Derivatives Contract Permitted in India

Historical development of derivative market in India

Derivative markets in India have been in existence in one form or the other for a long time. In the area of commodities, the Bombay Cotton Trade Association started future trading way back in 1875. This was the first organized futures market. Then Bombay Cotton Exchange Ltd. in 1893, Gujarat Vyapari Mandall in 1900, Calcutta Hesstan Exchange Ltd. in 1919 had started future market. After the country attained independence, derivative market came through a full circle from prohibition of all sorts of derivative trades to their recent reintroduction. In 1952, the government of India banned cash settlement and options trading, derivatives trading shifted to informal forwards markets. In recent years government policy has shifted in favour of an increased role at market based pricing and less suspicious derivatives trading. The first step towards introduction of financial derivatives trading in India was the promulgation at the securities laws (Amendment) ordinance 1995. It provided for withdrawal at prohibition on options in securities. The last decade, beginning the year 2000, saw lifting of ban of futures trading in many commodities. Around the same period, national electronic commodity exchanges were also set up. The more detail about evolution of derivatives are shown in table No.1 with the help of the chronology of the events. This table is presenting complete historical developments

S.No. Product Traded with underlying asset

Introduction Date

1 Index Futures S&P CNX Nifty June 12,20002 Index Options S&P CNX Nifty June 4,20013 Individual Stock Option Concerned Company

StockJuly 2, 2001

4 Individual Stock futures Concerned Company Stock

November 9,2001

5 Interest Rate Future T – Bills and 10 Years Bond

June 23,2003

6 IT Futures & Options CNX IT August 29,20037 Nifty Futures & Options Bank June 13,20058 Nifty Junior Futures &

OptionsCNX June 1,2007

9 Futures & Options CNX100 June 1,200710 Midcap 50 Futures &

OptionsNifty October 5,2007

11 Mini index Futures &Options

S&P CNX Nifty index January 1, 2008

12 long Term Optioncontracts

S&P CNX Nifty Index March 3,2008

13 Currency Future US Dollar Rupee August 29,2008

Evolution of Derivatives

The history of derivatives is quite colorful and surprisingly a lot longer than most people think. A few years ago I compiled a list of the events that I thought shaped the history of derivatives. That list is published in its entirety in the Winter1995 is sue of Derivatives Quarterly. What follows here is a snapshot of the major events that I think form the evolution of derivatives.

I would like to first note that some of these stories are controversial. Do they really involve derivatives? Or do the minds of people like myself and others see derivatives everywhere?

To start we need to go back to the Bible. In Genesis Chapter 29, believed to be about the year 1700 B.C., Jacob purchased an option costing him seven years of labor that granted him the right to marry Laban's daughter Rachel. His prospective father-in-law, however, reneged, perhaps making this not only the first derivative but the first default on a derivative. Laban required Jacob to marry his older daughter Leah. Jacob married Leah, but because he preferred Rachel, he purchased another option, requiring seven more years of labor, and finally married Rachel, bigamy being allowed in those days. Jacob ended up with two wives, twelve sons, who became the patriarchs of the twelve tribes of Israel, and a lot of domestic friction, which is not surprising. Some argue that Jacob really had forward contracts, which obligated him to the marriages but that does not matter. Jacob did derivatives, one way or the other. Around 580 B.C., Thales the Milesian purchased options on olive presses and made a fortune off of a bumper crop in olives. So derivatives were around before the time of Christ.

The first exchange for trading derivatives appeared to be the Royal Exchange in London, which permitted forward contracting. The celebrated Dutch Tulip bulb mania, which you can read about in Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, published 1841 but still in print, was characterized by forward contracting on tulip bulbs around 1637. The first "futures" contracts are generally traced to the Yodoya rice market in Osaka, Japan around 1650. These were evidently standardized contracts, which made them much like today's futures, although it is not known if the contracts were marked to market daily and/or had credit guarantees.

