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 !"#. This was the first organi$ed futures market. Then Bombay Cotton %xchange &td. in !'(, )u*arat +ya,ari -andall in '.., Calcutta /esstan %xchange &td. in ' ' had started future market. After the country attained inde,endence, derivative market came through a full circle from ,rohibition of all sorts of derivative trades to their recent reintroduction. In '#0, the government of India banned cash settlement and o,tions trading, derivatives trading shifted to informal forwards markets. In recent years government ,olicy has shifted in favour of an increased role at market based ,ricing and less sus,icious derivatives trading. The first ste, towards introduction of financial derivatives trading in India was the ,romulgation at the securities laws 1Amendment2 ordinance ''#. It ,rovided for withdrawal at ,rohibition on o,tions in securities. The last decade, beginning the year 0..., saw lifting of ban of futures trading in many commodities. Around the same ,eriod, national electronic commodity exchanges were also set u,. The more detail about evolution of derivatives are shown in table 3o. with the hel, of the chronology of the events. This table is ,resenting com,lete historical develo,ments S.No. 0 ( ; # ? " ! ' . Product Index 4utures Index :,tions Individual 5tock :,tion Individual 5tock futures Interest <ate 4uture IT 4utures 6 :,tions 3ifty 4utures 6 :,tions 3ifty 9unior 4utures 6 :,tions 4utures 6 :,tions -idca, #. 4utures 6 :,tions Traded with underlying asset 567 C38 3ifty 567 C38 3ifty Concerned Com,any 5tock Concerned Com,any 5tock T = Bills and . >ears Bond C38 IT Bank C38 C38 .. 3ifty Introduction Date 9une 0,0... 9une ;,0.. 9uly 0, 0.. 3ovember ',0.. 9une 0(,0..( August 0',0..( 9une (,0..# 9une ,0.." 9une ,0.." :ctober #,0.."

0 (

-ini index 4utures 6 :,tions long Term :,tion contracts Currency 4uture

567 C38 3ifty index 567 C38 3ifty Index @5 Dollar <u,ee

9anuary , 0..! -arch (,0..! August 0',0..!

Evolution of Derivatives

The history of derivatives is Auite colorful and sur,risingly a lot longer than most ,eo,le think. A few years ago I com,iled a list of the events that I thought sha,ed the history of derivatives. That list is ,ublished in its entirety in the Binter ''# is sue of Derivatives Cuarterly. Bhat follows here is a sna,shot of the ma*or 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 derivativesD :r do the minds of ,eo,le like myself and others see derivatives everywhereD To start we need to go back to the Bible. In )enesis Cha,ter 0', believed to be about the year ".. B.C., 9acob ,urchased an o,tion costing him seven years of labor that granted him the right to marry &abanEs daughter <achel. /is ,ros,ective fatherFinFlaw, however, reneged, ,erha,s making this not only the first derivative but the first default on a derivative. &aban reAuired 9acob to marry his older daughter &eah. 9acob married &eah, but because he ,referred <achel, he ,urchased another o,tion, reAuiring seven more years of labor, and finally married <achel, bigamy being allowed in those days. 9acob ended u, with two wives, twelve sons, who became the ,atriarchs of the twelve tribes of Israel, and a lot of domestic friction, which is not sur,rising. 5ome argue that 9acob really had forward contracts, which obligated him to the marriages but that does not matter. 9acob did derivatives, one way or the other. Around #!. B.C., Thales the -ilesian ,urchased o,tions on olive ,resses and made a fortune off of a bum,er cro, in olives. 5o derivatives were around before the time of Christ.

