Page 26 - DMGT513_DERIVATIVES_AND_RISK_MANAGEMENT

Unit 2: Evolution of Derivatives in India

Self Assessment Notes

State the following are true or false:
10. Speculators are those traders who wish to eliminate price risk associated with the
underlying security being traded.

11. The position traders speculate on the price movements during one trading day.
12. Arbitrage is the process of simultaneous purchase of securities or derivatives in one
market at a lower price and sale thereof in another market at a relatively higher price.

2.4 SEBI Guidelines Related to Derivative Trade

The following are the key guidelines issued by SEBI for derivative trading:
1. Derivative trading to take place through an on screen based trading system.
2. The derivatives exchange/segment should have on-line surveillance capability to monitor
positions, prices and volumes on a real time basis so as to deter market manipulation.
3. The derivatives exchange/segment should have arrangements for dissemination of
information about trades, quantities and quotes on a real time basis through at least two
information vending networks, which are easily accessible to investors across the country.
4. The derivatives exchange/segment should have arbitration and investor grievances
redressal mechanism operative from all the four areas/regions of the country.
5. The derivatives exchange/segment should have satisfactory system of monitoring investor
complaints and preventing irregularities in trading.
6. The derivative segment of the exchange would have a separate Investor Protection Fund.
7. The clearing corporation/house will perform full novation, i.e., the clearing corporation/
house will interpose itself between both legs of every trade, becoming the legal counterparty
to both or alternatively should provide an unconditional guarantee for settlement of all
trades.
8. The clearing corporation/house should have the capacity to monitor the overall position
of members across both derivatives market and the underlying securities market for
those members who are participating in both.
9. The level of initial margin on index futures contracts will be related to the risk of loss on
the position. The concept of value-at-risk will be used in calculating the required level of
initial margins. The initial margins should be large enough to cover the one-day loss that
can be encountered on the position on 99 percent of the days.
10. The clearing corporation/house will establish facilities for Electronic Funds Transfer (EFT)
for swift movement of margin payments.

11. In the event of a member defaulting in meeting its liabilities, the clearing corporation/
house shall transfer client positions and assets to another solvent member or close-out all
open positions.
12. The clearing corporation/house should have capabilities to segregate initial margins
deposited by clearing members for trades on their own account and on account of his

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