Probably the next major event, and the most significant as far as the history of U. S. futures markets, was the creation of the Chicago Board of Trade in 1848. Due to its prime location on Lake Michigan, Chicago was developing as a major center for the storage, sale, and distribution of Midwestern grain. Due to the seasonality of grain, however, Chicago's storage facilities were unable to accommodate the enormous increase in supply that occurred following the harvest. Similarly, its facilities were underutilized in the spring. Chicago spot prices rose and fell drastically. A group of grain traders created the "to-arrive" contract, which permitted farmers to lock in the price and deliver the grain later. This allowed the farmer to store the grain either on the farm or at a storage facility nearby and deliver it to Chicago months later. These to-arrive contracts proved useful as a device for hedging and speculating on price changes. Farmers and traders soon realized

that the sale and delivery of the grain itself was not nearly as important as the ability to transfer the price risk associated with the grain. The grain could always be sold and delivered anywhere else at any time. These contracts were eventually standardized around 1865, and in 1925 the first futures clearinghouse was formed. From that point on, futures contracts were pretty much of the form we know them today.

In the mid 1800s, famed New York financier Russell Sage began creating synthetic loans using the principle of put-call parity. Sage would buy the stock and a put from his customer and sell the customer a call. By fixing the put, call, and strike prices, Sage was creating a synthetic loan with an interest rate significantly higher than usury laws allowed.

One of the first examples of financial engineering was by none other than the beleaguered government of the Confederate States of America, which is sued a dual currency optionable bond. This permitted the Confederate States to borrow money in sterling with an option to pay back in French francs. The holder of the bond had the option to convert the claim into cotton, the south's primary cash crop.

Interestingly, futures/options/derivatives trading was banned numerous times in Europe and Japan and even in the United States in the state of Illinois in 1867 though the law was quickly repealed. In 1874 the Chicago Mercantile Exchange's predecessor, the Chicago Produce Exchange, was formed. It became the modern day Merc in 1919. Other exchanges had been popping up around the country and continued to do so.

The early twentieth century was a dark period for derivatives trading as bucket shops were rampant. Bucket shops are small operators in options and securities that typically lure customers into transactions and then flee with the money, setting up shop elsewhere.

In 1922 the federal government made its first effort to regulate the futures market with the Grain Futures Act. In 1936 options on futures were banned in the United States. All the while options, futures and various derivatives continued to be banned from time to time in other countries.

The 1950s marked the era of two significant events in the futures markets. In 1955 the Supreme Court ruled in the case of Corn Products Refining Company that profits from hedging are treated as ordinary income. This ruling stood until it was challenged by the 1988 ruling in the Arkansas Best case. The Best decision denied

the deductibility of capital losses against ordinary income and effectively gave hedging a tax disadvantage. Fortunately, this interpretation was overturned in 1993.

Another significant event of the 1950s was the ban on onion futures. Onion futures do not seem particularly important, though that is probably because they were banned, and we do not hear much about them. But the significance is that a group of Michigan onion farmers, reportedly enlisting the aid of their congressman, a young Gerald Ford, succeeded in banning a specific commodity from futures trading. To this day, the law in effect says, "you can create futures contracts on anything but onions.”

In 1972 the Chicago Mercantile Exchange, responding to the now-freely floating international currencies, created the International Monetary Market, which allowed trading in currency futures. These were the first futures contracts that were not on physical commodities. In 1975 the Chicago Board of Trade created the first interest rate futures contract, one based on Ginnie Mae (GNMA) mortgages. While the contract met with initial success, it eventually died. The CBOT resuscitated it several times, changing its structure, but it never became viable. In 1975 the Merc responded with the Treasury bill futures contract. This contract was the first successful pure interest rate futures. It was held up as an example, either good or bad depending on your perspective, of the enormous leverage in futures. For only about $1,000, and now less than that, you controlled $1 million of T -bills. In 1977, the CBOT created the T -bond futures contract, which went on to be the highest volume contract. In 1982 the CME created the Eurodollar contract, which has now surpassed the T -bond contract to become the most actively traded of all futures contracts. In 1982, the Kansas City Board of Trade launched the first stock index futures, a contract on the Value Line Index. The Chicago Mercantile Exchange quickly followed with their highly successful contract on the S&P 500 index.

