difficult for the members to indulge in malpractices like, trading
ahead of clients, etc. The Commission has also mandated all the Exchanges
following open outcry system to display at a prominent place in Exchange
premises, the name, address, telephone number of the officer of the Commission
who can be contacted for any grievance. The website of the Commission also has
a provision for the customers to make complaint, send comments and
suggestions to the Commission.
Product/G
-20
requirem
ents
Trade
Standardis
Repositor
ation
y (for
both
interbank
and
client
trades)
Interest
IRS
Rate
Derivative
s
Available
for both
interbank
and client
trade
Credit
CDS
Derivative
Forex
Available
PartialMIBOR
standardised
.
Central Electronic
Clearing
trading
(CCP)
platform
NonNot
No margin
guaranteed available. requirement
central
Electronic
clearing in trading
place.
platform
CCP based under
clearing
considerati
under
on.
considerati
on.
Not
Guarantee
available as d Central
majority of clearing
interbank
available.
trades
RBI has not
driven by
mandated
customized it.
client trades.
Not
Higher
capital
/Margin
requiremen
ts for noncentrally
clearing
OTC
derivative
trades
Not
available
Margin
requirement
in place
No
exclusive
platform
available.
Can be
traded on
FX- SWAP.
No
regulatory
requirement.
Guarantee Can be
No
Swap
for both
interbank
and client
trades
(FCY -INR
& FCYFCY).
Forex Available
option for both
interbank
and client
trades
(FCY -INR
& FCYFCY).
available as
majority of
interbank
trades
driven by
customized
client
trades..
d Central
clearing
available.
RBI has not
mandated
it.
Not
Central
available as clearing
majority of not
interbank
available.
trades
driven by
customized
client trades.
traded on regulatory
CCIL and
requirement.
Reuters
trading
platform.
Majority of
trades
done
through
brokers.
Not
available.
No
regulatory
requirement.
Not
available.
Not
available.
No
regulatory
requirement.
IRS in
FCY
Available Not
for both
available.
interbank
and client
trades.
Not
available.
Not
available.
No
regulatory
requirement.
IRS
Not
Not
option available available.
in FCY due to
negligible
trading
volume.
Not
available.
Not
available.
No
regulatory
requirement.
Source: http://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?
UrlPage=&ID=762
United States
In the United States, the Securities and Exchange Commission
(SEC),Commodity Futures Trading Commission (CFTC), and the Federal
Reserve System (Fed), among others, are responsible for financial regulation.
The SEC regulates the securities industry (stocks, bonds, and security-based
derivatives) and enforces its laws. The CFTC regulates the trading of
agricultural commodities and futures, but as of recently, since most futures
are now based on securities, the distinction between the organizations has been
blurring, especially with regards to derivatives regulation.The Commodity
Exchange Act (CEA) regulates the trading of commodity futures in the United
States. Passed in 1936, it has been amended several times since then. The CEA
establishes the statutory framework under which the CFTC operates. The DoddFrank Wall Street Reform and Consumer Protection Act brings comprehensive
reform to the regulation of swaps
Analysis
Major issues concerning regulatory framework
There are several important issues in connection with derivatives trading, some of
which have a direct bearing on the design of the regulatory framework. They are
listed below:
a. Should a derivatives exchange be organised as independent and
separate from an existing stock exchange?
b. What exactly should be the division of regulatory responsibility,
including both framing and enforcing the regulations, between SEBI
and the derivatives exchange?
From the purely regulatory angle, a separate exchange for futures trading
seems to be a neater arrangement. However, considering the constraints in
infrastructure facilities, the existing stock exchanges having cash trading may
also be permitted to trade derivatives provided they meet the minimum
eligibility conditions as indicated below :
1. The trading should take place through an online screen-based trading
system, which also has a disaster recovery site. The per-half-hour capacity
of the computers and the network should be at least 4 to 5 times of
the anticipated peak load in any half hour, or of the actual peak load seen
in any half-hour during the preceding six months. This shall be reviewed
from time to time on the basis of experience.
2. The clearing of the derivatives market should be done by an independent
clearing corporation, which satisfies the conditions listed in a later chapter
of this report.
3. The exchange must have an online surveillance capability which monitors
positions, prices and volumes in realtime so as to deter market
manipulation. Price and position limits should be used for improving market
quality.
4. Information about trades, quantities, and quotes should be disseminated by
the exchange in realtime over at least two information vending networks
which are accessible to investors in the country.
10.
11.
No trading/clearing member should be allowed simultaneously to be
on the governing council of both the derivatives market and the cash
market.
12.
If already existing, the Exchange should have a satisfactory record of
monitoring its members, handling investor complaints and preventing
irregularities in trading
Bibliography
Official sites of RBI , FMC , NASDAQ
www.cmegroup.com
Sm_ed_begn.pdf
52