The first exchange for trading derivatives a,,eared to be the <oyal %xchange in &ondon, which ,ermitted forward contracting. The celebrated Dutch Tuli, bulb mania, which you can read about in %xtraordinary 7o,ular Delusions and the -adness of Crowds by Charles -ackay, ,ublished !; but still in ,rint, was characteri$ed by forward contracting on tuli, bulbs around ?(". The first GfuturesG contracts are generally traced to the >odoya rice market in :saka, 9a,an around ?#.. These were evidently standardi$ed contracts, which made them much like todayEs futures, although it is not known if the contracts were marked to market daily andHor had credit guarantees. 7robably the next ma*or event, and the most significant as far as the history of @. 5. futures markets, was the creation of the Chicago Board of Trade in !;!. Due to its ,rime location on &ake -ichigan, Chicago was develo,ing as a ma*or center for the storage, sale, and distribution of -idwestern grain. Due to the seasonality of grain, however, ChicagoEs storage facilities were unable to accommodate the enormous increase in su,,ly that occurred following the harvest. 5imilarly, its facilities were underutili$ed in the s,ring. Chicago s,ot ,rices rose and fell drastically. A grou, of grain traders created the GtoFarriveG contract, which ,ermitted farmers to lock in the ,rice and deliver the grain later. This allowed the farmer to store the grain either on the farm or at a storage facility nearby and deliver it to Chicago months later. These toFarrive contracts ,roved useful as a device for hedging and s,eculating on ,rice changes. 4armers and traders soon reali$ed

that the sale and delivery of the grain itself was not nearly as im,ortant as the ability to transfer the ,rice risk associated with the grain. The grain could always be sold and delivered anywhere else at any time. These contracts were eventually standardi$ed around !?#, and in '0# the first futures clearinghouse was formed. 4rom that ,oint on, futures contracts were ,retty much of the form we know them today. In the mid !..s, famed 3ew >ork financier <ussell 5age began creating synthetic loans using the ,rinci,le of ,utFcall ,arity. 5age would buy the stock and a ,ut from his customer and sell the customer a call. By fixing the ,ut, call, and strike ,rices, 5age was creating a synthetic loan with an interest rate significantly higher than usury laws allowed. :ne of the first exam,les of financial engineering was by none other than the beleaguered government of the Confederate 5tates of America, which is sued a dual currency o,tionable bond. This ,ermitted the Confederate 5tates to borrow money in sterling with an o,tion to ,ay back in 4rench francs. The holder of the bond had the o,tion to convert the claim into cotton, the southEs ,rimary cash cro,. Interestingly, futuresHo,tionsHderivatives trading was banned numerous times in %uro,e and 9a,an and even in the @nited 5tates in the state of Illinois in !?" though the law was Auickly re,ealed. In !"; the Chicago -ercantile %xchangeEs ,redecessor, the Chicago 7roduce %xchange, was formed. It became the modern day -erc in ' '. :ther exchanges had been ,o,,ing u, around the country and continued to do so. The early twentieth century was a dark ,eriod for derivatives trading as bucket sho,s were ram,ant. Bucket sho,s are small o,erators in o,tions and securities that ty,ically lure customers into transactions and then flee with the money, setting u, sho, elsewhere. In '00 the federal government made its first effort to regulate the futures market with the )rain 4utures Act. In '(? o,tions on futures were banned in the @nited 5tates. All the while o,tions, futures and various derivatives continued to be banned from time to time in other countries. The '#.s marked the era of two significant events in the futures markets. In '## the 5u,reme Court ruled in the case of Corn 7roducts <efining Com,any that ,rofits from hedging are treated as ordinary income. This ruling stood until it was challenged by the '!! ruling in the Arkansas Best case. The Best decision denied

the deductibility of ca,ital losses against ordinary income and effectively gave hedging a tax disadvantage. 4ortunately, this inter,retation was overturned in ''(. Another significant event of the '#.s was the ban on onion futures. :nion futures do not seem ,articularly im,ortant, though that is ,robably because they were banned, and we do not hear much about them. But the significance is that a grou, of -ichigan onion farmers, re,ortedly enlisting the aid of their congressman, a young )erald 4ord, succeeded in banning a s,ecific commodity from futures trading. To this day, the law in effect says, Gyou can create futures contracts on anything but onions.I