1973 marked the creation of both the Chicago Board Options Exchange and the publication of perhaps the most famous formula in finance, the option pricing model of Fischer Black and Myron Scholes. These events revolutionized the investment world in ways no one could imagine at that time. The Black-Scholes model, as it came to be known, set up a mathematical framework that formed the basis for an explosive revolution in the use of derivatives. In 1983, the Chicago Board Options Exchange decided to create an option on an index of stocks. Though originally known as the CBOE 100 Index, it was soon turned over to Standard and Poor's and became known as the S&P 100, which remains the most actively traded exchange-listed option.

The 1980s marked the beginning of the era of swaps and other over-the-counter derivatives. Although over-the-counter options and forwards had previously existed, the generation of corporate financial managers of that decade was the first to come out of business schools with exposure to derivatives. Soon virtually every large corporation, and even some that were not so large, were using derivatives to hedge, and in some cases, speculate on interest rate, exchange rate and commodity risk. New products were rapidly created to hedge the now-recognized wide varieties of risks. As the problems became more complex, Wall Street turned increasingly to the talents of mathematicians and physicists, offering them new and quite different career paths and unheard-of money. The instruments became more complex and were sometimes even referred to as "exotic."

In 1994 the derivatives world was hit with a series of large losses on derivatives trading announced by some well-known and highly experienced firms, such as Procter and Gamble and Metallgesellschaft. One of America's wealthiest localities, Orange County, California, declared bankruptcy, allegedly due to derivatives trading, but more accurately, due to the use of leverage in a portfolio of short- term Treasury securities. England's venerable Barings Bank declared bankruptcy due to speculative trading in futures contracts by a 28- year old clerk in its Singapore office. These and other large losses led

to a huge outcry, sometimes against the instruments and sometimes against the firms that sold them. While some minor changes occurred in the way in which derivatives were sold, most firms simply instituted tighter controls and continued to use derivatives. These stories hit the high points in the history of derivatives. Even my aforementioned "Chronology" cannot do full justice to its long and colorful history. The future promises to bring new and exciting developments.

Abstract Risk is a characteristic feature of most commodity and capital markets. Variations in the prices of agricultural and non-agricultural commodities are induced, over time, by demand-supply dynamics. The last two decades have witnessed many-fold increase in the volume of international trade and business due to the wave of globalization and liberalization sweeping across the world. This has led to rapid and unpredictable variations in financial assets prices, interest rates and exchange rates, and subsequently, to exposing the corporate world to an unwieldy financial risk. In the present highly uncertain business scenario, the importance of risk management is much greater than ever before. The emergence of derivatives market is an ingenious feat of financial engineering that provides an effective and less costly solution to the problem of risk that is embedded in the price unpredictability of the underlying asset.

In India, the emergence and growth of derivatives market is relatively a recent phenomenon. Since its inception in June 2000, derivatives market has exhibited exponential growth both in terms of volume and number of traded contracts. The market turn-over has grown from Rs.2365 crore in 2000-2001 to Rs. 11010482.20 crore in 2008-2009. Within a short span of eight years, derivatives trading in India has surpassed cash segment in terms of turnover and number of traded contracts. The present study encompasses in its scope an analysis of historical roots of derivative trading, types of derivative products, regulation and policy developments, trend and growth, future prospects and challenges of derivative market in India. Some space is devoted also to a brief

discussion of the status of global derivatives markets vis-a–vis the Indian derivatives market.

TRADING

In this chapter we shall take a brief look at the trading system for NSE’s futures and options market. However, the best way to get a feel of the trading system is to actually watch the screen and observe how it operates.

Futures and options trading system

The futures & options trading system of NSE, called NEAT-F&O trading system, provides a fully automated screen-based trading for Nifty futures & options and stock futures & options on a nationwide basis as well as an online monitoring and surveillance mechanism. It supports an order driven market and provides complete transparency of trading operations. It is similar to that of trading of equities in the cash market segment.

The software for the F&O market has been developed to facilitate efficient and transparent trading in futures and options instruments. Keeping in view the familiarity of trading members with the current capital market trading system, modifications have been

performed in the existing capital market trading system so as to make it suitable for trading futures and options.

Entities in the trading system

There are four entities in the trading system. Trading members, clearing members, professional clearing members and participants.

