Regulatory Framework of Derivatives Trading in India

REGULATORY
FRAMEWORK OF
FINANCIAL ENGINEERING
IN INDIA
1
CHHAVI KIRAN
SURBHI
ANSHIKA
ARPITA BAIJAL

LEARNING OBJECTIVES
2
BACKGROUND
REGULATORY OBJECTIVES
MAJOR ISSUES CONCERNING REGULATORY
DEVELOPMENT
 SHOULD DERIVATIVES TRADING BE CONDUCTED IN A
SEPARATE EXCHANGE?
 DIVISION OF REGULATORY RESPONSIBLITY
SUGGESTIVE BYE-LAWS FOR REGULATION OF
DERIVATIVE TRADING

BACKGROUND(1)
SEBI appointed a 24 member committee under the
chairmanship of Dr. L.C. Gupta in November 1996 to
develop appropriate regulatory framework for derivatives
trading in India.
 Dr. L.C. Gupta Committee(1996):
The Board of SEBI in its meeting held on May 11, 1998
 Accepted the recommendations.
 Approved the "Suggestive Bye-laws".
3

BACKGROUND(2)
SEBI Board in its meeting on June 24, 2002
considered some important issues relating to the
derivative markets including:
 Physical settlement of stock options and stock futures
contracts.
 Review of the eligibility criteria of stocks on
which derivative products are permitted.
 Use of sub-brokers in the derivative markets.
 Norms for use of derivatives by mutual funds
4

BACKGROUND(3)
The Advisory Committee therefore decided to take this
opportunity to present a comprehensive report on the
development and regulation of derivative markets
including a review of the recommendations of the Dr.
L. C. Gupta Committee (LCGC).
Equity derivative markets have grown in size and
diversity of products.
5

REGULATORY OBJECTIVES
(A) INVESTOR PROTECTION
(B) QUALITY OF MARKET
(C) INNOVATION
6

REGULATORY OBJECTIVES(1)
Fairness and
Transparency
Safeguard for clients’
money
Competent and
honest service
Market integrity
INVESTOR
PROTECTION
7

i. Fairness and Transparency:
 Experience in other countries shows that in many
cases, derivatives brokers/dealers failed to disclose
potential risk to the clients.
 Sales practices adopted by dealers would require
specific regulation.
 The use of derivatives was for speculation rather
than for risk hedging.
8

9
ii. Safeguard for clients’ money:
 Money and securities deposited by clients with
the trading members should not only be kept in
a separate clients’ account but should also not
be attachable for meeting the broker’s own
debts.

(iii) Competent and honest service:
The eligibility criteria for trading members should be
designed to encourage competent and qualified
personnel so that investors/clients are served well.
(iv) Market integrity:
The trading system should ensure that the market’s
integrity is safeguarded by minimizing the possibility of
defaults.
10

B. Quality of markets:
The concept of “Quality of Markets” goes well
beyond market integrity and aims at enhancing
important market qualities, such as
 cost-efficiency
 price-continuity
 price-discovery.
11

12
C. Innovation:
 While curbing any undesirable tendencies, the
regulatory framework should not stifle innovation
which is the source of all economic progress.
 Financial derivatives represent a new rapidly
developing area, aided by advancements in
information technology.

MAJOR ISSUES CONCERNING REGULATORY
DEVELOPMENT
1) Should a derivatives exchange be organized as an independent
and separate from an existing stock exchange?
2) What exactly should be the division of regulatory
responsibility, including both framing and enforcing the
regulations, between SEBI and the derivatives exchange?
3) How should we ensure that the derivatives exchange will
effectively fulfill its regulatory responsibility.?
4) What criteria should SEBI adopt for granting permission for
derivatives trading to an exchange?
5) What new regulations or changes in existing regulations will
have to be introduced by SEBI for derivatives trading?
13

SHOULD DERIVATIVES TRADING BE
CONDUCTED IN A SEPARATE EXCHANGE?
14
 The Committee has
 examined various aspects of the problem.
 reviewed the position prevailing in other countries.
 Organizational and regulatory arrangements are not the
same in all countries.
 Exchange-traded financial derivatives originated in
USA and were subsequently introduced in many other
countries.

15
In U.S.A., futures trading in financial instruments,
including currency, bonds and equities, was started in
early 1970s.
Cash trading in
securities and options on
securities were under the
Securities and Exchange
Commission (SEC)
Futures trading was
under the Commodities
Futures Trading
Commission(CFTC)
SHOULD DERIVATIVES TRADING BE
CONDUCTED IN A SEPARATE EXCHANGE?

16
Should derivatives
trading be conducted
in a separate
exchange?
Arguments for
allowing existing
stock exchanges to
start futures trading
Arguments for
setting-up separate
futures exchange

Arguments for allowing existing stock
exchanges to start futures trading
Advantage of synergies:
To take advantage of synergies arising from the pooling of
costs of expensive information technology networks and
the sharing of expertise required for running a modern
exchange.
To facilitate coordination:
Exchange-level supervisory coordination between futures
and cash markets is greatly facilitated if both are parts of
the same exchange.
To save time
17

Arguments for setting-up separate futures
exchange
The trading rules and entry requirements for futures
trading would have to be different from those for cash
trading.
The possibility of collusion among traders for market
manipulation seems to be greater if cash and futures
trading are conducted in the same exchange.
A separate exchange will start with a clean slate and the
entry will be thrown open to all potential eligible players
18

RECOMMENDATIONS(1)
19
A separate exchange for futures trading seems to be a
neater arrangement.
However, considering the constraints in
infrastructure facilities, the existing stock exchanges
having cash trading may also be permitted to trade
derivatives provided they meet the minimum eligibility
conditions.

 The trading should take place through an online
screen-based trading system, which also has a
disaster recovery site.
 The per-half-hour capacity of the computers and the
network should be at least 4 to 5 times of
the anticipated peak load in any half hour, or of the
actual peak load seen in any half-hour during
the preceding six months.
20
RECOMMENDATIONS(2)

RECOMMENDATIONS(3)
21
 The clearing of the derivatives market should be done
by an independent clearing corporation, which
satisfies the listed conditions.
 The exchange must have an online surveillance
capability which monitors positions, prices and
volumes in real-time so as to deter market
manipulation.

RECOMMENDATIONS(4)
22
 The Exchange should have at least 50 members to start
derivatives trading.
 If derivatives trading is to take place at an existing cash
market, it should be done in a separate segment with a
separate membership; i.e., all members of the existing cash
market would not automatically become members of the
derivatives market.
 The exchange should have an adequate inspection
capability.

The Chairman of the Governing Council of the Derivative
Division/Exchange shall be a member of the Governing
Council.
If the Chairman is a Broker/Dealer, then, he shall not
carry on any Broking or Dealing Business on any
Exchange during his tenure as Chairman.
The exchange should have investor grievances redressal
mechanism operative from all the regions of the country.
23
RECOMMENDATIONS(5)

24
DIVISION OF REGULATORY
RESPONSIBILITY
TWO DISTINCT
LEVELS
A derivatives exchange's
own operational rules
and regulations
SEBI rules and
regulations with which
the exchange and its
members must comply

DIVISION OF REGULATORY
RESPONSIBILITY
25
 A crucial pre-condition for the success of derivatives
trading is that the derivatives exchange should be capable
of acting as an effective self-regulator on its own.
 In the Committee's opinion, the derivatives exchange,
being in day to day touch with the market, will be in a
position to spot a problem and take prompt corrective
action.
 As a statutory body, SEBI will first have to enquire,
collect all the facts and go through a certain statutory
procedure before acting.

