Option presentation

8/9/2019 Option presentation

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RULES AND REGULATIONS

OF DERIVATIVES MARKETS -

OPTIONS


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REGULATORY

FRAMEWORK

The trading of

derivatives

is governed byprovisions contained

SC(R)A [Securities Contract

Regulation Act] 19!

S"#$ Act 199% Stoc& e'changes

rulesa

ndby

e)la

*sof


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The derivatives e'change+seg,ent should have a separate governing

council

The e'change have to obtain prior approval of S"#$ before start of trading

in any derivative contract

The ,e,bers of the derivative seg,ent *ould need to fulfill the eligibility

conditions as laid do*n by the - C .upta co,,ittee

The clearing and settle,ent of derivatives trades *ould be through aS"#$ approved clearing corporation+house ie /SCC- (The /ational

Securities Clearing Corporation -i,ited)

REGULATION FOR DERIVATIVES TRADING

0erivative bro&ers+dealers and clearing ,e,bers are reuired to get

registered *ith S"#$ (Securities "'change #oard of $ndia)

Representation of trading+clearing ,e,bers shall be li,ited

to ,a'i,u, of 234 of the total ,e,bers of the governing council


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The ,ini,u, net*orth reuired for clearing ,e,bers of the derivatives

clearing corporation+house shall be Rs533 -a&h

The ,ini,u, contract value shall not be less than Rs% -a&h

The initial ,argin reuire,ent6 e'posure li,its and ,argin de,ands

related to the ris& of loss on the position *ill be prescribed by S"#$+"'change

fro, ti,e to ti,e

The ,e,bers of the derivatives seg,ent are also reuired to ,a&e their clients

a*are of the ris&s by issuing to the client the Ris& 0isclosure 0ocu,ent and

obtain a copy of the sa,e duly signed by the client

The trading ,e,bers are reuired to have ualified approved user and

sales person *ho have passed a certification progra,,e approved by

S"#$


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7e,bers and dealer6 authori8ed dealer have to fulfill certain reuire,ents and

provide collateral deposits to beco,e ,e,bers of the :; seg,ent

To beco,e ,e,ber of :; seg,ent one has to ta&e ,e,bership of holesale 0ebt 7ar&et) and :; seg,ent=

An e'isting ,e,ber of C7 seg,ent can also ta&e ,e,bership of :;

seg,ent

A trading ,e,ber can also be a clearing ,e,ber by ,eeting additional

reuire,ents There can also be only clearing ,e,bers


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OPTION MECHANICS

TRADING OF OPTIONS

CLEARING

SETTLEMENT

MARGINS


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Stoc& options are A,erican style ie options are auto,atically e'ercised

on the e'piration day6 and voluntary prior to the e'piration day of the

option contract

Trading in stoc& options co,,enced on the /S" fro, ?uly %331.

These contracts are A,erican style and are settled in cash

The e'piration cycle for stoc& options is the sa,e as for inde' futuresand inde' options

/S" provides a ,ini,u, of seven stri&e prices for every option

type (ie call and put) during the trading ,onth

;n /S"6 inde' options are "uropean style6 ie options are auto,atically

e'ercised on the e'piration day

TRA0$/. $/ ;@T$;/

A ne* contract is introduced on the trading day follo*ing the e'piry of the

near ,onth contract


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inal settle,ent price Closing price of underlying on e'ercise day or

e'piry day

Trading cycle The options contracts *ill have a ,a'i,u, of three ,onth tradingcycle B the current ,onth (one)6 the ne't ,onth (t*o) and the far ,onth (three)

/e* contract *ill be introduced on the ne't trading day follo*ing the e'piry of

near ,onth contract

"'piry day The last Thursday of the e'piry ,onth or the previous tradingday if the last Thursday is a trading holiday

Settle,ent basis 0aily settle,ent on T1 basis and final option e'ercise

settle,ent on T1 basis

Security descriptor / ;@TSTD

Details of options


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Entities in the trading system

There are for entities in the tra!in" s#ste$.