1. Trading members: Trading members are members of NSE. They can trade either on their own account or on behalf of their clients including participants. The exchange assigns a Trading member ID to each trading member. Each trading member can have more than one user. The number of users allowed for each trading member is notified by the exchange from time to time. Each user of a trading member must be registered with the exchange and is assigned a unique user ID. The unique trading member ID functions as a reference for all orders/trades of different users. This ID is common for all users of a particular trading member. It is the responsibility of the trading member to maintain adequate control over persons having access to the firm’s User IDs.

2. Clearing members: Clearing members are members of NSCCL. They carry out risk management activities and confirmation/inquiry of trades through the trading system.

3. Professional clearing members: A professional clearing members is a clearing member who is not a trading member. Typically, banks and custodians become professional clearing members and clear and settle for their trading members.

4. Participants: A participant is a client of trading members like financial institutions. These clients may trade through multiple trading members but settle through a single clearing member.

Basis of trading

The NEAT F&O system supports an order driven market, wherein orders match automatically. Order matching is essentially on the basis of security, its price, time and quantity. All quantity fields are in units and price in rupees. The lot size on the futures market is for 200 Nifties. The exchange notifies the regular lot size and tick size for each of the contracts traded on this segment from time to time. When any order enters the trading system, it is an active order. It tries to find a match on the other side of the book. If it finds a match, a trade is generated. If it does not find a match, the order becomes passive and goes and sits in the respective outstanding order book in the system.

Corporate hierarchy

In the F&O trading software, a trading member has the facility of defining a hierarchy amongst users of the system. This hierarchy comprises corporate manager, branch manager and dealer.

1. Corporate manager: The term ‘Corporate manager’ is assigned to a user placed at the highest level in a trading fi rm. Such a user can perform all the functions such as order and trade h related activities, receiving reports for all branches of the trading member firm and also all dealers of the firm. Additionally, a corporate manager can define exposure limits for the branches of the firm. This facility is available only to the corporate manager.

2. Branch manager: The branch manager is a term assigned to a user who is placed under the corporate manager. Such a user can perform and view order and trade related activities for all dealers under that branch.

3. Dealer: Dealers are users at the lower most level of the hierarchy. A Dealer can perform view order and trade related activities only for oneself and does not have access to information on other dealers under either the same branch or other branches.

Below given cases explain activities possible for specific user categories:

1. Clearing member corporate manager: He can view outstanding orders, previous trades and net position of his client trading members by putting the TM ID (Trading member identification) and leaving the Branch ID and Dealer ID blank.

2. Clearing member and trading member corporate manager: He can view:

Outstanding orders, previous trades and net position of his client trading members by putting the TM ID and leaving the Branch ID and the Dealer ID blank.

Outstanding orders, previous trades and net positions entered for himself by entering his own TM ID, Branch ID and User ID. This is his default screen.

Outstanding orders, previous trades and net position entered for his branch by entering his TMID and Branch ID fields

Outstanding orders, previous trades, and net positions entered for any of his users/dealers by entering his TM ID, Branch ID and user ID fields.

3. Clearing member and trading member dealer: He can only view requests entered by him.

4. Trading member corporate manager

He can view

Outstanding requests and activity log for requests entered by him by entering his own Branch and User IDs. This is his default screen.

Outstanding requests entered by his dealers and/or branch managers by either entering the Branch and/or User IDs or leaving them blank.

5. Trading member branch manager

He can view

Outstanding requests and activity log for requests entered by him by entering his own Branch and User IDs. This is his default screen.

Outstanding requests entered by his users either by filling the User ID field with a specific user or leaving the User ID field blank.

6. Trading member dealer: He can only view requests entered by him.

Chart 4(1)- Security/contract/portfolio entry system screen in NEAT F&O

Order types and conditions

The system allows the trading members to enter orders with various conditions attached to them as per their requirements. These conditions are broadly divided into the following categories:

Time conditions

Price conditions

Other conditions

Several combinations of the above are allowed thereby providing enormous flexibility to the users. The order types and conditions are summarized below.

Time conditions

– Day order:A day order, as the name suggests is an order, which is valid for the day on which it is entered. If the order is not executed during the day, the system cancels the order automatically at the end of the day.