SUGGESTIVE BYE-LAWS
FOR REGULATION
AND
CONTROL OF TRADING
AND
SETTLEMENT OF
DERIVATIVE
CONTRACTS 26

BYE -LAWS
27
Definitions
Eligibility criteria for Derivative Exchange/Segment
Dealing on derivative Exchange/Segment
Eligibility for clearing corporation
Clearing mechanism for derivatives segment

28
Arbitration
Inspection
Default
Investor Protection Fund
Miscellaneous
BYE -LAWS

DEFINITIONS
29
•Clearing Corporation/House
approved by SEBI for settlement of
trades on the Derivatives
Exchange/Segment.
Clearing
Corporation/House
•Member of the Clearing Corporation
and includes all categories of Clearing
Members as may be admitted as such
by the Clearing Corporation to the
Derivatives Segment.
Clearing Member

DEFINITIONS
30
• Trading cycle means the period, as
notified by the Exchange from time
to time, during which the
Derivatives Contract will be
available for trading.
Trading cycle
•Trading Member means a
Member of the Derivatives
Exchange/Segment and
registered with SEBI.
Trading
Member

DEFINITIONS
31
•Means a buy transaction which
will have the effect of partly or
fully offsetting a short position.
Closing buy
transaction
•Means a sell transaction which
will have the effect of partly or
fully offsetting a long position.
Closing sell
transaction

DEFINITIONS
32
•Means a buy transaction which
will have the effect of creating or
increasing a long position.
Opening buy
transaction
•Means a sell transaction which
will have the effect of creating or
increasing a short position
Opening sell
transaction
.

DEALINGS ON THE
DERIVATIVES
EXCHANGE/
SEGMENT
34

1. TRADING SYSTEM 12. BROKERAGE
2. TRADING MEMBERS 13. MARGIN REQUIREMENTS
3. TRADING DAYS / HOURS 14. TRADING MEMBERS’ OFFICE
RELATED PROCEDURE
4. CONTRACT EXPIRATION 15. TRADING MEMBERS’ SUPERVISIO
5. TRADING PARAMETERS 16. INTERNAL COMPLIANCE
6. SETTLEMENT OF TRADES 17. WRITTEN APPROVAL
7. DEALINGS IN CONTRACTS 18. QUALIFICATIONS INVESTIGATED
8. ORDER MANAGEMENT 19. RELATION WITH CLIENTS
9. ORDER VALIDATION 20. CODE OF CONDUCT FOR TRADING
MEMBERS
10. MATCHING RULES 21. RECORDS, ANNUALACCOUNTS &
AUDIT
11. CONTRACT NOTE
35

TRADING SYSTEM (1)
 The Derivative Exchange/Segment shall take prior
approval of SEBI for admitting any contracts for
dealings in Derivatives Segment of the Exchange.
 The Exchange shall provide an Automated Trading
facility in all the Derivatives Contracts admitted for
dealings on the Derivatives Market Segment of the
Exchange.
 Trading on the Exchange shall be allowed only through
approved Workstation(s) located at approved
locations of the office of a Member.
36

TRADING SYSTEM (2)
 The Trading System shall be made available to the
Member for trading subject to such terms and
conditions as the Exchange may determine from time to
time.
 Access to the Trading System may be withdrawn or
restricted by the Exchange for non-compliance with any
of these Bye-laws without assigning any reasons.
 The Exchange shall have the right to inspect equipment
and software used for the purpose of accessing the
Trading System.
37

TRADING SYSTEM (3)
38
 The Member shall adopt such security procedures
pertaining to connection to the Trading System as may
be prescribed by the Exchange from time to time.

TRADING SYSTEM (4)
 In the event of failure of a Member’s workstation and/
or the loss of access to the Trading System, the Exchange
may carry out necessary functions which the Member
is eligible for on a valid request from the Member subject
to such terms and conditions which the Exchange may
deem necessary to be imposed.
 The Member shall be accountable for the functions
executed by the Exchange on his / their behalf and shall
indemnify the Exchange against any losses or costs
arising out of the above situation
39

RELATED PROCEDURE
4. CONTRACT EXPIRATION 15. TRADING MEMBERS’ SUPERVISION
MEMBERS
10. MATCHING RULES 21. RECORDS, ANNUAL ACCOUNTS &
AUDIT
11. CONTRACT NOTE
40

TRADING MEMBERS (1)
 Members shall restrict the use of the Approved
Workstation(s) by the Authorized Persons only subject to
payment of such approval fee as may be prescribed by
the Exchange from time to time.
 Approved Users on the Derivatives market should have
passed a certification program which has been
approved by SEBI
 A Member of the Derivatives Exchange/Segment shall be
required to be registered with SEBI. This shall be in
addition to his registration as brokers of any other
Exchange/Segment.
41

TRADING MEMBERS (2)
 The Trading Member shall be required to deposit,
security deposit, either in the form of cash, deposit
receipts, bank guarantee of an approved banker as the
Exchange may specify from time to time.
 The Trading Member should have a minimum net-
worth as may be prescribed by the Exchange from time
to time.
 The minimum security deposit specified by the
Exchange shall be deposited with the Exchange within
such time as may be prescribed by the Exchange from
time to time
42

TRADING MEMBERS (3)
 The Exchange shall prescribe from time to time such
categories of securities that would be eligible for such a
security deposit as also the method of valuation and
amount of securities that would be required to be so
deposited.
 The procedure for refund of security deposit will such as
prescribed by the Exchange from time to time
43

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
44

TRADING DAYS / HOURS
 The Exchange shall announce trading calendar and
trading hours in advance, as the Exchange may decide
from time to time.
45

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
46

CONTRACT EXPIRATION
 Contracts will expire on a pre-determined date and time
upto which the contract will be available for trading
which shall be notified by the Exchange in advance.
 The contract expiration period may not exceed twelve
months or as may be prescribed by SEBI from time to
time
47

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
48

TRADING PARAMETERS (1)
• Every Member shall be required to specify buy or sell
order as either an open order or a close order.
 The Exchange shall prescribe an order book that shall
be maintained on the Trading System and shall specify
various conditions of the order that shall make it
eligible to be placed.
 The Trading System shall automatically generate a
unique order identification number at the time of order
entry itself.
49

 The Exchange shall specify from time to time the
Regular/Market Lot size in which orders can be placed
for any or all contracts traded on the Exchange.
 The Exchange shall specify from time to time the tick size
in which orders shall be entered on the Trading System of
the Exchange.
 The Exchange shall lay down gross exposure limits for a
Member not exceeding the limit, if any, prescribed by
SEBI from time to time.
 The Exchange shall specify the price bands for each
Derivatives Contract.
50

 The Exchange may permit off-line order entry i.e.
outside trading hours. Such orders shall be stored by
the system but shall be executed only when the market
opens for trading on the following working day.
51

