Sebi Lays Out Rules For Derivatives Trade

The Securities and Exchange Board of India (Sebi) has laid out the ground rules for derivatives trading in the country, broadly based on the recommendations of the L C Gupta committee.

Derivatives trading is, however, likely to take another three to four months to commence, as the notification that will provide derivative instruments to be treated as security is still awaited from the ministry of finance.

Sebi senior executive director O P Gahrotra said, "The regulations were issued to help exchanges get ready for derivatives. The key pre-condition is the government issuing the notification."

The regulator has, however, not yet set out the initial margin requirements, exposure limits linked to capital adequacy, and margin demands linked to risk of loss on positions.

 

Sebi said derivatives brokers/dealers and clearing members would have to get a separate registration with Sebi, over and above the existing one as a stock

broker. The regulator has set out the net worth of members and its calculations.

Members will need to have a qualified approved-user and salesperson who have passed a certification programme approved by Sebi.

Gahrotra further said exchanges would now be able to gear up independently, through software development, surveillance/monitoring training and response from trading members - regarding derivatives trading, in the coming weeks.

The National Stock Exchange, which has its trading software and hardware in place, is now expected to commence trading in the next 2-3 months.

Gahrotra issued letters to all the stock exchange presidents and EDs yesterday regarding the pre-conditions for derivatives trading. The broad guidelines are as follows:

the derivatives exchange/ segment will have a separate governing counciland representations of trading/clearing members shall be limited to 40 per cent of the total members of the governing council.

the derivatives trade will have to be settled by a separate clearing corporation/house.

the clearing member would have to maintain a liquid capital of Rs 3 crore as a risk comtainment measure.

the minimum value of the derivative trade will be not less than Rs one lakh, prior approval of regulator while commencing derivatives contract.

The net worth of the trading member will be calculated as follows:

Capital + free reserves

Less: non-allowable assets like fixed assets, pledged securities, member's card, unlisted securities, bad deliveries, prepaid expenses, intangible assets and 30 per cent of marketable securities.

Exchanges which are keen to commence derivatives will have to apply to Sebi for such trading.