– Good till canceled (GTC):A GTC order remains in the system until the user cancels it. Consequently, it spans trading days, if not traded on the day the order is entered. The maximum number of days an order can remain in the system is notified by the exchange from time to time after which the order is automatically cancelled by the system. Each day counted is a calendar day inclusive of holidays. The days counted are inclusive of the day on which the order is placed and the order is cancelled from the system at the end of the day of the expiry period.

– Good till days/date (GTD):A GTD order allows the user to specify the number of days/date till which the order should stay in the system if not executed. The maximum days allowed by the system are the same as in GTC order. At the end of this day/date, the order is cancelled from the system. Each day/date counted are inclusive of the day/date on which the order is placed and the order is cancelled from the system at the end of the day/date of the expiry period.

– Immediate or Cancel (IOC): An IOC order allows the user to buy or sell a contract as soon as the order is released into the system, failing which the order is cancelled from the system. Partial match is possible for the order, and the unmatched portion of the order is cancelled immediately.

Price condition

– Stop– loss:This facility allows the user to release an order into the system, after the market price of the security reaches or crosses a threshold price e.g. if for stop–loss buy order, the trigger is 1027.00, the limit price is 1030.00 and the market (last traded) price is 1023.00, then this order is released into the system once the market price reaches or exceeds 1027.00. This order is added to the regular lot book with time of triggering as the time stamp, as a limit order of 1030.00. For the stop–loss sell order, the trigger price has to be greater than the limit price.

Other conditions

– Market price:Market orders are orders for which no price is specified at the time the order is entered (i.e. price is market price). For such orders, the system determines the price.

– Trigger price: Price at which an order gets triggered from the stop–loss book.

– Limit price: Price of the orders after triggering from stop–loss book.

– Pro: Pro means that the orders are entered on the trading member’s own account.

– Cli: Cli means that the trading member enters the orders on behalf of a client.

The trader workstation

The market watch window

The following windows are displayed on the trader workstation screen.

Title bar

Ticker window of futures and options market

Ticker window of underlying(capital) market

Tool bar

Market watch window

Inquiry window

Snap quote

Order/trade window

System message window

As mentioned earlier, the best way to familiarize oneself with the screen and its various segments is to actually spend some time studying a live screen. In this section we shall restrict ourselves to understanding just two segments of the workstation screen, the market watch window and the inquiry window.

The market watch window is the third window from the top of the screen, which is always visible to the user. The purpose of market watch is to allow continuous monitoring of contracts or securities that are of specific interest to the user. It displays trading information for contracts selected by the user. The user also gets a broadcast of all the cash market securities on the screen. This function also will be available if the user selects the relevant securities for display on the market watch screen. Display of trading information related to cash market securities will be on “Read only ” format, i.e. the dealer can only view the information on cash market but, cannot trade in them through the system. This is the main window from the dealer’s perspective.

Inquiry window

The inquiry window enables the user to view information such as Market by Order (MBO), Market by Price (MBP), Previous Trades (PT), Outstanding Orders (OO), Activity log (AL), Snap Quote (SQ), Order Status (OS), Market Movement (MM), Market Inquiry (MI), Net Position, On line backup, Multiple index inquiry, Most active security and so on.

Relevant information for the selected contract/security can be viewed. We shall look in detail at the Market by Price (MBP) and the Market Inquiry (MI) screens.

1. Market by order (MBO):The purpose of the MBO is to enable the user to view passive orders in the trading books in the order of price/time priority for a selected security. The F5 key invokes the selection window for MBO. If a particular contract or security is selected, the details of the selected contract or security defaults in the selection screen or else the current position in market watch defaults. Details of contract or security in the selection screen can also be defaulted from the last action. One can select the security from the contract list or from the last operation. The fields that are available on the selection screen are instrument, symbol, and expiry and book type. The instrument type, symbol, expiry and book type fields are compulsory.

2. Market by price(MBP):The purpose of the MBP is to enable the user to view passive orders in the market aggregated at each price and are displayed in order of best prices. The window can be invoked by pressing the [F6] key. If a particular contract or security is selected, the details of the selected contract or security can be seen on this screen.

