Exchange Traded Interest Rate Futures on 2-year and 5-year Notional Coupon Bearing Government of India Security

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.... to promote the development of, and to regulate the securities market. 4. The circular shall come into force from the date of the circular. 5. This circular is available on SEBI website at www.sebi.gov.in., under the category "Derivatives- Circulars". Yours faithfully, Sujit Prasad General Manager Derivatives and New Products Department 022-26449460 [email protected] Encl: as above ANNEXURE-1 Product Design and Risk Management Framework for Cash settled Futures on 2 Year Notional Coupon Bearing Government of India Security 1 Underlying Notional coupon bearing 2-year GoI security with a notional coupon of 7% paid semi-annually and face value of Rs. 100. 2 Trading hours The trading hours would be from 9 a.m. to 5.00 p.m. 3 Size of the contract Rs.2 lakh. 4 Quotation The quotation would be similar to the quoted price of the GoI security. 5 Tenor of the contract The maximum maturity of the contract would be 12 months. 6 Contract months To begin with, three serial monthly contracts can be introduced. 7 Settlement mechanism The futures on notional GoI security would be settled in cash in Indian Rupees. The settlement price of the notional bond would be determine....

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....pread margin 2 Year Notional Coupon Bearing Government of India (GoI) Security futures position at one maturity hedged by an offsetting 2 Year Notional Coupon Bearing Government of India (GoI) Security futures position at a different maturity would be treated as a calendar spread. The calendar spread margin shall be at a value of Rs. 300 for spread of one month and Rs. 450 for spread of two months. The benefit for a calendar spread would continue till expiry of the near month contract. 15 Formula for determining standard deviation The exponential moving average method would be used to obtain the volatility estimate every day. The estimate of volatility (σt) for the time period t is estimated using the volatility estimate (σt-1) for the previous time period and the return (rt-1) observed in the futures market during the previous time period. The formula would be as under: (σt)2 = λ (σt-1)2 + (1 - λ ) (rt-1)2 where λ is a parameter which determines how rapidly volatility estimates change. The value of λ is fixed at 0.94. i. σt (sigma) means the standard deviation of daily logarithmic returns of futures price of 2 Year N....

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....rities and the total gross short (sold) position, for the purpose of hedging only, should not exceed their long position in the government securities and in Interest Rate Futures, at any point in time. ANNEXURE-1a Settlement Mechanism a. Polling shall be carried out by the Fixed Income, Money Market and Derivatives Association, i.e., FIMMDA; b. The yields (Bid and Ask) of the GoI securities shall be polled from Primary Dealers (PDs) registered with the Reserve Bank of India; c. Each poll shall involve ten PDs who would be selected at random from the universe of PDs; d. Polling would be conducted at three instances, i.e., 11.00 am, 11.30 am and 12.00 pm daily; e. At each instance of polling, for each bond, out of the ten buy yields, two highest and two lowest yields would be treated as outliers and would be ignored. Similarly outliers from ten sell yields would be identified and ignored. f. After rejecting the outliers in above step, there will be [6 * 2 * 3 * Number of Bonds in Basket] number of remaining yields. g. Average settlement yield (Ys) is the simple average of the remaining yields. Ys will be rounded off to 4 decimal digits. h. Ys determined in above step would ....

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....er 2 5.9750  5.9600 6.0175 6.0025  6.0575 6.0450 Dealer 3 5.9750  (5.9650) 6.0175 (6.0075) 6.0575 (6.0475) Dealer 4 (5.9700) (5.9500) 6.0150 (5.9950) 6.0600 6.0400 Dealer 5 (5.9800) 5.9600 (6.0225) 6.0025  (6.0625) 6.0425 Dealer 6 5.9750  (5.9550) 6.0200 6.0000  6.0600 (6.0400) Dealer 7 (5.9800) 5.9600 6.0200 (6.0000) 6.0600 (6.0400) Dealer 8 5.9800  5.9600 (6.0250) 6.0050  6.0625 6.0425 Dealer 9 5.9750  5.9650 (6.0150) 6.0050  (6.0550) 6.0450 Dealer 10 (5.9750) 5.9650 (6.0150) 6.0050  (6.0575) 6.0475 * ( ) : Outlier yields, which are two highest and two lowest values on sell and buy side for individualbond at a particular instant of polling * Average of all theyields except those in parentheses () =6.005787 * Settlement Yield = Average yield rounded off to 4 decimal digits=6.0058   ANNEXURE-2 Product Design and Risk Management Framework for Cash settled Futures on 5 Year Notional Coupon Bearing Government of India Security 1 Underlying Notional coupon bearing 5-year GoI security with a notional coupon of 7% paid semi-annually and face....

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....onal value of the contract on the first day of trading in Futures on 5 Year Notional Coupon Bearing GoI Security and 0.6 % of the notional value of the contract thereafter. The initial margin shall be deducted from the liquid net worth of the clearing member on an online, real time basis. 13 Extreme Loss margin Extreme loss margin of 0.15 % of the notional value of the contract for all gross open positions shall be deducted from the liquid assets of the clearing member on an on line, real time basis. 14 Calendar spread margin 5 Year Notional Coupon GoI Security futures position at one maturity hedged by an offsetting 5 Year Notional Coupon Bearing GoI Security futures position at a different maturity would be treated as a calendar spread. The calendar spread margin shall be at a value of Rs. 400 for spread of one month and Rs. 600 for spread of two months. The benefit for a calendar spread would continue till expiry of the near month contract. 15 Formula for determining standard deviation The exponential moving average method would be used to obtain the volatility estimate every day. The estimate of volatility (σt) for the time period t is estimated using the volatility....

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....ure that his own trading position and the positions of each trading member clearing through him is within the limits specified above. iv. FIIs: In case of Foreign Institutional Investors registered with Securities and Exchange Board of India the total gross long (bought) position in cash and Interest Rate Futures markets taken together should not exceed their individual permissible limit for investment in government securities and the total gross short (sold) position, for the purpose of hedging only, should not exceed their long position in the government securities and in Interest Rate Futures, at any point in time. ANNEXURE-2a Settlement Mechanism a. Polling shall be carried out by the Fixed Income, Money Market and Derivatives Association, i.e., FIMMDA; b. The yields (Bid and Ask) of the GoI securities shall be polled from Primary Dealers (PDs) registered with the Reserve Bank of India; c. Each poll shall involve ten PDs who would be selected at random from the universe of PDs; d. Polling would be conducted at three instances, i.e., 11.00 am, 11.30 am and 12.00 pm daily; e. At each instance of polling, for each bond, out of the ten buy yields, two highest and two lowest....