Tra!in"

$e$%ers

Clearin"

$e$%ers

Professional

&learin" $e$%ers

Parti&ipants


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This $0 is co,,on for all users of a particular trading ,e,ber

Trading

,e,bers

Trading ,e,bers are ,e,bers of /S"

They can trade either on their o*n account or on behalf of their clients

including participants

The e'change assigns a trading ,e,ber $0 to each trading ,e,ber

"ach trading ,e,ber can have ,ore than one user

The uniue trading ,e,ber $0 functions as a reference for all orders+trades

of different users

"ach user of a trading ,e,ber ,ust be registered *ith the e'change and is

assigned an uniue user $0

The nu,ber of users allo*ed for each trading ,e,ber is notified bythe e'change fro, ti,e to ti,e


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A participant is a client of trading ,e,bers li&e financial institutions

Clearing

,e,bers

Clearing ,e,bers are ,e,bers of /SCC-

@rofessional

clearing ,e,bers

is a clearing ,e,ber *ho is not a trading ,e,ber

Typically6 ban&s and custodians beco,e professional clearing ,e,bers and

clear and settle for their trading ,e,bers.

@articipants

They carry out ris& ,anage,ent activities and confir,ation+inuiry of tradesthrough the trading syste,

These clients ,ay trade through ,ultiple trading ,e,bers but settle through

a single clearing ,e,ber


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$f it finds a ,atch6 a trade is generated $f it does not find a

,atch6 the order beco,es passive and goes and sits in the respective

outstanding order boo& in the syste,

BASIS OF TRADING

The /"AT :; syste, supports an order driven ,ar&et6 *herein orders

,atch auto,atically

;rder ,atching is essentially on the basis of security6 its price6 ti,e and uantity

All uantity fields are in units and price in rupees

The e'change notifies the regular lot si8e and tic& si8e for each of the contracts

traded on this seg,ent fro, ti,e to ti,e

>hen any order enters the trading syste,6 it is an active order $t tries to find a

,atch on the other side of the boo&


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CLEARING AND SETTLEMENT

/ational Securities Clearing Corporation -i,ited (/SCC-) underta&es

clearing and settle,ent of all trades e'ecuted on the futures and options

(:;) seg,ent of the /S"

Clearing and settle,ent activities in the ;ption seg,ent are underta&en by

/SCC- *ith the help of the follo*ing entities

CLEARING ENTITIES

Clearing banksClearing members


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Clearing members

Self clearing

,e,bers

Trading ,e,berBcu,

Bclearing ,e,ber (T7s)

@rofessional clearing

,e,bers (@C7)

clear and settle their trades e'ecuted by the, only either on their

o*n account or on account of their clients

clear and settle their o*n trades as *ell as trades of

other trading ,e,bers (T7s)

is a special category of ,e,bers

clear and settle trades e'ecuted by other trading

,e,bers (T7s)


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The Clearing and Settle,ent process co,prises of the follo*ing

three ,ain activities1) Clearing

%) Settle,ent

5) Ris& 7anage,ent

Clearing banks

unds settle,ent ta&es place through clearing ban&s

or the purpose of settle,ent all clearing ,e,bers are reuired to open a

separate ban& account *ith /SCC- designated clearing ban& for ;ption

seg,ent


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@roprietary positions are calculated on net basis (buy B sell) for each contract

$nvolves *or&ing out open positions and obligations of clearing (selfB

clearing+tradingBcu,Bclearing+professional clearing) ,e,bers

This position is considered for e'posure and daily ,argin purposes

The open positions of C7s are arrived at by aggregating the open positions of

all the T7s and all custodial participants clearing through hi,6 in contracts in

*hich they have traded

A T7Es open position is arrived at as the su,,ation of his proprietary openposition and clientsE open positions6 in the contracts in *hich he has traded

>hile entering orders on the trading syste,6 T7s are reuired to identify the orders6

*hether proprietary (if they are their o*n trades) or client (if entered on behalf of

clients) through E@ro+CliE indicator provided in the order entry screen

ClientsE positions are arrived at by su,,ing together net (buy B sell) positions

of each individual client A T7Es open position is the su, of proprietary open

position6 client open long position and client open short position

CLEARING


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SETTLEMENT MECANISM

All futures and options contracts are cash settled6 ie through e'change of

cashThe underlying for inde' futures+options of the /ifty inde' cannot be

delivered These contracts6 therefore6 have to be settled in cash

Se!!lemen! "# "$!i"ns %"n!ra%!s

0aily @re,iu,

Settle,ent

"'ercise

Settle,ent

$nteri, "'ercise

Settle,ent

;ptions contracts have three types of settle,ents

in the case of option contracts on securities and final settle,ent


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Dail& $remi'm se!!lemen!

#uyer of an option is obligated to pay the pre,iu, to*ards the

options purchased by hi,

The seller of an option is entitled to receive the pre,iu, for the

option sold by hi,

The pre,iu, payable a,ount and the pre,iu, receivable a,ount

are grouped to co,pute the net pre,iu, payable or receivable

a,ount for each client for each option contract


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E(er%ise se!!lemen!

