TaxTMI 
TaxTMI 
EXCHANGE TRADED INTEREST RATE FUTURES
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....ge/ Clearing Corporation / Clearing House. Further, a Recognized Stock Exchange shall ensure that; a. Product design, margins and position limits as laid down in Annexure I are complied with. b. Risk management measures as mentioned in Annexure II are complied with. 2. Clearing Corporation / Clearing House: The Clearing Corporation / Clearing House of Interest Rate Futures shall be the same as for currency derivatives segment. 3. Clearing Member and Trading Member: The members registered by SEBI for trading in Currency/Equity Derivative Segment shall be eligible to trade in Interest Rate Derivatives also, subject to fulfilling the requirements mentioned in Annexure III. B. To operationalise 10-Year Notional Coupon-bearing GoI security Futures, the following is clarified: 1. Deliverable Grade Securities: Exchanges shall select their own basket of securities from the eligible Deliverable Grade Securities, viz., GoI securities maturing at least 7.5 years but not more than 15 years from the first day of the delivery month with a minimum total outstanding stock of Rs. 10,000 crore. Exchanges shall disclose upfront to the market participants the compositi....
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....e prices of the illiquid previous as well as the subsequent quarter contracts. The cost of carry for the above purpose shall include the financing cost @ 91-day treasury bill rate and the coupon of the particular security. 4. Delivery Schedule and Delivery Process/Mechanism: Buyer and seller in Interest rate Futures on 10-year Notional Coupon bearing GoI security shall take and give securities respectively in the demat mode through the depository system. The delivery schedule shall be as follows: T +0 day Delivery notice: It is the day when the selling Clearing Member (CM) sends a notice to the Clearing Corporation (CC) expressing his intention to deliver along with details of the security to be delivered. CM shall send the notice before 6:00 pm IST on the second business day prior to the day he wishes to deliver. For example, if he wishes to deliver on 4th September 2009 and 2^nd and 3rd are business days, he shall give notice before 6 PM on 2^nd September 2009. He can deliver on any business day during the delivery month of the contract. Along with the notice, he shall provide the notional face value (equal to its short position in the expiring contract), security ISI....
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....lement obligation by the CM, the following action shall be followed: i Selling CM fails to deliver the securities T +0 day: Selling CM gives intention to deliver the securities T+2 day: Buying CM pays-in funds and the selling CM fails to deliver the securities T+2 or T+3 day: CC shall conduct buy-in auction of the securities. In case of successful auction, the defaulting CM shall be debited by: the actual auction price, difference in invoice price and auction price, if the auction price is less than the invoice price, and a penalty of 2% of the face value of security short delivered. In case of unsuccessful auction, transaction shall be closed out wherein the defaulting CM shall be debited by: invoice price, and a penalty of 5% of the face value of security short delivered. In respect of the seller in an auction failing to honour the auction obligations, he shall be debited by: invoice price, and a penalty of 3% of the face value of security short delivered These penalties shall be passed on to the buying CM, who shall pass it on to the buying client. ii Buying CM fails to pay-in funds T +0 day: Selling CM gives intention to delive....
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....delivery date, it shall be presumed that selling CM has failed to deliver the security and the auction mechanism, as specified for security shortages, shall be activated. The auction shall take place one business day prior to the last delivery date. This Circular is being issued in exercise of the powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act 1992, read with Section 10 of the Securities Contracts (Regulation) Act, 1956 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market. This Circular is available on SEBI website at www.sebi.gov.in., under the category "Derivatives- Circulars". Yours faithfully, SUJIT PRASAD ============= Document 1 ANNEXURE I Product Design, Margins and Position Limits for 10-Year Notional Coupon-bearing Government of India (Gol) Security Futures 1 2 3 Underlying 10-Year Notional Coupon-bearing Gol security Coupon The notional coupon would be 7% with semi-annual compounding. Trading Hours The Trading Hours would be from 9 a.m. to 5.00 p.m on all working days from Monday to Friday. 4 ....
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.... 10-Year Notional Coupon-bearing Gol security futures, the deliverable security's remaining term to maturity shall be calculated in complete three-month quarters, always rounded down to the nearest quarter. If, after rounding, the deliverable security lasts for an exact number of 6-month periods, the first coupon shall be assumed to be paid after 6 months. If, after rounding, the deliverable security does not last for an exact number of 6-month periods (i.e. there are an extra 3 months), the first coupon would be assumed to be paid after 3 months and accrued interest would be subtracted. 12 Invoice Price Invoice Price of the respective deliverable grade security would be the futures settlement price times a conversion factor plus accrued interest. 13 Last Trading Day Seventh business day preceding the last business day of the delivery month. 14 Last Delivery Day Last business day of the delivery month. 15 Initial Margin Initial Margin requirement shall be based on a worst case loss of a portfolio of an individual client across various scenarios of price changes. The various scenarios of price changes woul....
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....rivatives market), the Committee, after considering the various aspects of the different models, decided that EWMA method would be used to obtain the volatility estimate every day fixing the price scan range at 3.5 standard deviation. During the first time-period on the first day of trading in 10-year Notional Coupon-bearing Gol security futures, the sigma would be equal to 0.8 %. 19 Formula for Determining Standard Deviation The EWMA method would be used to obtain the volatility estimate every day. The estimate at the end of time period t (σyt) is arrived at using the volatility estimate at the end of the previous time period i.e. as at the end of t-1 time period (σyt-1), and the return (ryt) observed in the futures market during the time period t. The formula would be as under: (σyt)² = A (σyt-1)² + (1 - A ) (ryt)² Where A(lambda) is a parameter which determines how rapidly volatility estimates changes. The value of A is fixed at 0.94. Page 14 of 23 İ. ii. iii. Oyt (sigma) is the standard deviation of daily logarithmic returns of yield of 10-year Notional Coupon-bearing Gol security....
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....level. The proprietary positions of the Trading / Clearing Member would be treated as that of a client. 2 3 Real-Time Computation The computation of worst scenario loss would have two components. The first is the valuation of the portfolio under the various scenarios of price changes. At the second stage, these scenario contract values would be applied to the actual portfolio positions to compute the portfolio values and the initial margin. The exchanges shall update the scenario contract values at least 6 times in the day, which may be carried out by taking the closing price of the previous day at the start of trading and the prices at 11:00 a.m., 12:30 p.m., 2:00 p.m., 3.30 p.m. and at the end of the trading session. The latest available scenario contract values would be applied to member/client portfolios on a real time basis. Liquid Networth The initial margin and the extreme loss margin shall be deducted from the liquid assets of the clearing member. The clearing member's liquid net worth after adjusting for the initial margin and extreme loss margin requirements must be at least Rs. 50 Lakhs at Page 17 of 23 4 ....
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....st for client purpose only. The following process is to be adopted for segregating the client's money vis-Ã -vis the clearing member's money: i ii 111 iv At the time of opening a position, the member should indicate whether it is a client or proprietary position. Margins across the various clients of a member should be collected on a gross basis and should not be netted off. When a position is closed, the member should indicate whether it was a client or his own position which is being closed. In the case of default, the margins paid on the proprietary position would only be used by the Clearing Corporation for realizing its dues from the member. 8 Periodic Risk Evaluation Report The Clearing Corporation of the Exchange shall on an ongoing basis and atleast once in every six months, conduct back testing of the margins collected vis-Ã -vis the actual price changes. A copy of Page 19 of 23 the study shall be submitted to SEBI along with suggestions on changes to the risk containment measures, if any. Page 20 of 23 ANNEXURE III The Interest Rate Derivative contracts shall be traded on the Currency ....