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
52

SETTLEMENT OF TRADES
 All trades executed on the Exchange shall be cleared and
settled by the Members either by themselves as Clearing
Members or through other Clearing Members in
accordance with the Rules, Bye-laws and Regulations of
the specified Clearing Corporation/House approved by
SEBI.
53

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
54

DEALINGS IN CONTRACTS (1)
 The Exchange may at its discretion suspend trading in
any Derivatives Contracts without giving any
reasons, inter alia, on the following grounds:
 suspension of trading in the underlying securities ;
 for protection of the interests of the investors ;
 for the purpose of maintaining a fair and orderly market.
 The Exchange may also revoke suspension of trading
in any contract at any time. If trading has been
suspended or halted in a particular contract or in all
contracts, the Exchange may determine in its absolute
discretion when trading in any of those contracts may be
resumed.
55

 Members may trade on the Trading System in
Derivatives Contracts, on account of their clients or
on their own account unless otherwise specified by the
Exchange..
 Trading by a Member on his own account should be
segregated from that of his clients. Monies and
securities deposited by the client should be kept in
separate clients’ accounts, and Members cannot utilise
clients’ monies or securities for dealing in his own
account.
56

 Transactions entered into on behalf of the director or
an employee of the Member or transactions in which the
director or employee has beneficial interest, shall be
considered as those of a client of that Member and
margins will be collected from each such client
separately.
 The Member cannot utilize the funds and securities
of one client for and on behalf of another client
except on specific authorization of the client whose
funds or securities are utilized.
57

 The Exchange may, at any time, restrict, conditionally
or unconditionally, a Member from dealing in a
specified contract.
 The Member shall be liable for all trades executed on
the system for orders entered on his behalf. The
trading Member shall be responsible for all the actions
of their Authorized Persons/Approved User.
58

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
59

ORDER MANAGEMENT (1)
 The Members shall ensure that order instructions are
obtained from clients before placing an order on the
Trading System and shall keep relevant records or
documents of the same and of the completion or
otherwise of these orders thereof as per SEBI
Regulations and SC(R) Rules.
 The Member shall make available on request to his
client the order number generated by the Trading
System and copies of the order/trade confirmation
slip/modification slip wherever applicable.
60

 The procedures and conditions for amendment or
cancellation of orders would be subject to such
conditions as may be specified by the Exchange from
time to time.
 The Member shall disclose to the Exchange/Clearing
Corporation at the time of order entry that the order is
on his own account or on behalf of client.
61

 The Exchange shall stipulate from time to time, the kinds of
orders that a Member can place in the Trading System which
may, inter-alia, include following order attributes subject to
restrictions if any prescribed by SEBI from time to time :
Market Order / Limit Order
Stop Loss
Immediate Or Cancel
Good Till Day
Good Till Canceled
Good Till Date
Good Till Days
62

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
63

ORDER VALIDATION
 Orders entered into the Trading System by Members
shall be subject to various validation requirements as
may be prescribed by the Exchange from time to time
including trading parameters, exposure limits and/or
other restrictions placed on traded contracts.
 Orders that do not meet the validation checks shall not
be accepted by the Trading System.
64

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
65

MATCHING RULES
 The Exchange shall specify from time to time the order
matching algorithms and the matching rules and
parameters that shall be followed by the Trading
System.
 The Exchange may modify or change the matching
algorithms any time when it considers it necessary to do
so.
 Where the Exchange feels that it is in the interest of the
market to do so, it may at any time withdraw any forms
of matching, in the case of a particular contract or for
the market as a whole.
66

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
67

CONTRACT NOTE
 Every Member shall issue a contract note to clients for
trades executed in such format with all relevant details
as required therein to be filled in, and issued in such
manner and within such time as prescribed by the
Exchange.
 A contract note shall be signed by a Member or his
Authorized Person or Constituted Attorney.
 Contract note shall be time stamped with the time of
receipt of order and the time of execution of order.
68

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
69

BROKERAGE
 All the orders entered on the Trading System shall be at
prices exclusive of brokerage.
 Members shall not charge brokerage at rates exceeding
such scale as the Exchange may prescribe from time to
time.
 A Trading Member may charge brokerage to his clients
which shall be indicated separately from the price, in the
contract note.
70

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
71

MARGIN REQUIREMENTS
 The Exchange shall, from time to time, impose upon
any particular Member/Client any special or other
margin requirement.
 On failure to deposit margins as per the Bye-laws, the
Exchange may withdraw the trading facility of the
Trading Member.
72

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
73

TRADING MEMBERS’ OFFICE
RELATED PROCEDURE
 No office of a Trading Member shall be used for trading
on the Exchange without prior approval of the
Exchange.
 Each office/department for trading on the Exchange,
shall be under the supervision and control of the
Trading Member establishing it.
 Every Trading Member shall ensure that all persons
acting on his behalf on the Trading System are
qualified and shall subscribe at all times to high
standards of professional expertise and integrity.
74

TRADING MEMBERS’ OFFICE
RELATED PROCEDURE
 Every Trading Member shall at all times maintain such
infrastructure, staff, communication facilities and
records so as to be able to service his clients
satisfactorily.
 Where the Exchange feels it necessary, in the public
interest to do so, seek explanation from the Trading
Member regarding the level of service or professional
conduct of the Trading Member or any of his staff where
such service or conduct has been found to be
unsatisfactory.
75

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
76

TRADING MEMBERS’
SUPERVISION(1)
 Every Trading Member shall establish, maintain and
enforce procedures to supervise his business and to
supervise the activities of its employees that are designed
to achieve compliance with the Bye-laws, Rules and
Regulations of the Exchange.
 The Trading Member shall maintain an internal record
of the names of all persons who are designated as
supervisory personnel and the period during which
[dates] such designation is or was effective. Such record
shall be preserved by the Trading Member for a period
of not less than three years.
77

TRADING MEMBERS’
SUPERVISION(2)
 Every Trading Member shall specifically authorize in
writing, person or persons who may be authorized to
transact on behalf of the Trading Member and make
available a copy of such power of attorney to the
Exchange before such person transacts any business on
the Exchange.
 A Trading Member shall maintain such records and
make available for inspection by any person authorised in
this behalf by the Exchange, the information related to
such Trading Member’s financial condition as prescribed
by the Exchange for this purpose.
78

TRADING MEMBERS’
SUPERVISION(3)
 The Trading Member shall pay such fees, charges and
other sums as the Exchange may notify from time to
time and in such time and manner as required by the
Exchange.
 The Trading Member must inform the Exchange of any
change in the status and constitution, operation and
activities of the Trading Member.
79

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
80

INTERNAL COMPLIANCE
 Every Trading Member shall conduct a review, at least
annually, of the business in which he engages, which
shall be reasonably designed to assist in detecting and
preventing violations of, and compliance with the
provisions contained in the Rules, Bye Laws, and
Regulations of the Exchange.
81

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
82

WRITTEN APPROVAL
 Every Trading Member shall establish procedures for
the review and endorsement by an appropriate senior
officer in writing, on an internal record, of all
transactions and all correspondence by its employees
pertaining to solicitation or execution of any
transaction.
83

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
84

QUALIFICATIONS INVESTIGATED
 Every Trading Member shall have the responsibility
and duty to ascertain and keep record of the good
character, qualifications, and experience of any person
prior to making such certification in the application for
registration of such person, with the Exchange as User.
85