There is al*ays a possibility of the option seller being assigned

an e'ercise

;nce an e'ercise of an option has been assigned to an option seller6

the option seller is bound to fulfill his obligation (,eaning6 pay the cash

settle,ent a,ount in the case of a cashBsettled option) even though

he ,ay not yet have been notified of the assign,ent

understanding of e'ercise can help an option buyer deter,ine

*hether e'ercise ,ight be ,ore advantageous than an offsettingsale of the option


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$nteri, e'ercise settle,ent is effected for such options at the close

of the trading hours6 on the day of e'ercise

An investor can e'ercise his inBtheB,oney options at any ti,e during

trading hours6 through his trading ,e,ber

Ta&es place only for option contracts on securities

.

.

In!erimE(er%ise se!!lemen!

Falid e'ercised option contracts are assigned to short positions in the option

Contract *ith the sa,e series (ie having the sa,e underlying6 sa,e e'piry

date and sa,e stri&e price)6 on a rando, basis6 at the client level


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$s effected for all open long inBtheB,oney stri&e price options e'isting at the

close of trading hours6 on the e'piration day of an option contract

FinalE(er%ise se!!lemen!

The investor *ho has long inBtheB,oney options on the e'piry

date *ill receive the e'ercise settle,ent value per unit of the option fro,

the investor *ho has been assigned the option contract

All such long positions are e'ercised and auto,atically assigned to short

positions in option contracts *ith the sa,e series6 on a rando, basis


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/SCC-Es onBline position ,onitoring syste, ,onitors a Clearing 7e,bers

open @ositions on a realBti,e basis

The open positions of the ,e,bers are ,ar&ed to ,ar&et based on

contract settle,ent price for each contract The difference is settled in

cash on a T1 basis

$t specifies the initial ,argin reuire,ents for each options

Contract on a daily basis

The financial soundness of the ,e,bers in ter,s of capitaladeuacy (net *orth6 security deposits) should be strong

A co,prehensive ris& contain,ent ,echanis, for the

;ptions seg,ent

RISK MANAGEMENT

/SCC-developed

eatures


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A separate settle,ent guarantee fund for this seg,ent has been created out

of the capital of ,e,bers

/SCC- assists the Clearing 7e,ber to ,onitor the intraBday e'posure li,its set

up by a Clearing 7e,ber and *henever a Trading ,e,ber e'ceed the li,its6

it stops that particular Trading ,e,ber fro, further trading

A ,e,ber is alerted of his position to enable hi, to adGust his capital @ositionviolations result in *ithdra*al of trading facility for all T7s of a Clearing 7e,ber

in case of a violation by the C7

@R$S7 uses S@A/(r) (Standard @ortfolio Analysis of Ris&) syste, for the purpose

of co,putation of onBline ,argins6 based on the para,eters defined by S"#$

The actual position ,onitoring and ,argining is carried out onBline through@arallel Ris& 7anage,ent Syste, (@R$S7)

The ,ost critical co,ponent of ris& contain,ent ,echanis, for ;ptions seg,ent

is the ,argining syste, and onBline position ,onitoring

Types of margins


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Types of margins

$nitial ,argin

7argin in the ;ption seg,ent is co,puted by /SCC- upto client level for openpositions of C7s+T7s

'

These are reuired to be paid upBfront on gross basis at individual client level for

client positions and on net basis for proprietary positions

A C7 is reuired to ensure collection of adeuate initial ,argin fro, his T7s

upBfront The T7 is reuired to collect adeuate initial ,argins upBfront fro,

his clients

/SCC- collects initial ,argin for all the open positions of a C7 based on the

,argins co,puted by /S"BS@A/


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The ,argin is charged on the net e'ercise settle,ent value payable by a C7

to*ards interi, and final e'ercise settle,ent

$n addition to initial ,argin6 pre,iu, ,argin is charged at client level This ,argin

is reuired to be paid by a buyer of an option till the pre,iu, settle,ent is co,plete

@re,iu, ,argin

Assign,ent ,argin for options on securities

$s levied in addition to initial ,argin and pre,iu, ,argin

$t is reuired to be paid on assigned positions of C7s to*ards interi, and

inal e'ercise settle,ent obligations for option contracts on individual

securities6 till such obligations are fulfilled


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Additionally ,e,bers are also reuired to report details of ,argins collected

fro, clients to /SCC-

Client ,argins

/SCC- inti,ates all ,e,bers of the ,argin liability of each of their client

Option presentation

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