In '"0 the Chicago -ercantile %xchange, res,onding to the nowFfreely floating international currencies, created the International -onetary -arket, which allowed trading in currency futures. These were the first futures contracts that were not on ,hysical commodities. In '"# the Chicago Board of Trade created the first interest rate futures contract, one based on )innie -ae 1)3-A2 mortgages. Bhile the contract met with initial success, it eventually died. The CB:T resuscitated it several times, changing its structure, but it never became viable. In '"# the -erc res,onded with the Treasury bill futures contract. This contract was the first successful ,ure interest rate futures. It was held u, as an exam,le, either good or bad de,ending on your ,ers,ective, of the enormous leverage in futures. 4or only about J ,..., and now less than that, you controlled J million of T Fbills. In '"", the CB:T created the T Fbond futures contract, which went on to be the highest volume contract. In '!0 the C-% created the %urodollar contract, which has now sur,assed the T Fbond contract to become the most actively traded of all futures contracts. In '!0, the Kansas City Board of Trade launched the first stock index futures, a contract on the +alue &ine Index. The Chicago -ercantile %xchange Auickly followed with their highly successful contract on the 567 #.. index. '"( marked the creation of both the Chicago Board :,tions %xchange and the ,ublication of ,erha,s the most famous formula in finance, the o,tion ,ricing model of 4ischer Black and -yron 5choles. These events revolutioni$ed the investment world in ways no one could imagine at that time. The BlackF5choles model, as it came to be known, set u, a mathematical framework that formed the basis for an ex,losive revolution in the use of derivatives. In '!(, the Chicago Board :,tions %xchange decided to create an o,tion on an index of stocks. Though originally known as the CB:% .. Index, it was soon turned over to 5tandard and 7oorEs and became known as the 567 .., which remains the most actively traded exchangeFlisted o,tion. The '!.s marked the beginning of the era of swa,s and other overFtheFcounter derivatives. Although overFtheFcounter o,tions and forwards had ,reviously existed, the generation of cor,orate financial managers of that decade was the first to come out of business schools with ex,osure to derivatives. 5oon virtually every large cor,oration, and even some that were not so large, were using derivatives to hedge, and in some cases, s,eculate on interest rate, exchange rate and commodity risk. 3ew ,roducts were ra,idly created to hedge the nowFrecogni$ed wide varieties of risks. As the ,roblems became more com,lex, Ball 5treet turned increasingly to the talents of mathematicians and ,hysicists, offering them new and Auite different career ,aths and unheardFof money. The instruments became more com,lex and were sometimes even referred to as Gexotic.G

In ''; the derivatives world was hit with a series of large losses on derivatives trading announced by some wellFknown and highly ex,erienced firms, such as 7rocter and )amble and -etallgesellschaft. :ne of AmericaEs wealthiest localities, :range County, California, declared bankru,tcy, allegedly due to derivatives trading, but more accurately, due to the use of leverage in a ,ortfolio of shortF term Treasury securities. %nglandEs venerable Barings Bank declared bankru,tcy due to s,eculative trading in futures contracts by a 0!F year old clerk in its 5inga,ore office. These and other large losses led

to a huge outcry, sometimes against the instruments and sometimes against the firms that sold them. Bhile some minor changes occurred in the way in which derivatives were sold, most firms sim,ly instituted tighter controls and continued to use derivatives. These stories hit the high ,oints in the history of derivatives. %ven my aforementioned GChronologyG cannot do full *ustice to its long and colorful history. The future ,romises to bring new and exciting develo,ments.

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 subse uently, to exposing the corporate world to an unwieldy financial risk. !n 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. !n !ndia, the emergence and growth of derivatives market is relatively a recent phenomenon. "ince its inception in #une $%%%, derivatives market has exhibited exponential growth both in terms of volume and number of traded contracts. The market turn-over has grown from Rs.$&'( crore in $%%%-$%%) to Rs. ))%)%*+$.$% crore in $%%+$%%,. -ithin a short span of eight years, derivatives trading in !ndia 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 !ndia. "ome space is devoted also to a brief

discussion of the status of global derivatives markets vis-a.vis the !ndian derivatives market.

