Page 206 - DCOM510_FINANCIAL_DERIVATIVES

Unit 13: Regulatory Framework

The regulatory framework in India is based on the L. C. Gupta Committee Report, and the J. R. Notes
Varma Committee Report. It is mostly consistent with the IOSCO5 principles and addresses the
common concerns of investor protection, market efficiency and integrity and financial integrity.
The L. C. Gupta Committee Report provides a perspective on division of regulatory responsibility
between the exchange and the SEBI. It recommends that SEBI’s role should be restricted to
approving rules, bye laws and regulations of a derivatives exchange as also to approving the
proposed derivatives contracts before commencement of their trading.
It emphasises the supervisory and advisory role of SEBI with a view to permitting desirable
flexibility, maximising regulatory effectiveness and minimising regulatory cost. Regulatory
requirements for authorisation of derivatives brokers/dealers include relating to capital
adequacy, net worth, certification requirement and initial registration with SEBI. It also suggests
establishment of a separate clearing corporation, maximum exposure limits, mark to market
margins, margin collection from clients and segregation of clients’ funds, regulation of sales
practice and accounting and disclosure requirements for derivatives trading. The J. R. Varma
committee suggests a methodology for risk containment measures for index-based futures and
options, stock options and single stock futures. We will discuss them in the following sections.

Notes The risk containment measures include calculation of margins, position limits,
exposure limits and reporting and disclosure.

Self Assessment

Fill in the blanks:

1. The derivatives can be classified into two categories: …………………… derivatives and
…………………… derivatives.
2. At present there are …………………… main Acts governing the securities markets.

3. …………………… has full autonomy and the authority to regulate and develop an orderly
securities market.
4. The primary objective of …………………… is to prevent money laundering.

5. The …………………… Report provides a perspective on division of regulatory
responsibility between the exchange and the SEBI.

13.2 L. C. Gupta Committee Report

SEBI appointed L. C. Gupta Committee on 18th November 1996 to develop appropriate regulatory
framework for the derivatives trading and to recommend suggestive bye-laws for Regulation
and Control of Trading and Settlement of Derivatives Contracts. The Committee was also to
focus on the financial derivatives and equity derivatives. The Committee submitted its report in
March 1998.

The Board of SEBI in its meeting held on May 11, 1998 accepted the recommendations and
approved the introduction of derivatives trading in India beginning with Stock Index Futures.
The Board also approved the “Suggestive Bye-laws” recommended by the L. C Gupta Committee
for Regulation and Control of Trading and Settlement of Derivatives Contracts. SEBI circulated
the contents of the Report in June 98.

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