The
term "Derivative" indicates that it has no independent value,
i.e. its value is entirely "derived" from the value of the
underlying asset. The underlying asset can be securities, commodities,
bullion, currency, live stock or anything else. In other words, Derivative
means a forward, future, option or any other hybrid contract of pre
determined fixed duration, linked for the purpose of contract fulfillment
to the value of a specified real or financial asset or to an index of
securities. With Securities Laws (Second Amendment) Act, 1999, Derivatives
has been included in the Definition of Securities. The term Derivative
has been defined in Securities Contracts (Regulations) Act, as:-
A Derivative includes: -
a. A security derived from a debt instrument, share, loan, whether secured
or unsecured, risk instrument or contract for differences or any other
form of security;
b. a contract which derives its value from the prices, or index of prices,
of underlying securities;
With the amendment in the definition of 'securities' under SC(R)A (to
include derivative contracts in the definition of securities), derivatives
trading takes place under the provisions of the Securities Contracts
(Regulation) Act, 1956 and the Securities and Exchange Board of India
Act, 1992. Dr. L.C. Gupta Committee, constituted by SEBI had laid down
the regulatory framework for derivative trading in India. SEBI has also
framed suggestive bye-law for Derivative Exchanges/Segments and their
Clearing Corporation/House which lay's down the provisions for trading
and settlement of derivative contracts. The Rules, Bye-laws & Regulations
of the Derivative Segment of the Exchanges and their Clearing Corporation/House
have to be framed in line with the suggestive Bye-laws. SEBI has also
laid the eligibility conditions for Derivative Exchange/Segment and
its Clearing Corporation/House to ensure that Derivative Exchange/Segment
& Clearing Corporation/House provide a transparent trading environment,
safety & integrity and provide facilities for redressal of investor
grievances.some of the important eligibility conditions are
* Derivative trading to take place through an on-line screen based Trading
System.
* The Derivatives Exchange/Segment shall have on-line surveillance capability
to monitor positions, prices, and volumes on a real time basis so as
to deter market manipulation.
* The Derivatives Exchange/ Segment should have arrangements for dissemination
of information about trades, quantities and quotes on a real time basis
through atleast two information vending networks, which are easily accessible
to investors across the country.
* The Derivatives Exchange/Segment should have arbitration and investor
grievances redressal mechanism operative from all the four areas / regions
of the country.
* The Derivatives Exchange/Segment should have satisfactory system of
monitoring investor complaints and preventing irregularities in trading.
* The Derivative Segment of the Exchange would have a separate Investor
Protection Fund.
* The Clearing Corporation/House shall perform full novation, i.e.,
the Clearing Corporation/House shall interpose itself between both legs
of every trade, becoming the legal counterparty to both or alternatively
should provide an unconditional guarantee for settlement of all trades.
* The Clearing Corporation/House shall have the capacity to monitor
the overall position of Members across both derivatives market and the
underlying securities market for those Members who are participating
in both.
* The level of initial margin on Index Futures Contracts shall be related
to the risk of loss on the position. The concept of value-at-risk shall
be used in calculating required level of initial margins. The initial
margins should be large enough to cover the one-day loss that can be
encountered on the position on 99% of the days.
* The Clearing Corporation/House shall establish facilities for electronic
funds transfer (EFT) for swift movement of margin payments.
* In the event of a Member defaulting in meeting its liabilities, the
Clearing Corporation/House shall transfer client positions and assets
to another solvent Member or close-out all open positions.
* The Clearing Corporation/House should have capabilities to segregate
initial margins deposited by Clearing Members for trades on their own
account and on account of his client. The Clearing Corporation/House
shall hold the clients’ margin money in trust for the client purposes
only and should not allow its diversion for any other purpose.
* The Clearing Corporation/House shall have a separate Trade Guarantee
Fund for the trades executed on Derivative Exchange / Segment.
SEBI has specified measures to enhance protection of the rights of investors
in the Derivative MarketThese measures are as follows:
1. Investor's money has to be kept separate at all levels and is permitted
to be used only against the liability of the Investor and is not available
to the trading member or clearing member or even any other investor.
2. The Trading Member is required to provide every investor with a risk
disclosure document which will disclose the risks associated with the
derivatives trading so that investors can take a conscious decision
to trade in derivatives.
3. Investor would get the contract note duly time stamped for receipt
of the order and execution of the order. The order will be executed
with the identity of the client and without client ID order will not
be accepted by the system. The investor could also demand the trade
confirmation slip with his ID in support of the contract note. This
will protect him from the risk of price favour, if any, extended by
the Member.
4. In the derivative markets all money paid by the Investor towards
margins on all open positions is kept in trust with the Clearing House
/Clearing Corporation and in the event of default of the Trading or
Clearing Member the amounts paid by the client towards margins are segregated
and not utilised towards the default of the member. However, in the
event of a default of a member, losses suffered by the Investor, if
any, on settled / closed out position are compensated from the Investor
Protection Fund, as per the rules, bye-laws and regulations of the derivative
segment of the exchanges.
Presently, SEBI has permitted Derivative Trading on the Derivative Segment
of BSE and the F&O Segment of NSE. Derivative products have been
introduced in a phased manner starting with Index Futures Contracts
in June 2000, Index Options and Stock Options introduced in June 2001
and July 2001 followed by Stock Futures in November 2001.
FAQs
on Derivatives
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