TRADING !n this chapter we shall take a brief look at the trading system for /"01s futures and options market. 2owever, 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 3 options trading system of /"0, called /04T-536 trading system, provides a fully automated screen-based trading for /ifty futures 3 options and stock futures 3 options on a nationwide basis as well as an online monitoring and surveillance mechanism. !t supports an order driven market and provides complete transparency of trading operations. !t is similar to that of trading of e uities in the cash market segment. The software for the 536 market has been developed to facilitate efficient and transparent trading in futures and options instruments. 7eeping 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 /"0. They can trade either on their own account or on behalf of their clients including participants. The exchange assigns a Trading member !8 to each trading member. 0ach 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. 0ach user of a trading member must be registered with the exchange and is assigned a uni ue user !8. The uni ue trading member !8 functions as a reference for all orders9trades of different users. This !8 is common for all users of a particular trading member. !t is the responsibility of the trading member to maintain ade uate control over persons having access to the firm1s :ser !8s.

. Clearing members: ;learing members are members of /";;<. They carry out risk management activities and confirmation9in uiry of trades through the trading system. !. Professional clearing members: 4 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.

". Participants: 4 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.

#asis o$ trading The /04T 536 system supports an order driven market, wherein orders match automatically. 6rder matching is essentially on the basis of security, its price, time and uantity. 4ll uantity fields are in units and price in rupees. The lot size on the futures market is for $%% /ifties. The exchange notifies the regular lot size and tick size for each of the contracts traded on this segment from time to time. -hen any order enters the trading system, it is an active order. !t tries to find a match on the other side of the book. !f it finds a match, a trade is generated. !f it does not find a match, the order becomes passive and goes and sits in the respective outstanding order book in the system.

%orporate hierarchy !n the 536 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 =;orporate manager1 is assigned to a user placed at the highest level in a trading fi rm. "uch 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. 4dditionally, a corporate manager can define exposure limits for the branches of the firm. This facility is available only to the corporate manager.

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

!. Dealer: 8ealers are users at the lower most level of the hierarchy. 4 8ealer 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. >elow given cases explain activities possible for specific user categories?

1.

Clearing member corporate manager: 2e can view outstanding orders, previous trades and net position of his client trading members by putting the T@ !8 ATrading member identificationB and leaving the >ranch !8 and 8ealer !8 blank. Clearing member and trading member corporate manager: 2e can view?

2.

6utstanding orders, previous trades and net position of his client trading members by putting the T@ !8 and leaving the >ranch !8 and the 8ealer !8 blank. 6utstanding orders, previous trades and net positions entered for himself by entering his own T@ !8, >ranch !8 and :ser !8. This is his default screen. 6utstanding orders, previous trades and net position entered for his branch by entering his T@ !8 and >ranch !8 fields 6utstanding orders, previous trades, and net positions entered for any of his users9dealers by entering his T@ !8, >ranch !8 and user !8 fields.

!. Clearing member and trading member dealer : 2e can only view re uests entered by him.

". Trading member corporate manager 2e can view

6utstanding re uests and activity log for re uests entered by him by entering his own >ranch and :ser !8s. This is his default screen. 6utstanding re uests entered by his dealers and9or branch managers by either entering the >ranch and9or :ser !8s or leaving them blank.

&. Trading member branch manager 2e can view

6utstanding re uests and activity log for re uests entered by him by entering his own >ranch and :ser !8s. This is his default screen. 6utstanding re uests entered by his users either by filling the :ser !8 field with a specific user or leaving the :ser !8 field blank.

'. Trading member dealer: 2e can only view re uests entered by him.

%hart "(1)* +ecurity,contract,port$olio entry system screen in NEAT F-.

