Page 28 - DCOM510_FINANCIAL_DERIVATIVES

Unit 2: Derivatives Market in India

2.2.3 Functioning of Derivative at NSE Notes

NSE admits members on its derivatives segment in accordance with the rules and regulations of
the exchange and the norms specified by SEBI.

Did u know? NSE follows 2-tier membership structure stipulated by SEBI to enable wider
participation.
Those interested in taking membership on F&O segment are required to take membership of
CM and F&O segment or CM, WDM and F&O segment. Trading and clearing members are
admitted separately. Essentially, a clearing member (CM) does clearing for all his trading
members (TMs), undertakes risk management and performs actual settlement. There are three
types of CMs:

Self Clearing Member: A SCM clears and settles trades executed by him only either on his
own account or on account of his clients.
Trading Member Clearing Member: TM—CM is a CM who is also a TM. TM—CM may clear
and settle his own proprietary trades and client’s trades as well as clear and settle for other
TMs.
Professional Clearing Member: PCM is a CM who is not a TM. Typically, banks or custodians
could become a PCM and clear and settle for TMs.
Details of the eligibility criteria for membership on the F&O segment are provided in Tables 2.2.
The TM—CM and the PCM are required to bring in additional security deposit in respect of
every TM whose trades they undertake to clear and settle. Besides this, trading members are
required to have qualified users and sales persons, who have passed a certification programme
approved by SEBI.

Table 2.2: Business Growth of Futures and Options Market Turnover (` crore)

Month Index futures Index options Stock options Stock futures
Jun-00 35 – – –
Jun-01 590 195 – –
Jun-02 2,123 389 4,642 16,178
Jun-03 9,348 1,942 15,042 46,505
Jun-04 64,017 8,473 7,424 78,392

Jun-05 77,218 14,799 14,799 163,096

2.2.4 Rules of Derivative Trading

The futures and options trading system of NSE, called NEAT-F&O trading system, provides a
fully automated screen-based trading for Nifty futures & options and stock futures & options on
a nationwide basis and an online monitoring and surveillance mechanism. It supports an
anonymous order driven market which provides complete transparency of trading operations
and operates on strict price—time priority. It is similar to that of trading of equities in the Cash
Market (CM) segment. The NEAT-F&O trading system is accessed by two types of users. The
Trading Members (TM) have access to functions such as order entry, order matching, order and
trade management. It provides tremendous flexibility to users in terms of kinds of orders that

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