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
86

RELATION WITH CLIENTS(1)
 Every Trading Member shall enter into an agreement
with each of his clients before accepting or placing orders
on clients’ behalf.
 The Trading Member shall take reasonable steps to assess
the background, genuineness, beneficial identity,
financial soundness of such person, and his investment
objectives by asking the new client to fill in a Client
Registration Form as may be specified by the
Exchange.
 Issue a copy of the Risk Disclosure Document.
87

RELATION WITH CLIENTS (2)
 The Trading Member shall provide to the clients at no
extra cost extracts of relevant provisions governing the
rights and obligations of clients, relevant manuals,
notifications, etc. of the Exchange.
 The Trading Member shall not recommend to the client
a sale or purchase of contracts traded on the Trading
System, unless he has reasonable grounds to believe that
such recommendation is suitable for the client on the
basis of facts,
88

 The Trading Member shall make adequate disclosures of
relevant material information in his dealing with his
client including the current best price of trade and trade or
order quantities on the Trading System,
 The Trading Member shall not furnish any false or
misleading information or advice with a view to inducing
the client to do business in particular contracts and which
shall enable the Trading Member to gain thereby.
 The Trading Member shall explain the Trading System
and order matching process to the client before accepting
any orders from him.
89

 Where the client requires an order to be placed or any of
his order to be modified/cancelled after the order has been
entered into the system but has not been executed, the
Trading Member shall provide, on request, the client with
the relevant order confirmation/modification/ cancellation
slip or copy there of, forthwith.
 The Trading Member shall at all times keep the money of
the client in a separate bank account.
90

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
91

CODE OF CONDUCT FOR TRADING
MEMBERS (1)
 The Trading Member, shall at all times follow to the
Code of Conduct as prescribed by the Securities and
Exchange Board of India (Stock Brokers and Sub-
Brokers) Regulations, 1992.
 General Principles
• Professionalism
• Adherence to Trading Practices
• Honesty and Fairness
• Capabilities
92

MEMBERS (2)
• Trading Members shall ensure that the fiduciary and
other obligations imposed on them and their staff by the
various statutory acts, rules and regulations are complied
with.
• Trading Members shall ensure -
• that any employee who has the necessary qualification.
• that employees are trained in operating in the relevant
market Segment in which they deal and are aware of
their own, and their organization’s responsibilities as
well as the relevant statutory acts.
93

MEMBERS (3)
Obligations of Trading Members
 Shielding or Assisting
 Suspended Contracts
 Misleading Transactions
 Use of information obtained in Fiduciary Capacity
94

RELATED PROCEDURE
MEMBERS
AUDIT
11. CONTRACT NOTE
95

RECORDS, ANNUALACCOUNTS &
AUDIT (1)
 Every Trading Member of the Exchange shall maintain
the following records for a period of five years:
• Trade confirmation slips.
• Statements of obligations received from the
Clearing Corporation/Clearing House of the
Exchange.
• Record of all statements received from the settling
agencies and record of all correspondence with
them.
• Order Book of clients.
96

AUDIT (2)
• Every Trading Member shall preserve the following
reports produced from the Trading System for a
period of five years:
• Activity Log
• Orders Cancelled Today
• New Orders Today
• Outstanding Orders Today
• Trades done Today
97

AUDIT (3)
 Every Trading Member shall keep for a period of three
years such books of accounts,:
• The moneys received from or on account of and
moneys paid to or on account of each of his
clients and,
• The moneys received and the moneys paid on
Trading Member's own account.
98

AUDIT (4)
 Every Trading Member shall maintain permanently
copies of :
• agreements executed with each of his clients.
• agreements with each of the settling agencies or
banks.
99

ELIGIBILITY CRITERIA FOR CLEARING
CORPORATION FOR DERIVATIVES SEGMENT
1
• The clearing and settlement of the derivatives trading
should be through a SEBI approved clearing
corporation/house.
• The clearing mechanism shall be in the form of a
separate and independent clearing corporation.
3/8/2023

Eligibility Conditions For SEBI Approval :
1. The Clearing Corporation shall have the capacity to monitor
the overall position of Members across both derivatives market
and the underlying securities market for those Members who
are participating in both.
2. The level of initial margin required on a position shall be
related to the risk of loss on the position. The concept of "Value
at Risk" should be used in calculating required levels of initial
margin.
3. The Clearing Corporation shall establish facilities for
electronic funds transfer (EFT) for swift movement of margin
payments.
4. In the event of a Member defaulting in meeting its liabilities,
the Clearing Corporation/House shall transfer client positions
and assets to another solvent Member.
3/8/2023
101

 SPECIFIED EXCHANGE
 ELIGIBILITY OF CLEARING MEMBER
 MARGINS AND EXPOSURE LIMITS
 DAILY MARK TO MARKET SETTLEMENT AND FINAL
SETTLEMENT OF FUTURES CONTRACT
 DAILY AND FINAL SETTLEMENT OF OPTIONS
CONTRACTS
 CLEARING BANK
 RECORDS, ANNUAL ACCOUNTS & AUDIT OF
CLEARING MEMBERS
CLEARING MECHANISM FOR
DERIVATIVES SEGMENT
3/8/2023
102

SPECIFIED EXCHANGE
The Clearing Corporation shall from time to time settle the transactions
executed on the Derivatives Exchange/Segment of the Exchange which
has entered into a Memorandum of Understanding with the Clearing
Corporation defining their mutual rights and obligations.
ELIGIBILITY OF CLEARING MEMBER
The Clearing Member of the Clearing Corporation should have a
minimum networth of Rs. 300 lakhs or such amount as may be
prescribed by SEBI / Clearing Corporation from time to time. Further,
the Clearing Member shall deposit with the Exchange/Clearing
Corporation the base minimum capital of Rs. 50 lakhs.
3/8/2023
103

MARGINS AND EXPOSURE LIMITS (1)
 The Clearing Corporation shall from time to time
prescribe margin requirements from the Clearing
Members including initial margin on open positions
through risk based algorithms. Every Clearing Member
has a continuing obligation to maintain margins at the
level and during the period from time to time stipulated
by the Clearing Corporation.
3/8/2023
104

1. Mode of Payment of Margin
Clearing Members shall be required to deposit margins either in the
form of cash, deposit receipts, guarantee of a bank(s) and securities
approved by the Clearing Corporation or such other mode and subject
to such terms and conditions as the Clearing Corporation may specify
from time to time.
2. Exposure Limit
a) Prescribe exposure limit for a market type either in quantity or
value or as a percentage of the base capital of the Clearing Member
or a combination of any of the above or such other method as the
Clearing Corporation may decide from time to time for all or any
of the Clearing Members.
b) Allow Clearing Members to increase this exposure limit on deposit
of additional base capital with the Clearing Corporation.
MARGINS AND EXPOSURE LIMITS (2)
3/8/2023
105

DAILY MARK TO MARKET SETTLEMENT &
FINAL SETTLEMENT OF FUTURES CONTRACT (1)
 Daily Settlement for Futures Contracts
All open positions whether long or short of a Clearing
Member in Futures Contracts shall be deemed to have
been settled at the daily settlement price, and such
Member shall be liable to pay to, or be entitled to collect
from, the Clearing Corporation any loss or profit, as the
case may be, represented by the difference between the
price at which the Futures Contract was bought or sold.
3/8/2023
106