.rder types and conditions

The system allows the trading members to enter orders with various conditions attached to them as per their re uirements. These conditions are broadly divided into the following categories? Time conditions Crice conditions 6ther conditions

"everal 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: 4 day order, as the name suggests is an order, which is valid for the day on which it is entered. !f the order is not executed during the day, the system cancels the order automatically at the end of the day.

Good till canceled (GTC): 4 DT; order remains in the system until the user cancels it. ;onse uently, 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. 0ach 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): 4 DT8 order allows the user to specify the number of days9date till which the order should stay in the system if not executed. The maximum days allowed by the system are the same as in DT; order. 4t the end of this day9date, the order is cancelled from the system. 0ach day9date counted are inclusive of the day9date on which the order is placed and the order is cancelled from the system at the end of the day9date of the expiry period.

mmediate or Cancel ( !C): 4n !6; 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. Cartial match is possible for the order, and the unmatched portion of the order is cancelled immediately.

0rice condition "top# 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 )%$E.%%, the limit price is )%&%.%% and the market Alast tradedB price is )%$&.%%, then this order is released into the system once the market price reaches or exceeds )%$E.%%. This order is added to the regular lot book with time of triggering as the time stamp, as a limit order of )%&%.%%. 5or the stop.loss sell order, the trigger price has to be greater than the limit price.

.ther conditions

$ar%et price: @arket orders are orders for which no price is specified at the time the order is entered Ai.e. price is market priceB. 5or such orders, the system determines the price. Trigger price: Crice at which an order gets triggered from the stop.loss book.

&imit price: Crice of the orders after triggering from stop.loss book. Pro: Cro means that the orders are entered on the trading member1s own account.

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

The trader wor1station

The mar1et watch window

The following windows are displayed on the trader workstation screen. Title bar Ticker window of futures and options market Ticker window of underlyingAcapitalB market

 Tool bar @arket watch window !n uiry window "nap uote 6rder9trade window "ystem message window

4s 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. !n this section we shall restrict ourselves to understanding Fust two segments of the workstation screen, the market watch window and the in uiry 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. !t 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. 8isplay of trading information related to cash market securities will be on GRead only H 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 dealer1s perspective.

In2uiry window The in uiry window enables the user to view information such as @arket by 6rder A@>6B, @arket by Crice A@>CB, Crevious Trades ACTB, 6utstanding 6rders A66B, 4ctivity log A4<B, "nap Iuote A"IB, 6rder "tatus A6"B, @arket @ovement A@@B, @arket !n uiry A@!B, /et Cosition, 6n line backup, @ultiple index in uiry, @ost active security and so on.

Relevant information for the selected contract9security can be viewed. -e shall look in detail at the @arket by Crice A@>CB and the @arket !n uiry A@!B screens.

1.

$ar%et by order ($B!): The purpose of the @>6 is to enable the user to view passive orders in the trading books in the order of price9time priority for a selected security. The F& key invokes the selection window for @>6. !f 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. 8etails of contract or security in the selection screen can also be defaulted from the last action. 6ne 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.

$ar%et by price($BP): The purpose of the @>C 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 J5'K key. !f a particular contract or security is selected, the details of the selected contract or security can be seen on this screen.

!.

$ar%et in'(iry($ ): The market in uiry screen can be invoked by using the J5))K key. !f 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 !nstrument type, symbol, expiry, contract status, total traded uantity, 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 uantity, 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.

0lacing orders on the trading system 5or both the futures and the options market, while entering orders on the trading system, members are re uired to identify orders as being proprietary or client orders. Croprietary orders should be identified as =Cro1 and those of clients should be identified as =;li1. 4part from this, in the case of =;li1 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 e uals the total number of short in any contract. The total number of outstanding contracts Along9shortB at any point in time is called the G6pen interestH. This 6pen interest figure is a good indicator of the li uidity in every contract. >ased on studies carried out in international exchanges, it is found that open interest is maximum in near month expiry contracts.

3ar1et spread,combination order entry The /04T 536 trading system also enables to enter spread9combination 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.

