Page 208 - DCOM510_FINANCIAL_DERIVATIVES

Unit 13: Regulatory Framework

12. The operations of the cash market on which the derivatives market will be based, need Notes
improvement in many respects.
13. Creation of a Derivation Cell, a Derivative Advisory Committee, and Economic Research
Wing by SEBl.
14. Declaration of derivatives as ‘securities’ under Section 2 (h) of the SCRA and suitable
amendments in the notification issued by the Central Government in June, 1969 under
Section 16 of the SCRA.
The SEBI Board approved the suggested Bye-Laws recommended by the L. C. Gupta Committee
for regulation and control of trading and settlement of derivatives contracts.

Task Find out the amendment to the SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2009 for revision of Bid-cum-Application Form and Abridged Prospectus.

Self Assessment

State whether the following statements are true or false:
6. RBI appointed L. C. Gupta Committee on 18th November 1996 to develop appropriate
regulatory framework for the derivatives trading
7. The L. C. Gupta Committee had conducted a wide market survey with contact of several
entities relevant to derivatives trading like brokers, mutual funds, banks/FIs, FIIs and
merchant banks.
8. The Dr. L. C. Gupta Committee is strongly of the view that there is urgent need of
introducing of financial derivatives.
9. In Dr. L. C. Gupta Committee the derivative trading should be initiated on a separate
segment of existing stock exchanges having an independent governing council.

13.3 J. R. Varma Committee Report

Accordingly, SEBI constituted a group in June, 1998, with Prof. J. R. Varma, as Chairman. The
group submitted its report in the same year. The group began by enumerating the risk
containment issues that assume importance in the Indian context while setting up an index
futures market. The recommendations of the group as covered by its report are as under:

13.3.1 Estimation of Volatility (Clause 2.1)

Different people have different definitions for volatility. For our purpose, we can say that
volatility essentially refers to uncertainty arising out of price changes of shares. It is important
to understand the meaning of volatility a little more closely because it has a major bearing on
how margins are computed. Several issues arise in the estimation of volatility:
1. Volatility in Indian market is quite high as compared to developed markets.
2. The volatility in Indian market is not constant and is varying over time.

3. The statistics on the volatility of the index futures markets do not exist (as these markets
are yet to be introduced), and therefore, in the initial period, reliance has to be made on
the volatility in the underlying securities market. The LCGC has prescribed that no cross
margining would be permitted and separate margins would be charged on the position in

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