TaxTMI 
TaxTMI 
Risk containment measures for Stock Option
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....es and Index Option Contracts. SEBI has setup a ' Technical Group' headed by Prof. J.R Varma to prescribe risk containment measures for new derivative products. The group has recommended the introduction of Exchange traded Options on Stocks, which is also in conformity with the sequence of introduction of derivative products recommended by Dr. L.C Gupta Committee. The 'Technical Group' has recommended the risk containment measure for Exchange traded Options on Stocks. While SEBI would not mandate any particular risk management product, the framework shall be consistent with the risk management guidelines mandated by the L. C. Gupta Committee. The Exchanges are free to decide whether they want to adopt any of the risk management models....
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....gining approach shall be adopted which will takes an integrated view of the risk involved in the portfolio of each individual client comprising of his positions in Derivative Contracts. The parameters for such a model should include the following A. Worst Scenario Loss The worst case loss of a portfolio would be calculated by valuing the portfolio under several scenarios (as specified in SEBI Circular No. IES/DC/CIR-5/00 dated December 11, 2000) of changes in the Stock prices and changes in the volatility of the Stock. The price range for generating the scenarios for Stock Option Contracts would be three and a half standard deviation (3.5 Sigma). The sigma value would be calculated using the methodology specified for Index Futur....
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....get adjusted against the available Liquid Net Worth. Since the options are premium style, mark to market gains and losses will not be settled in cash for stock option positions also. D. Cash Settlement of Premium For the Stock Option positions, the premium shall be paid in by the buyers in cash and paid out to the sellers in cash on T+1 day. E. Exercise & Assignment The Exchanges are free to set exercise limits, if any, for the Stock Option Contracts. The assignment of all exercise shall be done randomly at the client level by the Exchange and its Clearing House. F. Unpaid Premium Until the buyer pays in the premium, the premium due shall be deducted from the available Liquid Net Worth on a real time basi....
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....cash segment of the Exchange, or • 10% of the number of shares held by non-promoters i.e. 10% of the free float, in terms of number of shares of a company. When the total open interest in a contract reaches 80% of the market wide limit in that contract, the exchanges would double the price range and volatility range as specified in Point No. (A) in this circular. The exchanges are required to continously review the impact of this measure and take further proactive risk containment measures as may be appropriate, including, further increases in the scan ranges and levying additional margins. The cash market segment of the Exchange should be informed of these developments so as to enable the cash segment also to....
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....e last six months, with the exception of cases in which a stock is unable to trade due to corporate actions like de-mergers etc. iv. The non promoter holding in the company should be at least 30%. v. The ratio of the daily volatility of the stock vis-à-vis the the daily volatility of the Index (either BSE-30 Sensex or S&P CNX Nifty) should not be more than 4, at any time during the previous six months. For this purpose the volatility would be computed as per the Exponentially Weighted Moving Average formula specified in the Prof. J. R Varma Committee Report on the risk containment measures for Index Futures. It is further clarified that the stock on which option contracts are permitted to be traded on one derivative Exchange/Se....
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.... six months to examine whether, in light of the experience, the list of eligible stocks could be expanded. 8. The Derivative Exchange/Segment shall submit their proposal for approval of the stock option contract to SEBI which shall include: a. the details of proposed derivative contract to be traded on the exchange which would include: i. Symbol ii. Underlying - giving details of the calculations mentioned above and ensuring that the stock fulfills the eligibility criterion specified. iii. Lot Size / Multiplier iv. Strike Price Intervals v. Premium Quotation vi. Last Trading Day vii. Expiration day/month viii. Exercise Style ix. Mode of ....