3. Market inquiry(MI):The market inquiry screen can be invoked by using the [F11] key. If a particular contract or security is selected, the details of the selected contract or selected security defaults in the selection screen or else the current position in the market watch defaults. The first line of the screen gives the Instrument type, symbol, expiry, contract status, total traded quantity, life time high and life time low. The second line displays the closing price, open price, high price, low price, last traded price and indicator for net change from closing price. The third line displays the last traded quantity, last traded time and the last traded date. The fourth line displays the closing open interest, the

opening open interest, day high open interest, day low open interest, current open interest, lifetime high open interest, lifetime low open interest and net change from closing open interest. The fifth line display very important information, namely the carrying cost in percentage terms.

Placing orders on the trading system

For both the futures and the options market, while entering orders on the trading system, members are required to identify orders as being proprietary or client orders. Proprietary orders should be identified as ‘Pro’ and those of clients should be identified as ‘Cli’. Apart from this, in the case of ‘Cli’ trades, the client account number should also be provided.

The futures market is a zero sum game i.e. the total number of long in any contract always equals the total number of short in any contract. The total number of outstanding contracts (long/short) at any point in time is called the “Open interest”. This Open interest figure is a good indicator of the liquidity in every contract. Based on studies carried out in international exchanges, it is found that open interest is maximum in near month expiry contracts.

Market spread/combination order entry

The NEAT F&O trading system also enables to enter spread/combination trades. This enables the user to input two or three orders simultaneously into the market. These orders will have the condition attached to it that unless and until the whole batch of orders finds a counter match, they shall not be traded. This facilitates spread and combination trading strategies with minimum price risk.

Basket trading

In order to provide a facility for easy arbitrage between futures and cash markets, NSE introduced basket-trading facility. Chart 4(2) shows the basket-trading screen. This enables the generation of portfolio offline order files in the derivatives trading system and its execution in the cash segment. A trading member can buy or sell a portfolio through a single order, once he determines its size. The system automatically works out the quantity of each security to be bought or sold in proportion to their weights in the portfolio.

Chart 4(2)- Portfolio offline order entry for basket trades

Futures and options market instruments

The F&O segment of NSE provides trading facilities for the following derivative instruments:

1. Index based futures

2. Index based options

3. Individual stock options

4. Individual stock futures

Contract specifications for index futures

NSE trades Nifty futures contracts having one-month, two-month and three-month expiry cycles. All contracts expire on the last Thursday of every month. Thus a January expiration contract would expire on the last Thursday of January and a February expiry contract would cease trading on the last Thursday of February. On the Friday following the last Thursday, a new contract having a three-month expiry would be introduced for trading.

Fig. 4(3) – Contract cycle

Thus, as shown in Figure 4(3) at any point in time, three contracts would be available for trading with the first contract expiring on the last Thursday of that month. Depending on the time period for which you want to take an exposure in index futures contracts, you can place buy and sell orders in the respective contracts. All index futures contracts on NSE’s futures trading system are coded as shown in Table 4(4)

TABLE 4(4) CONTRACT SPECIFICATION FOR INDEX FUTURES

The Instrument type refers to “Futures contract on index” and Contract symbol - NIFTY denotes a “Futures contract on Nifty index” and the Expiry date represent the last date on which the contract will be available for trading. Each futures contract has a separate limit order book. All passive orders are stacked in the system in terms of price-time priority and trades take place at the passive order price (similar to the existing capital market trading system). The best buy order for a given futures contract will be the order to buy the index at the highest index level whereas the best sell order will be the order to sell the index at the lowest index level. Trading is for a minimum lot size of 200 units. Thus if the index level is around 1000, then the appropriate value of a single index futures contract would be Rs.200,000. The minimum tick size for an index future contract is 0.05 units. Thus a single move in the index value would imply a resultant gain or loss of Rs.10.00 (i.e. 0.05*200 units) on an open position of 200 units. Table 10.1 gives the contract specifications for Nifty futures

Contract specification for index options

On NSE’s index options market, contracts at different strikes, having one-month, two-month and three-month expiry cycles are available for trading. There are typically one-month, two-month and three-month options; each with five different strikes available for trading. Hence at a given point in time there are minimum 3 X 5 X 2 or 30 options products. Option contracts are specified as follows: DATE-EXPIRYMONTH-YEAR-CALL/PUT- AMERICAN/EUROPEAN-STRIKE. For example the European style call option contract on the Nifty index with a strike price of 1040 expiring on the 28th June 2001 is specified as ‘28 JUN 2001 1040 CE’.