1. Daily Settlement Price
Daily settlement price shall be the closing price of the futures
contracts for the day or such other price as may be decided by
the Clearing Corporation from time to time.
2. Final Settlement Price
The Final Settlement Price shall be the closing price of the
underlying security on the last trading day of the contract or
such other price as may be specified by the Clearing
Corporation from time to time.
DAILY MARK TO MARKET SETTLEMENT AND
3/8/2023
107

DAILY MARK TO MARKET SETTLEMENT &
108
3. Final Settlement
Clearing Members having open positions in the cash settled
Futures Contract at the time of termination of trading in that
futures contract on the last trading day, shall make payment
to or receive payment from the Clearing Corporation in
accordance with the daily mark to market settlement
procedures based on a settlement price equal to the final
settlement price.
3/8/2023

DAILYAND FINAL SETTLEMENT OF
OPTIONS CONTRACTS
1. Daily Settlement
The Value at Risk of all positions whether call or put in option
contracts of an option writer shall be calculated daily by the Clearing
Corporation as per the formula and procedure prescribed by it from
time to time and the option writer shall be liable to pay or be entitled
to collect from the Clearing Corporation any margin or surplus
margin, as the case maybe.
2. Final Settlement
The final settlement of the option contract shall be on the settlement
date as per the terms of the option contract and as per the procedure
defined in the option contract or as laid down by the Clearing
Corporation from time to time.
3/8/2023
109

CLEARING BANK (1)
1. Clearing Corporation to Regulate
The Clearing Corporation shall specify from time to time the
processes, procedures, and operations that every Clearing Member
shall be required to follow for the purpose of funds transactions
through their clearing account with the Clearing Bank(s).
2. Functions of Clearing Bank
The Clearing Corporation shall appoint Clearing Bank(s) for the
purpose of funds settlement, for the collection of margin money for
all transactions entered into through the Clearing Corporation and
any other funds movement between Clearing Members and the
Clearing Corporation and between Clearing Members inter se.
3/8/2023
110

3. Clearing Members to have Account with the Clearing
Bank
Every Clearing Member of the Clearing Corporation shall have
clearing account(s) with designated Clearing Bank branch(es).
Clearing Members shall operate the clearing account(s) only for
the purpose of settlement of deals entered through the Clearing
Corporation, for the payment of margin money and for any
other purpose as may be specified by the Clearing Corporation
from time to time. The clearing accounts may be for any or all
of the Segments as may be specified by the Clearing
Corporation. The Clearing Member shall not operate the
clearing account(s) for any other purpose.
CLEARING BANK (2)
3/8/2023
111

CLEARING BANK (3)
112
4. Clearing Bank to inform Clearing Corporation of
Default in Funds Settlement
If there is any funds default arising out of the instructions
received from the Clearing Corporation, the Clearing Bank
shall inform the Clearing Corporation immediately.
3/8/2023

RECORDS, ANNUALACCOUNTS & AUDIT
OF CLEARING MEMBERS (1)
1. Records
Every Clearing Member shall comply with all relevant
statutory acts, including Securities Contracts (Regulation) Act,
1956 and Rules thereunder of 1957, and Securities Exchange
Board of India Act, 1992 and Rules, Regulations and
guidelines thereunder, and the requirements of and under any
notifications, directives and guidelines issued by the Central
Government and any statutory body or local authority or any
body or authority acting under the authority or direction of the
Central Government relating to maintenance of accounts and
records.
3/8/2023
113

 Every Clearing Member of the Clearing Corporation
shall maintain the following records relating to its
business for a period of five years.
 Statements of obligations received from the clearing(s).
 Record of all statements received from the settling agencies and
record of all correspondence with them.
 Copies of all instructions obtained in writing from clients.
 Records in respect of monies borrowed and loaned including
monies received.
AUDIT OF CLEARING MEMBERS (2)
3/8/2023
114

RECORDS, ANNUALACCOUNTS & AUDIT OF
CLEARING MEMBERS (3)
115
 Records in respect of clearing charges collected separately from
clients.
 A register of transactions containing the details pertaining, inter alia,
to all sales / purchase transactions entered into, the parties to such
transactions, date and time of execution of such transactions, the price
at which the futures contracts were bought/ sold, name of clients and
the clearing charges, if any, charged by the Clearing Member.
 Every Clearing Member shall keep such records and books of
accounts, as may be necessary, to distinguish client information from
own information including details of transactions, margins and
settlement information.
3/8/2023

Annual Accounts and Audit
 Each Clearing Member shall prepare annual accounts for each
financial year ending on 31st March or such other date as specified
to the Clearing Corporation.
 The Assets and Liabilities of the Clearing Member's business shall
be brought into account in the balance sheet at such amounts and
shall be classified and described therein in such manner that the
balance sheet gives a true and fair view of the state of affairs of
such business as at the date to which it is made up.
RECORDS, ANNUAL ACCOUNTS & AUDIT OF
CLEARING MEMBERS (4)
3/8/2023
116

RECORDS, ANNUALACCOUNTS & AUDIT
OF CLEARING MEMBERS (5)
3/8/2023
117
 Each Clearing Member shall furnish to the Clearing Corporation, its
audited financial statement and such report shall be furnished not later
than six months after the end of the Clearing Member's financial year,
provided that when the Clearing Corporation is satisfied that
circumstances warrant an extension of time is necessary to furnish
such report, it may grant an extension of such time as it may deem fit.

In case of any claim, complaint, dispute or difference
between Members or between Members and clients arising
out of or in relation to trading/settlement, the party/parties
thereto shall resolve such claim, complaint, dispute or
difference by arbitration. In respect of any claim, complaint,
dispute or difference to be referred to arbitration, the
party/parties shall not commence any legal proceedings in a
Court without the permission of the Exchange/Clearing
Corporation.
ARBITRATION(1)
3/8/2023
119

1. APPLICATION
In every case when a claim, complaint, dispute or
difference between Members or between Members and
clients arising out of or in relation to trading/settlement on
the Exchange/Clearing Corporation, the party/parties
concerned shall submit to the Exchange/Clearing
Corporation an application for arbitration in such form
with such fee, as may be prescribed by the
Exchange/Clearing Corporation from time to time.
ARBITRATION (2)
3/8/2023
120

ARBITRATION (3)
121
2. APPOINTMENT OF ARBITRATOR
BY EXCHANGE/CLEARING CORPORATION:
If the parties fail to select a sole or common arbitrator, the
Exchange/Clearing Corporation shall select an arbitrator which
has to be accepted by both the parties. Such a selection cannot be
challenged in any Court or before any authority. The arbitrator
may be from the list of arbitrators submitted by either of the
parties or any other arbitrator from the panel of Arbitrators. The
Exchange/Clearing Corporation while selecting such arbitrator
will ensure that such arbitrator is an independent person. In both
cases, the parties to the reference shall be intimated within ten
(10) days of such appointment.
3/8/2023