#as1et trading

!n order to provide a facility for easy arbitrage between futures and cash markets, /"0 introduced basket-trading facility. ;hart *A$B 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. 4 trading member can buy or sell a portfolio through a single order, once he determines its size. The system automatically works out the uantity of each security to be bought or sold in proportion to their weights in the portfolio.

%hart "( )* 0ort$olio o$$line order entry $or bas1et trades

Futures and options mar1et instruments

The 536 segment of /"0 provides trading facilities for the following derivative instruments?

). !ndex based futures $. !ndex based options &. !ndividual stock options

*. !ndividual stock futures

%ontract speci$ications $or inde4 $utures /"0 trades /ifty futures contracts having one-month, two-month and three-month expiry cycles. 4ll contracts expire on the last Thursday of every month. Thus a #anuary expiration contract would expire on the last Thursday of #anuary and a 5ebruary expiry contract would cease trading on the last Thursday of 5ebruary. 6n the 5riday following the last Thursday, a new contract having a three-month expiry would be introduced for trading.

Fig. "(!) / %ontract cycle Thus, as shown in 5igure *A&B at any point in time, three contracts would be available for trading with the first contract expiring on the last Thursday of that month. 8epending 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. 4ll index futures contracts on /"01s futures trading system are coded as shown in Table *A*B

TA#5E "(") %.NTRA%T +0E%IFI%ATI.N F.R INDE6 F7T7RE+ The !nstrument type refers to G5utures contract on indexH and ;ontract symbol /!5TL denotes a G5utures contract on /ifty indexH and the 0xpiry date represent the last date on which the contract will be available for trading. 0ach futures contract has a separate limit order book. 4ll passive orders are stacked in the system in terms of price-time priority and trades take place at the passive order price Asimilar to the existing capital market trading systemB. 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 $%% units. Thus if the index level is around )%%%, then the appropriate value of a single index futures contract would be Rs.$%%,%%%. The minimum tick size for an index future contract is %.%( units. Thus a single move in the index value would imply a resultant gain or loss of Rs.)%.%% Ai.e. %.%(M$%% unitsB on an open position of $%% units. Table )%.) gives the contract specifications for /ifty futures

%ontract speci$ication $or inde4 options

6n /"01s index options market, contracts at different strikes, having one-month, two-month and three-month expiry cycles are available for trading. There are typically onemonth, two-month and three-month optionsN each with five different strikes available for trading. 2ence at a given point in time there are minimum & O ( O $ or &% options products. 6ption contracts are specified as follows? 84T0-0OC!RL@6/T2-L04R-;4<<9C:T4@0R!;4/90:R6C04/-"TR!70. 5or example the 0uropean style call option contract on the /ifty index with a strike price of )%*% expiring on the $+th #une $%%) is specified as =$+ #:/ $%%) )%*% ;01. #ust as in the case of futures contracts, each option product Afor instance, the $+ #:/ $%%) )%*% ;0B has it1s own order book and it1s own prices. 4ll index options contracts are cash settled and expire on the last Thursday of the month. The clearing corporation does the novation. #ust as in the case of futures, trading is in minimum market lot size of $%% units. The minimum tick for an index options contract is %.%( paise. Table *A(B gives the contract specifications for /ifty options.

TA#5E - %.NTA%T +0E%IFI%ATI.N8 F.R INDE6 .0TI.N+

Deneration of strikes

<et us look at an example of how the various option strikes are generated by the exchange. "uppose we start with /ifty at )(%% and options with strikes )*'%, )*+%, )(%%, )($%, and )(*%. The exchange commits itself to an inter.strike distance of say $%. -hen the /ifty-closing price crosses )($%, a new set of strikes at )('% start trading from the next day. -hen the /ifty-closing price falls below )*+%, a new set of strikes at )**% start trading from the next day.

