FITTC/DC/CIR-1/98
June 16, 1998.
To
Executive Directors / Managing Directors /
Presidents of all Stock Exchanges.

Dear Sir,

Sub.: DERIVATIVES TRADING IN INDIA

The Board of SEBI in its meeting held on May 11, 1998 accepted the recommendations of the Dr. L.C. Gupta Committee and approved the phased introduction of derivatives trading in India beginning with Stock Index Futures. The Board also approved the "Suggestive Bye-laws" recommended by the committee for Regulation and Control of Trading and Settlement of Derivatives Contracts. However, Derivatives trading could commence only after necessary amendments to the Securities Contract (Regulation) Act, 1956 are made to enable derivatives instruments to be treated as securities.

The Exchanges fulfilling the eligibility criteria as prescribed in the Committee Report (Chapter 3 of the Suggestive Bye-laws) may apply to SEBI for grant of recognition under Section 4 of the Securities Contracts (Regulations) Act, 1956 to start derivatives trading. The derivatives exchange/segment should have a separate governing council and representation of trading/clearing members shall be limited to maximum of 40% of the total members of the Governing Council. The exchange shall regulate the sales practices of its members and will obtain prior approval of SEBI before start of trading in any derivatives contract.

The clearing and settlement of derivatives trades shall be through a SEBI approved Clearing Corporation/House. Clearing Corporations/Houses complying with the eligibility conditions as laid down by the committee (Chapter 5 of the Suggestive Bye-laws) may apply to SEBI for grant of approval.

Derivative Broker/Dealers and clearing members are required to seek registration from SEBI. This shall be in addition to their registration as brokers of existing stock exchanges. Derivative Broker/dealers shall be granted registration under SEBI (Stock Brokers and Sub-Brokers) Rules and Regulations, 1992. The minimum networth for clearing members of the derivatives clearing corporation/house shall be Rs. 300 lacs. The networth of a member shall be computed as follows :

    1. Fixed assets
    2. Pledges securities
    3. Member’s card
    4. Non-allowable securities (unlisted securities)
    5. Bad deliveries
    6. Doubtful debts and advances*
    7. Prepaid expenses
    8. Intangible assets
    9. 30% of marketable securities
* Explanation - Includes debts/advances overdue for more than three months or given to associates.

The members shall be required to have qualified dealers, approved users and sales personnel who have passed a Certification Programme approved by SEBI.

The minimum contract value shall not be less than Rs. 1 lakh. Exchanges should also submit details of the futures contract they propose to introduce as prescribed at clause 3.14 of the Suggestive Bye-laws for approval of SEBI.

The initial margin requirement, exposure limits linked to capital adequacy and margin demands related to the risk of loss on the position shall be prescribed by SEBI/Exchange from time to time.

Exchanges willing to start derivatives trading may submit their application to SEBI for its consideration. The proposed Bye-laws of the Exchange and the Clearing Corporation/House shall be in conformity with the Suggestive Bye-laws prescribed by the committee and should be submitted along with the application to SEBI for grant of approval.

A copy of the Dr. L C Gupta Committee Report and the Suggestive Bye-laws is enclosed.

Yours sincerely,
 
 

O. P. GAHROTRA
SENIOR EXECUTIVE DIRECTOR

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