3. SELECTION OF ARBITRATOR
 Each party to the reference shall submit to the Exchange/Clearing
Corporation in order of choice a list of such number of arbitrators as
specified by the Exchange/Clearing Corporation from time to time, from
the Panel of Arbitrators constituted by the Exchange/Clearing Corporation
for the purpose. The Panel of Arbitrators shall have at least sixty per cent
Members in the panel from the persons who are non-Members.
 The Exchange/Clearing Corporation shall identify the common arbitrator
from the lists submitted by the parties. If more than one arbitrator is
selected by the parties, the arbitrator to whom the highest preference is
given as per the order of the preference shall be selected as the arbitrator
for the purpose of the proceeding.
ARBITRATION(4)
3/8/2023
122

4. ARBITRATION PROCEDURE
 The arbitrator shall make an award within one month or such time
as may be specified by the Exchange/Clearing Corporation after
entering into the reference. If the arbitrator fails to make an award
within the prescribed time, the Exchange/Clearing Corporation shall
appoint an alternate arbitrator who shall follow the similar
procedure as prescribed in these Bye-laws.
 The decision of the arbitrator shall be by way of an award in writing
which shall clearly state the reasons for arriving at such decision.
Such an award shall be final and binding on the parties to the
reference.
 After the arbitration award is made, a signed copy shall be delivered
to each party.
ARBITRATION(4)
3/8/2023
123

Continue..
 The Arbitrator may at any time during the arbitration
proceedings, make an interim arbitration award on any
matter with respect to which he may make a final arbitration
award.
 The award shall be complied with by the party concerned
immediately on receipt thereof and in any case not later than
seven (7) days from the date of award.
 In case of arbitration between Members, a Member who is
not satisfied with the award may prefer an appeal to
Governing Council of the Exchange/Clearing Corporation
after depositing the awarded amount.
3/8/2023
124

5. APPEAL TO GOVERNING COUNCIL
 Any Member party to arbitration against another Member not
satisfied with the award given by an arbitrator may make an
appeal in such form as may be prescribed within seven (7) days of
the date of communication of the award to the Governing Council
or such Appellate Authority as duly empowered by the
Exchange/Clearing Corporation, if the sum involved in dispute is
more than such amount as may be prescribed by the
Exchange/Clearing Corporation from time to time.
 The decision given by the Governing Council or Appellate
Authority on the award shall be complied with by the Member
concerned immediately on receipt thereof and in any case not later
than thirty (30) days from the date of decision.
ARBITRATION(5)
3/8/2023
125

SUGGESTIVE BYE-LAWS
FOR REGULATION
AND
CONTROL OF TRADING
AND
SETTLEMENT OF
DERIVATIVE
CONTRACTS 126

BYE -LAWS
127
Definitions
Eligibility criteria for Derivative Exchange/Segment
Dealing on derivative Exchange/Segment
Eligibility for clearing corporation
Clearing mechanism for derivatives segment

128
Arbitration
Inspection
Default
Investor Protection Fund
Miscellaneous
BYE -LAWS

OVERVIEW
129
The Exchange/ Clearing Corporation
Clearing Member Clearing Bank
Trading Member
Client
A Clearing Member (CM) of NSCCL has the responsibility of clearing and settlement of all
deals executed by Trading Members (TM) on NSE, who clear and settle such deals through
them. Types of Clearing Members
Trading Member Clearing Member (TM-CM)
Professional Clearing Member (PCM)
Self Clearing Member (SCM) Primarily, the CM performs the following functions:
Clearing - Computing obligations of all his TM's i.e. determining positions to settle.
Settlement - Performing actual settlement.
Risk Management - Setting position limits based on upfront deposits / margins for each TM
and monitoring positions on a continuous basis.
This category of membership entitles a member to execute trades on his own account as well
as on account of his clients but, clearing and settlement of trades executed through the
Trading Member would have to be done through a Trading-cum Clearing Member or
Professional Clearing Member of the Exchange
DEFINITION of 'Clearing Corporation'
An organization associated with an exchange to handle the confirmation, settlement and
delivery of transactions, fulfilling the main obligation of ensuring transactions are made
in a prompt and efficient manner.
They are also referred to as "clearing firms" or "clearing houses".
• The National Securities Clearing Corporation Ltd. (NSCCL), a wholly owned
subsidiary of NSE, was incorporated in August 1995. CRISIL has assigned its highest
corporate credit rating of ‘AAA’ to the National Securities Clearing Corporation Ltd
(NSCCL).
• Indian Clearing Corporation Limited ("ICCL") was incorporated in 2007as a wholly
owned subsidiary of BSE Ltd. ("BSE").ICCL is the only clearing corporation in India
to have been granted "AAA" rating by two rating agencies, India Ratings Ltd. (Indian
arm of Fitch Ratings) and Care Ratings Ltd.
Every Clearing Member is required to maintain and operate clearing accounts with any of
the empanelled clearing banks at the designated clearing bank branches. The clearing
accounts are to be used exclusively for clearing & settlement operations
Ex- NSCCL has empanelled 13 clearing banks namely Axis Bank Ltd., Bank of India,
Canara Bank, Citibank N.A, HDFC Bank, Hongkong & Shanghai Banking Corporation
Ltd., ICICI Bank, IDBI Bank, IndusInd Bank, Kotak Mahindra Bank, Standard Chartered
Bank, State Bank of India and Union Bank of India.`

INSPECTION
130
The following Bye-laws relating to the Inspection would
apply to Trading Member and Clearing Member.
 8.1 INSPECTION AUTHORITY
 8.2 NOTICE
 8.3 OBLIGATIONS OF A MEMBER ON
INSPECTION
 8.4 SUBMISSION OF REPORT

8.1 INSPECTION AUTHORITY
131
The Exchange/ Clearing Corporation shall :
1.Undertake inspection of books of accounts, other
records and documents of the Members and clients for
any of the purposes specified in regulation
2.The inspecting authority appointed by the Exchange/
Clearing Corporation under Bye-law 8.1.1. may be either
its own officials or such Authorized Person as the
Exchange/ Clearing Corporation may appoint from time
to time.

Bye-law 8.1.1. (1)
132
The purposes referred to in Bye-law 8.1.1.
shall be as follows, namely :
a.To ensure that the specified records, books of
accounts and other books are being maintained in
the manner required;
b.To ensure that the provisions of SEBI Act,
rules and regulation thereunder are being
complied with;

Bye-law 8.1.1. (2)
133
The purposes referred to in Bye-law 8.1.1.
shall be as follows, namely:
c. To ensure- Provisions of the Securities Contracts
(Regulation) Act and the Securities Contracts
(Regulation) Rules are being complied with;
d. To ensure -That the various provisions contained in
the [of Exchange/ Clearing Corporation] Rules, Bye-
laws and Regulations of the Exchange/ Clearing
Corporation and any directions or instructions issued
thereunder are being complied with;

134
The purposes referred to in Bye-law 8.1.1. shall be as
follows, namely :
e. To investigate -Complaints received from investors,
other Members of the Exchange/ Clearing
Corporation or any other person on any matter having
a bearing on the activities of the Member;
f. To investigate -Suo-moto, for any reason where
circumstances so warrant an inspection, into the
affairs of the Member;
Bye-law 8.1.1. (3)
'on his own initiative'

Bye-law 8.1.1. (4)
135
The purposes referred to in Bye-law 8.1.1. shall
be as follows, namely (contd.)
g. To examine -Whether any notices, circulars, instructions
or orders issued by the Exchange/ Clearing Corporation
from time to time relating to trading and other activities of
Members are being complied with;
h. To comply- With any of the directives issued in this
behalf by any regulating authority including Government
of India.