%ontract speci$ications $or stoc1 $utures Trading in stock futures commenced on the /"0 from /ovember $%%). These contracts are cash settled on a TP) basis. The expiration cycle for stock futures is the same as for index futures, index options and stock options. 4 new contract is introduced on the trading day following the expiry of the near month contract. Table *A'B gives the contract

specifications for stock futures. TA#5E "(') %.NTA%T +0E%IFI%ATI.N8 F.R +T.%9 F7T7RE+ %ontract speci$ications $or stoc1 options Trading in stock options commenced on the /"0 from #uly $%%). These contracts are 4merican style and are settled in cash. The expiration cycle for stock options is the same as for index futures and index options. 4 new contract is introduced on the trading day following the expiry of the near month contract. /"0 provides a minimum of five strike prices for every option type Ai.e. call and putB 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.

TA#5E "(:) %.NTA%T +0E%IFI%ATI.N8 F.R +T.%9 .0TI.N+

;riteria for stocks eligible for options trading The following criteria will have to be met before a stock can be considered eligible for options trading. The stock should be amongst the top $%% 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.E(% 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 &%Q. The stock should be amongst the top $%% scrips on the basis of average daily volume Ain value termsB, during the last six months. 5urther, the average daily volume should not be less than Rs.( crore in the underlying cash market. The stock should be traded on at least ,%Q 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 *, at any time during the previous six months. >ased on these criteria, "0>! approved trading in option contracts on )* stoc%s.

%harges The maximum brokerage chargeable by a T@ in relation to trades effected in the contracts admitted to dealing on the 536 segment of /"0 is fixed at $.(Q of the contract value in case of index futures and $.(Q of notional value of the contract JA"trike price P CremiumB M IuantityK in case of index options, exclusive of statutory levies. The

transaction charges payable by a T@ for the trades executed by him on the 536 segment are fixed at Rs.$ per lakh of turnover A%.%%$QBAeach sideB or Rs.) lakh annually, whichever is higher. The T@s contribute to !nvestor Crotection 5und of 536 segment at the rate of Rs.)% per crore of Turnover A%.%%%)QBAeach sideB.

Top 10 Derivativ e Stocks (January' 14 )

Rank

Contract Symbol 1 *N+, 3 S5*N 1 TCS %6R789%R 4 :% :CD7;<==> 0 N 2 =T / %?*S5%N@ . *C*C*5%N@ - T%T%ST<<= 10 R<=*%NC<

No o! tra"es -..0/11//12. /1/.-3 3-2-10 441..0 403210 210.0220442 421.20 221223

Tra"e" #uantity 1-0/0.1/0 311140300 111-2/130 240420000 ..--0230 311302000 1-4414000 31431/000 01.404000 3101//300

Tra"e" $alue (Rs Crs) 2..2/ 44 10310 0 10321 -0 3/0/. 2. 31-3/ -3 314./ 34 3110. 00 33014 23 30-.1 .0 30211 12

%v& Daily Tra"in& value (Rs Crs) 34--4 34 14011 11 14110 /4 141// 11 14040 14 14031 1. 14011 1-/. -13 14 .-/ 01

S'are in total tra"in& value (() ())

No o! Contract s 14032402 - 11( / 142.-412 4 /2( 3 140004/1 4 0-( / 1 22( 1 31( 1 1/( 1 10( 1 04( 3 .4( 3 /-( 1334/10 /114-20 4234411 ///420. .024.2. 01.4404 -41400-

NoteA ()) %s a percenta&e o! total turnover !or +6TST@ B 78TST@

NS< :%R@<T ST%T*ST*CS %vera& e "aily turnover (Ccrore) 10 . 104--1 1- 3 13 1 :arket Capitalisatio n (Ccrore) 2..412/

Se&ments C: <Duity +B7 Currency +B7 *nterest Rate +utures T7T%=

Turnover (C crore) Dec' 3011 Jan' 3014 3104.1/ 3004210 3/./-21 - 11341/1 2 0 / 1.2024 4/ 30.021 ./ 0 1432/4113

8ercenta&e C'an&e over last mont'

