Page 203 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes Introduction
In the previous unit, you have studied about the risks associated with derivative activities, risk
management systems and features of risk containment mechanism on the F&O segment. We
also discussed about the objective of NSCCL-SPAN, types of margins, SPAN approach of
computing initial margins, mechanics of SPAN, adjustments for corporate actions and margining
system.
This unit will help you to understand the rules and regulations in derivatives trading and five
main Acts governing the securities markets. We will also learn about the important
recommendations made by the Dr. L. C. Gupta Committee on the introduction of derivatives
markets in India and recommendations covered by J. R. Varma committee report. Further, we
will end up the unit with discussion with the Securities Contracts (Regulation) Act, 1956 [SC(R)
A] that was enacted to prevent undesirable transactions in securities. To make the learning
easier, we will take the help of globally recognised best practices.
The SEBI is entrusted to regulate the carry-forward trading on stock market and other financial
derivatives like equity stock, stock index, options, etc. through recognised stock exchanges of
the country. Over-the-counter (OTC) forward contracts and options on foreign currencies are
regulated by the Reserve Bank of India (RBI).

13.1 Regulation for Derivatives Trading

Rules and regulations in derivatives trading serve an important purpose to sustain confidence
in the financial market, to enable a common framework for listed companies and to protect
minority stakeholders such as retail investors. The regulatory committee believes that regulation
should be designed to achieve specific, well-defined goals. It is inclined towards positive
regulation designed to encourage healthy activity and behavior.

Notes At present, the five main Acts governing the securities markets are (a) the SEBI
Act, 1992; (b) the Companies Act, 1956, which sets the code of conduct for the corporate
sector in relation to issuance, allotment, and transfer of securities, and disclosures to be
made in public issues; (c) the Securities Contracts (Regulation) Act, 1956, which provides
for the regulation of transactions in securities through control over stock exchanges;
(d) the Depositories Act, 1996 which provides for electronic maintenance and transfer of
ownership of demat (dematerialised) shares; and (e) the Prevention of Money Laundering
Act, 2002.
Now let us discuss these Acts in detail:
1. The SEBI Act, 1992: The SEBI Act, 1992 was enacted to empower SEBI with statutory
powers for (a) protecting the interests of investors in securities, (b) promoting the
development of the securities market, and (c) regulating the securities market. Its regulatory
jurisdiction extends over corporate in the issuance of capital and transfer of securities, in
addition to all intermediaries and persons associated with the securities market. It can
conduct enquiries, audits, and inspection of all concerned, and adjudicate offences under
the Act. It has the powers to register and regulate all market intermediaries, as well as to
penalise them in case of violations of the provisions of the Act, Rules, and Regulations
made thereunder.

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