INSPECTION
136
The following Bye-laws relating to the Inspection
would apply to Trading Member and Clearing
Member.
8.2 NOTICE
8.3 OBLIGATIONS OF A MEMBER ON
INSPECTION
8.4 SUBMISSION OF REPORT

8.2 NOTICE
137
1.Before undertaking any inspection under Bye-law 8.1.1. the
Exchange/ Clearing Corporation shall give a reasonable
notice to the Member for that purpose.
2.Where the Exchange/ Clearing Corporation is of the opinion
that no such notice should be given, it may direct in writing
that the inspection of the affairs of the Member be taken up
without such notice.
3.The inspecting authority appointed by the Exchange/
Clearing Corporation shall undertake inspection and the
Member against whom an inspection is being carried out, shall
be bound to discharge his obligations as provided under Bye-
law 8.3.

INSPECTION
138
Member.
8.2 NOTICE
INSPECTION

INSPECTION(1)
139
 It shall be the duty of every director, officer and
employee of the Member, who is being inspected, to
produce to the inspecting authority
• books,
• records and other documents
 Reasonable access to:
• Premises
• computerised data
• Relevant copies of documents or other materials
in his custody or control or arrange to produce such books, records and give access to
premises which are in any other person’s custody or control and within such time as the
said inspection authority may require. Such copies or materials shall be retained by the
inspecting authority as the property of the Exchange/ Clearing Corporation.

INSPECTION(2)
140
The inspecting authority, in the course of
inspection shall be entitled to :
• Examine or record statements of any Member, director,
officer and employee of the Member or of any associate
of such Member.
• Examine the records relating to the Member’s financial
affairs held with its bankers or any other agency which
the inspecting authority may find relevant.

INSPECTION(3)
141
 The inspecting authority, in the course of inspection
shall be entitled to :(contd)
• Shall have access to the accounts and other records relating to the
Member or such access as authorised by the Exchange/ Clearing
Corporation to the accounts and other records relating to any
associate of the Member as are within the power of the Member
to provide
 It shall be the duty of every director, officer and employee of
the Member or where an associate is examined, such associate,
to give to the inspecting authority all assistance in connection
with the inspection which the Member may be reasonably
expected to give.

INSPECTION
142
Member.
8.2 NOTICE
INSPECTION

The inspecting authority shall:
Submit an inspection report
to
the Exchange/ Clearing
Corporation
Within such time as the
Exchange/ Clearing
Corporation may prescribe in
this regard from time to time.
The Exchange/ Clearing Corporation shall:
After consideration of the
Inspection Report
Communicate the findings to
the Member
to give him an opportunity of
being heard before any
action is taken by the
Exchange/ Clearing
Corporation on the findings
of the inspecting authority.
The Exchange/ Clearing Corporation may :
On receipt of the explanation,
if any, from the Member
call upon the Member to take such measures as the
Exchange/ Clearing Corporation
may deem fit in the public
interest.
8.4 SUBMISSION OF REPORT (contd.)

8.4 SUBMISSION OF REPORT (contd.)
Where the Exchange/ Clearing Corporation is of the opinion that
no such hearing should be provided in certain circumstances:
Notwithstanding
anything contained in
Bye-law 8.4.1 (a),
Corporation is of the
opinion that no such
hearing should be
provided in certain
circumstances
it may take action
forthwith without
giving the Member
any opportunity of
being heard.
The Exchange/ Clearing Corporation may:
At its discretion
require
from the clients of the
Member or any other
persons dealing with
the Member
submission of such
documents, records,
statement of accounts
or any other
information as it may
deem fit.

CHAPTER 9 DEFAULT (1)
145
Declaration of Default
 A Trading/ Clearing Member may be declared a defaulter by
direction/circular/ notification of the Exchange/Clearing
Corporation if :
• He is unable to fulfill his obligations; or
• He admits or discloses his inability to fulfill or discharge his
duties, obligations and liabilities; or
• He fails or is unable to pay within the specified time the
damages and the money difference due on a closing-out effected
against him under these Bye Laws, Rules and Regulations; or

CHAPTER 9 DEFAULT (2)
146
Declaration of Default(contd.)
• He fails to pay any sum due to the Exchange/Clearing Corporation or
to submit or deliver to the Exchange/Clearing Corporation on the due
date delivery and receive orders, statement of differences and
securities, balance sheet and such other clearing forms and other
statements as prescribed from time to time; or
• If defaulter fails to pay or deliver to the Defaulters’ Committee all
monies, securities and other assets due to within such time of the
declaration of default of such Trading/ Clearing Member as may be
directed; or
• If he fails to abide by the arbitration proceedings as laid down under
the Bye Laws, Rules and Regulations

CHAPTER 10 INVESTOR PROTECTION
FUND(1)
147
Investor Protection Fund shall be maintained :
 Contribution by- Each Trading/ Clearing member or
such sources as it may deem fit.
 Purpose-To make good claims for compensation
 Of -Client who has suffered losses because of any
Trading/ Clearing member being declared a defaulter.
 The amount of claim as compensation = Amount of
the actual loss suffered by him (-) Amount of value of
all monies or other benefits received or receivable by
him from any source in reduction of the loss.
(including the reasonable costs of and disbursements
incidental to the making and proof of his claim)

INVESTOR PROTECTION FUND (2)
148
• The Exchange/Clearing Corporation shall cause to be published
in a daily newspaper a notice specifying a date not being less than
3 months after the said publication, on or before which claims for
compensation in relation to the person specified in the notice,
may be made.
• The contribution of each Trading/ Clearing member to the
Investor Protection Fund shall be such an amount as may be
determined by the Exchange/Clearing Corporation from time to
time.
• Any person wishing to make a claim from the Investor Protection
fund shall comply with such procedures as may be prescribed by
the Exchange/Clearing Corporation from time to time and the
decision of Exchange/Clearing Corporation shall be final and
binding.
published and circulating widely,

CHAPTER 11 MISCELLANEOUS
149
• For a matter which is not specifically provided in these
Bye-laws.In case of any dispute in respect of applicability of
any Bye-laws of cash market Segment to a Member, the
decision of the Governing Council of Derivatives Segment
shall be final and binding on the Member and clients.
• The Derivatives Exchange/Clearing Corporation shall be
empowered to impose such restrictions on transactions in
Derivative Contracts as the Derivatives Exchange/Clearing
Corporation in its judgement deems advisable in the interest
of maintaining a fair and orderly market in the securities
or if it otherwise deems advisable in the public interest or
for the protection of investors.

CURRENT SCENARIO(1)
150
The past decade has witnessed the multiple growths in the
volume of international trade and business due to the wave
of globalization and liberalization all over the world. As a
result:
1. The demand for the international money and financial
instruments increased significantly at the global level.
2. Change in exchange rates, interest rates and stock prices
of different financial markets have increased the financial
risk to the corporate world

CURRENT SCENARIO(2)
151
3.Adverse changes in the macroeconomic factors have even
threatened the very survival of business world.
4. It is therefore essential to develop a set of new financial
instruments known as derivatives in the Indian financial
markets, to manage such risk.
5.Today, the financial derivatives have become increasingly
popular and most commonly used in the world of finance.
This has grown with a phenomenal speed all over the world
that now it is called as the derivatives revolution.