Just as in the case of futures contracts, each option product (for instance, the 28 JUN 2001 1040 CE) has it’s own order book and it’s own prices. All index options contracts are cash settled and expire on the last Thursday of the month. The clearing corporation does the novation. Just as in the case of futures, trading is in minimum market lot size of 200 units. The minimum tick for an index options contract is 0.05 paise. Table 4(5) gives the contract specifications for Nifty options.

TABLE - CONTACT SPECIFICATION: FOR INDEX OPTIONS

Generation of strikes

Let us look at an example of how the various option strikes are generated by the exchange.

Suppose we start with Nifty at 1500 and options with strikes 1460, 1480, 1500, 1520, and 1540.

The exchange commits itself to an inter–strike distance of say 20. When the Nifty-closing price crosses 1520, a new set of strikes at 1560 start trading

from the next day. When the Nifty-closing price falls below 1480, a new set of strikes at 1440 start trading

from the next day.

Contract specifications for stock futures

Trading in stock futures commenced on the NSE from November 2001. These contracts are cash settled on a T+1 basis. The expiration cycle for stock futures is the same as for index futures, index options and stock options. A new contract is introduced on the trading day following the expiry of the near month contract. Table 4(6) gives the contract

specifications for stock futures.

TABLE 4(6) CONTACT SPECIFICATION: FOR STOCK FUTURES

Contract specifications for stock options

Trading in stock options commenced on the NSE from July 2001. These contracts are American style and are settled in cash. The expiration cycle for stock options is the same as for index futures and index options. A new contract is introduced on the trading day following the expiry of the near month contract. NSE provides a minimum of five strike prices for every option type (i.e. call and put) during the trading month. There are at least two in–the–money contracts, two out–of– the–money contracts and one at–the–money contract available for trading.

TABLE 4(7) CONTACT SPECIFICATION: FOR STOCK OPTIONS

Criteria for stocks eligible for options tradingThe following criteria will have to be met before a stock can be considered eligible for options trading.

The stock should be amongst the top 200 scrips, on the basis of average market capitalization during the last six months and the average free fl oat market capitalization should not be less than Rs.750 crore. The free fl oat market capitalization means the non-–promoter holding in the stock. The non-– promoter holding in the company should be at least 30%.

The stock should be amongst the top 200 scrips on the basis of average daily volume (in value terms), during the last six months. Further, the average daily volume should not be less than Rs.5 crore in the underlying cash market.

The stock should be traded on at least 90% of the trading days in the last six months.

The ratio of the daily volatility of the stock vis-a-vis the daily volatility of the index should not be more than 4, at any time during the previous six months. Based on these criteria, SEBI approved trading in option contracts on 31 stocks.

Charges

The maximum brokerage chargeable by a TM in relation to trades effected in the contracts admitted to dealing on the F&O segment of NSE is fixed at 2.5% of the contract value in case of index futures and 2.5% of notional value of the contract [(Strike price + Premium) * Quantity] in case of index options, exclusive of statutory levies. The

transaction charges payable by a TM for the trades executed by him on the F&O segment are fixed at Rs.2 per lakh of turnover (0.002%)(each side) or Rs.1 lakh annually, whichever is higher. The TMs contribute to Investor Protection Fund of F&O segment at the rate of Rs.10 per crore of Turnover (0.0001%)(each side).

