AI Drafter 
TaxTMI 
TaxTMI 
EXCHANGE TRADED INTEREST RATE FUTURES
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....d 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 composition of the basket of deliverable grade securities and the associated conversion factors f....
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....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 2nd and 3rd are business days, he shall give notice before 6 PM on 2nd 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 ISIN, coupon, maturity date, issuance date, coupon convention, and other details as may be sought by the CC. Ba....
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....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 deliver the securities T+2 day: Selling CM delivers securities and the buying CM fails to pay-in funds. The CC shall pay-out funds to the selling CM on T+2 day Fur....
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....s 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 Size of the Contract 5 LO The Contract Size would be Rs. 2 lakh. Quotation The Quotation would be similar to the quoted price of the Gol security. The day count convention for interest payments would be on the basis of a 360-day year, consisting ....
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.... 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 would be so computed so as to cover a more than 99% VaR over a one day Page 12 of 23 horizon. In order to achieve this, the price scan range may initially be fixed at 3.5 standard deviation1. The initial margin so computed would be subject to a minimum of 2.33% of the value of the futures contract on the first day of trading in 10-year Notional Coupon- bearing Gol security futures and 1.6% of the valu....
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....ty 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 Ä°. ii. iii. Oyt (sigma) is the standard deviation of daily logarithmic returns of yield of 10-year Notional Coupon-bearing Gol security futures at time t. The "return" is defined as the logarithmic return: râ‚ = In(Yâ‚/Yt-1) where Yâ‚ is the yield of 10-year Notional Coupon-bearing Gol security futures at time t. The volatility estimation and margin fixation methodology should be clearly made known to all market participants so that they can compute the margin for any given closing level of the interest rate futures price. Further, the trading software itself should provide this information on a real time basis on the trading workstation screen....
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....ading 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 LO 5 6 all points in time. The minimum liquid networth shall be treated as a capital cushion for days of unforeseen market volatility. Liquid Assets The liquid assets for trading in Interest Rate Futures would have to be provided separately and maintained with the Clearing Corporation. However, the permissible liquid assets, the applicable haircuts and minimum cash equivalent norms would be mutatis mutandis applicable from the equity/currency derivatives segment. Mark-to-Market (MTM) Settlement The MTM gains and losses shall be settled in cash before the start of trading on T+1 day. If MTM obligations are not collected before start of the next day's trad....
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....going basis and atleast once in every six months, conduct back testing of the margins collected vis-à -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 Derivative Segment of a recognized Stock Exchange. The members registered by SEBI for trading in Currency/Equity Derivative Segment shall be eligible to trade in Interest Rate Derivatives also, subject to meeting the Balance Sheet networth requirement of Rs 1 crore for a trading member and Rs 10 crores for a clearing member. Before the start of trading, the Exchange shall submit the proposal for approval of the contract to SEBI giving: ¡ The details of the proposed interest rate futures contract to be traded in the exchange; ii The economic purposes it is intended to serve; iii Its likely contribution to market development; The safeguards and the risk protection mechanisms adopted iv V by the exchange to ensure market integrity, protection of investors and smooth and orderly trading; The ....