The Hindu Business Line : A relaxed, yet safer future

THE existing eligibility criteria for stocks and indices, the position limits and the risk containment measures in the derivative markets were reviewed by the Advisory Committee on Derivatives and Market Risk Management (Advisory Committee) recently.

Based on the recommendations of the Advisory Committee, considered and approved by the SEBI Board, the eligibility criteria, the position limits and the risk containment measures in the derivative markets stand modified in the following manner.

Eligibility criteria: A stock on which stock option and single stock future contracts are proposed to be introduced shall conform to the following broad eligibility criteria:

The stock shall be chosen from amongst the top 500 stock in terms of average daily market capitalisation and average daily traded value in the previous six month on a rolling basis.

The stock's median quarter-sigma order size over the last six months shall be not less than Rs 1 lakh. For this purpose, a stock's quarter-sigma order size shall mean the order size (in value terms) required to cause a change in the stock price equal to one-quarter of a standard deviation.

The market wide position limit in the stock shall not be less than Rs 50 crore. Since market wide position limit for a stock is computed at the end of every month, the exchange shall ensure that stocks comply with this criterion before introduction of new contracts. Further, the market wide position limit (which is in number of shares) shall be valued taking the closing prices of stocks in the underlying cash market on the date of expiry of contract in the month.

The procedure for introducing and dropping stocks on which option and future contracts are traded shall continue to be in the manner specified earlier.

Index futures: The exchange may consider introducing derivative contracts on an index if 80 per cent of the index constituents are individually eligible for derivatives trading. However, no single ineligible stock in the index shall have a weight of more than 5 per cent in the index. The index on which futures and options contracts are permitted shall be required to comply with the eligibility criteria on a continuous basis.

The exchange shall check whether the index continues to meet the aforesaid eligibility criteria on a monthly basis. If the index fails to meet the eligibility criteria for three months consecutively, then no fresh month contract shall be issued on that index. However, the existing unexpired contracts shall be permitted to trade till expiry and new strikes may also be introduced in the existing contracts.

Risk containment measures: The following risk containment measures are being specified in addition to those prescribed by the SEBI from time to time.

Collection of mark-to-market margin/settlement

It had been specified that if mark-to-market margin/ settlements (MTM) for derivative contracts is not collected before the start of the next day's trading, the exchange is required to collect correspondingly higher initial margins to cover the potential for losses over the time elapsed in the collection of MTM.

Henceforth, the exchange may offer a choice to the members to opt for payment of MTM

either before the start of trading the next day i.e. T+0, or

on the next day i.e. T+1.

If the member opts for payment of MTM by T+1, then correspondingly higher initial margin shall be collected to cover the potential for losses over the time elapsed in the collection of MTM.

For stocks which have a mean value of impact cost greater than 1 per cent, in addition to the price scanning range, the minimum initial margin for single stock futures contracts and the short option minimum charge for stock option contracts shall also be scaled up by square root of three.

Liquid assets of clearing member: In order to align the collateral requirements in the cash market and the derivative market, the following modifications in components of liquid asset are specified:

Units of money market mutual funds and units of gilt funds may be accepted towards cash equivalent component of the liquid assets of a clearing member.

The unit shall be valued on the basis of its net asset value after applying a haircut of 10 per cent on the NAV and any exit load charged by the mutual fund. The valuation or the marking to market of such units shall be carried out on a daily basis.

Equity securities classified under Group I in the underlying cash market may be accepted towards liquid assets in the derivative markets.

Securities classified under Group I shall be those, which have traded at least 80 per cent (+/-5 per cent) of the days for the previous eighteen months and which have a mean impact cost of less than or equal to 1 per cent, for an order size of Rs 1 lakh.

The equity securities shall be valued/marked to market on a daily basis after applying a haircut equivalent to the respective VAR of the equity security. The list of acceptable equity securities shall be updated on the basis of trading and mean impact cost on the 15th of each month.

Units of all mutual funds may also be accepted as the securities component of liquid assets. The unit shall be valued on the basis of its net asset value (NAV) after applying a haircut equivalent to the VAR of the units NAV and any exit load charged by the mutual fund.

The valuation or the marking to market of such units shall be carried out on a daily basis.

The valuation/marking to market of all securities, including debt securities, dated Government securities and T-bills, shall be carried out daily, with appropriate haircuts.

Source: www.sebi.gov.in

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Investment Quiz

Choosing a scooter

Preferred ten mutual funds — Unfazed by rapid asset expansion

What the duty cut means for oil cos

Need to be bullish about investing

Monsoons losing hold on India Inc.

Benefit of a floating rate

Sundaram Growth Fund

Reliance Growth: Buy in a phased manner

UTI Growth & Value Fund: Hold