Top 10 Derivative Stocks (January' 14 )

RankContract Symbol

No. of trades

Traded Quantity

Traded Value (Rs Crs)

Avg. Daily Trading value (Rs Crs)

Share in total trading value (%) (*)

No. of Contracts

1 INFY 988079 190758375 68867.44 2,994.24 9.31% 1,526,0672 SBIN 1177168 211145250 35215.5 1,531.11 4.76% 1,689,1623 TCS 717892 131967125 30261.95 1,315.74 4.09% 1,055,7374 AUROPHARMA 296915 645460000 27078.68 1,177.33 3.66% 322,7305 MCDOWELL-N 443885 88995625 23927.92 1,040.34 3.23% 711,9656 LT 402630 231206500 23487.24 1,021.18 3.17% 462,4137 AXISBANK 615809 194414500 23308.05 1,013.39 3.15% 777,6588 ICICIBANK 665446 214217000 22514.62 978.9 3.04% 856,8689 TATASTEEL 461865 538454000 20983.85 912.34 2.84% 538,454

10 RELIANCE 663662 235377250 20631.16 897.01 2.79% 941,509

Note: (*) As a percentage of total turnover for FUTSTK & OPTSTK

NSE MARKET STATISTICS

Segments Turnover (` crore)Percentage Change over last month

Average daily turnover

Market Capitalisation

Dec' 2013 Jan' 2014 (`crore) (`crore)CM 230,817 255,630 10.8 10,991 6884167Equity F&O 2787961.95 3324373.67 19.2 132,760 --Currency F&O 186064.47 208563.87 12.1 8,860 --Interest Rate Futures 0 0 -- 0 0TOTAL 3,267,332 3,867,602 18.4 155,587 11,998,486

Business Growth in F&O Segment

Year

Total

Index FutureTurnover 

( cr.)

Stock FutureTurnover 

( cr.)

Index OptionsNotional

Turnover ( cr.)

Stock optionNotional Turnover 

( cr.)

TotalTurnover 

( cr.)

Avg Daily Turnover

( Cr.)

2013-14 3085296.45 4949281.72 27767341.23 2409488.64 38211408.04 152236.69

2012-13 2527130.76 4223872.02 22781574.14 2000427.29 31533003.96 126638.57

2011-12 3577998.41 4074670.73 22720031.64 977031.13 31349731.74 125902.54

2010-11 4356754.53 5495756.70 18365365.76 1030344.21 29248221.09 115150.48

2009-10 3934388.67 5195246.64 8027964.20 506065.18 17663664.57 72392.07

2008-09 3570111.40 3479642.12 3731501.84 229226.81 11010482.20 45310.63

2007-08 3820667.27 7548563.23 1362110.88 359136.55 13090477.75 52153.30

2006-07 2539574 3830967 791906 193795 7356242 2954

Month/Year

No of co.s

listed*

No. of co.s

permitted*

No. of co.s

available for

trading*

No. of tradin

g days

No. of securities traded

#

No. of trades (lakh)

Traded Quantity

(lakh)

Turnover

( cr)

Average Daily

Turnover

( cr)

Average

Trade Size

Demat Securities Traded

(lakh)

Demat Turnove

r

Market Capitalisatio

n( cr)*

Current Month

Mar-2014 1,688 75 1,586 21 1,768 1306 1,44,6782,76,74

1 13,178 21,187 1,44,6782,76,74

1 72,77,720

2012-2013 1,666 76 1,582 250 1,683 13605

16,59,160

27,08,279 10,833 19,907

16,59,160

27,08,279 62,39,035

2011-2012 1,646 73 1,563 249 1,807

14,377

16,16,978

28,10,893 11,289 19,551

16,16,978

28,10,893 60,96,518

2010-2011 1,574 61 1,484 255 1,607

15,507

18,24,515

35,77,412 14,048 23,009

18,24,515

35,77,412 67,02,616

2009-2010 1,470 37 1,359 244 1,968

16,816

2,215,530

4,138,024 16,959 24,608

2,215,530

4,138,024 6,009,173

2008-2009 1,432 - 1,291 243 1,327

13,651

1,426,354

2,752,023 11,325 20,160

1,426,354

2,752,023 2,896,194

2007-2008 1,381 - 1,236 251 1,264

11,727

1,498,469

3,551,038 14148 30,281

1,498,469

3,551,038 4,858,122

2006-2007 1,228 - 1,084 249 1,191 7,846 855,456

1,945,285 7,812 24,793 855,456

1,945,285 3,367,350

2005-2006 1,069 - 929 251 956 6,088 844,486

1,569,556 6,253 25,781 844,486

1,569,556 2,813,201