1134/20 >> .4.20 >> 0 10040./ 0 114--.44.2

0 >> 14.2/4203

1. 4

#usiness Growth in F-. +egment

Total

Year !"#$%#& !"#!%#$ !"##%#! !"#"%## !"")%#" !""'%")

Index Future Turnover ( cr.) $"'(!)*.&( !(!+#$".+* $(++))'.&# &$(*+(&.($ $)$&$''.*+ $(+"###.&"

Stock Future Turnover ( cr.) &)&)!'#.+! &!!$'+!."! &"+&*+".+$ (&)(+(*.+" (#)(!&*.*& $&+)*&!.#!

Index Options Notional Turnover ( cr.) !++*+$&#.!$ !!+'#(+&.#& !!+!""$#.*& #'$*($*(.+* '"!+)*&.!" $+$#("#.'&

Stock option Notional Turnover ( cr.) !&")&''.*& !"""&!+.!) )++"$#.#$ #"$"$&&.!# ("*"*(.#' !!)!!*.'#

Total Turnover ( cr.) $'!##&"'."& $#($$""$.)* $#$&)+$#.+& !)!&'!!#.") #+**$**&.(+ ##"#"&'!.!"

Avg Daily Turnover ( r.) #(!!$*.*) #!**$'.(+ #!()"!.(& ##(#(".&' +!$)!."+ &($#".*$

!""+%"' !""*%"+

$'!"**+.!+ !($)(+&

+(&'(*$.!$ $'$")*+

#$*!##".'' +)#)"*

$()#$*.(( #)$+)(

#$")"&++.+( +$(*!&!

(!#($.$" !)(&

Month/Year &urrent Month Mar'()*+ ()*('()*1 ()**'()*( ()*)'()** ())2'()*) ()).'())2 ())/'()). ())-'())/ ())0'())-

No of No. of co.s No. of co.s No. of co.s available trading listed* permitted*for trading* days

No. of securities traded #

No. of trades (lakh)

raded !uantity (lakh)

urnover ( cr)

"verage #aily "verage urnover rade ( cr) $i%e

#emat $ecurities raded (lakh)

Market #emat &apitalisation urnover ( cr)*

*,-.. *,--*,-+*,0/+ *,+/) *,+1( *,1.* *,((. *,)-2

/0 //1 -* 1/ ' ' ' '

*,0.*,0.( *,0-1 *,+.+ *,102 *,(2* *,(1*,).+ 2(2

(* (0) (+2 (00 (++ (+1 (0* (+2 (0*

*,/-. *,-.1

*1)-

*,++,-/.

(,/-,/+*

*1,*/. *),.11 **,(.2 *+,)+. *-,202 **,1(0 *+*+. /,.*( -,(01

(*,*./ *2,2)/ *2,00* (1,))2 (+,-). (),*-) 1),(.* (+,/21 (0,/.*

*,++,-/.

(,/-,/+*

/(,//,/() -(,12,)10 -),2-,0*. -/,)(,-*-,))2,*/1 (,.2-,*2+ +,.0.,*(( 1,1-/,10) (,.*1,()*

*1-)0 *-,02,*-) (/,).,(/2

*-,02,*-) (/,).,(/2 *-,*-,2/. (.,*),.21 *.,(+,0*0 10,//,+*( (,(*0,01) +,*1.,)(+ *,+(-,10+ (,/0(,)(1 *,+2.,+-2 1,00*,)1. .00,+0- *,2+0,(.0 .++,+.- *,0-2,00-

*,.)/ *+,1// *-,*-,2/. (.,*),.21 *,-)/ *0,0)/ *.,(+,0*0 10,//,+*( *,2-. *-,.*- (,(*0,01) +,*1.,)(+ *,1(/ *1,-0* *,+(-,10+ (,/0(,)(1 *,(-+ **,/(/ *,+2.,+-2 1,00*,)1. *,*2* 20/,.+-,).. .00,+0- *,2+0,(.0 .++,+.- *,0-2,00-