CURRENT SCENARIO(3)
152
6. In India, the emergence and growth of derivatives market
is relatively a recent phenomenon.
Inception -June 2000, derivatives market has exhibited
exponential growth both in terms of volume and number of
contract traded. The market turnover has grown from
Rs.2365 Cr. in 2000-2001 to Rs. 26444804.86 Cr. in 2013-
14. Within a short span of twelve years, derivatives trading
in India has surpassed cash segment in terms of turnover
and number of traded contracts
HS, S.,Verma, R. (2014). A Study of Derivatives Market in India and its Current Position in Global Financial
Derivatives Markets . IOSR Journal of Economics and Finance (IOSR-JEF), e-ISSN: 2321-5933, p-ISSN: 2321-
5925.Volume 3, Issue 3.

Value traded in Secondary Market (percent)
153
Source: BSE, NSE, MCX-SX,USE
http://www.sebi.gov.in/sebiweb/home/adsearch.jsp?type=search&websearch=status%20report%20on%20the%
20developments%20in%20the%20derivatives%20market%202014
value
currency
derivatives
corporate bonds cash segment equity derivative

Product-wise Share in Derivatives Turnover at
NSE, BSE and MCX-SX (in Percent)
154
0 10 20 30 40 50 60 70 80 90
Stock Future
Stock Option
Index Future
Index Option
Chart Title
2010-11 2011-12 2012-13 2013-14
http://www.sebi.gov.in/sebiweb/home/adsearch.jsp?type=search&websearch=status%20rep
ort%20on%20the%20developments%20in%20the%20derivatives%20market%202014
Source: BSE, NSE, MCX-SX

2013-14
Apr 72.69 3001.26 64.07 1.38 2085.90 21924.70 3650.64 2440.39 -
May 70.55 6119.53 67.62 4.46 2457.83 26216.47 4098.51 2265.21 -
Jun 65.21 6622.21 38.54 6.29 2463.51 24379.37 3434.93 1631.05 -
Jul 100.45 14218.55 69.45 6.91 2536.44 22514.14 4285.04 2468.30 -
Aug 53.39 8254.63 35.67 8.19 3277.35 29009.78 4100.88 1751.20 -
Sep 55.08 3921.85 44.03 14.95 3171.54 25247.46 3877.99 1518.59 -
Oct 60.76 6717.72 52.17 15.95 2970.26 22818.09 4164.32 2107.99 -
Nov 24.81 6321.40 27.01 13.64 2540.56 20799.38 3976.76 1668.34 -
Dec 18.90 5619.75 33.02 22.72 2339.73 19686.22 4241.28 1612.40 -
Jan 36.37 11334.92 42.79 56.42 2636.91 23206.92 4852.33 2547.57 88.32
Feb 34.65 7544.29 26.37 78.48 1812.08 18800.93 3599.10 1646.71 91.46
Mar 42.06 10875.90 45.26 231.91 2538.92 23069.96 5211.03 2437.13 121.94
Total 634.92 90552.01 546.00 461.30 30831.03 277673.42 49492.81 24094.88 301.72
2014-15
Apr 42.81 5050.06 27.46 4.60 2190.25 17315.84 5413.03 2179.14 176.03
May 31.57 2913.98 23.67 10.94 3828.40 26039.64 8088.82 2760.20 204.72
Jun 54.69 19573.26 1.54 23.36 3396.17 28978.12 8347.23 2959.86 251.39
Jul 53.15 22457.65 2.42 30.66 3662.47 33965.50 8045.72 2965.31 306.58
Total 182.22 49994.95 55.09 69.56 13077.29 106299.10 29894.80 10864.51 938.72
Turnover in the Equity Derivatives Market (` Billion)
Year/
Month
BSE Ltd. National Stock Exchange of India Limited (NSE)
Index
futures
Index
options
Stock
futures
Stock
options
Index
futures
Index
options
Stock
futures
Stock
options
Interest
rate
futures
1 2 3 4 5 6 7 8 9 10
Notes : 1. Index futures were introduced in June 2000, index options in June 2001, stock options in July 2001 and stock
futures in November 2001, both in the BSE and NSE, while interest rate futures were introduced on NSE in June 2003.
2.Notional turnover includes call and put options.
3. The RBI has introduced cash settled interest rate futures on 10-year G-sec on December 5, 2013.
Sources : BSE Ltd. and the National Stock Exchange of India Ltd. (NSE).
http://rbi.org.in/Scripts/PublicationsView.aspx?Id=15988

Currency Derivatives Segment
156
 INR currency futures contracts started on August 29, 2008 at
NSE, on October 1, 2008 at BSE and on October 7, 2008 at
MCX-SX. BSE has stopped all its operations in the Currency
Derivatives Segment from April 7, 2010. USE commenced its
operation since September 20, 2010.
 Futures on 3 additional currency pairs, namely, EURO:INR,
GBP:INR and JPY:INR were introduced at NSE and MCX-SX
on February 1, 2010.
 Futures on currency pairs, namely, USD-INR, EURO:INR,
GBP:INR and JPY:INR were introduced at USE on September
20, 2010.

CONCLUSION
158
These suggested Bye-laws for the Derivatives Exchange and
Clearing Corporation have been drawn up in conformity
with the recommendations on various matters as contained
in the Report of the Committee on Derivatives and as
approved by Dr. LC Gupta Committee at its meeting held on
26thFebruary 1998 .
All the bye laws discussed needs to be followed for trading
in derivative market and they are meant to encourage
derivative trading and protect the investors.

REFERENCES(1)
159
 SEBI. (2015). Retrieved January 4,2015, Regulatory framework
for derivatives http://www.sebi.gov.in/commreport/LC06.html
 SEBI. (2015). Retrieved January 4,2015, Special entry rules for
derivatives http://www.sebi.gov.in/commreport/LC08.html
 SEBI. (2015). Retrieved January 4,2015, Suggestive bye-laws
for regulation and control of trading and settlement of
derivative contracts
http://www.sebi.gov.in/commreport/byelaws.html

REFERENCES(2)
160
 SEBI. (2015). Retrieved January 4,2015, FAQ on Equity
and Currency Derivatives
http://www.sebi.gov.in/faq/derivativesfaq.html
 SEBI. (2012). Retrieved January 4,2015,Status report on the
developments in the derivatives market
http://www.sebi.gov.in/sebiweb/status report on the
developments in the derivatives market.html
 Rao,Mohana P(2002),Financial Systems and Economic
Reforms.Deep and Deep Publications

REFERENCES(3)
161
 USE. Retrieved January 30,2015,
http://www.useindia.com/
 HS, S.,Verma, R. (2014). A Study of Derivatives
Market in India and its Current Position in Global
Financial Derivatives Markets . IOSR Journal of
Economics and Finance (IOSR-JEF), e-ISSN: 2321-
5933, p-ISSN: 2321-5925.Volume 3, Issue 3.

Regulatory Framework of Derivatives Trading in India

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