DERIVATIVES AND NEW PRODUCTS DEPARTMENT
August 28, 2009
Recognized Stock Exchanges
and their Clearing Corporations / Clearing Houses, Clearing Members and Trading Members
SUB: EXCHANGE TRADED INTEREST RATE FUTURES
It has been decided to introduce Exchange traded 10-Year Notional coupon bearing GoI security futures as per the following details in terms of product design, risk management measures and other related issues:
1.For trading in Exchange Traded Interest Rate Futures, Recognized Stock Exchanges and their Clearing Corporations / Clearing Houses, Clearing Members and Trading Members have to comply with the following:
2.Further, a Recognized Stock Exchange shall ensure that;
1.Product design, margins and position limits as laid down in Annexure I are complied with.
2.Risk management measures as mentioned in Annexure II are complied with.
3.Clearing Corporation / Clearing House: The Clearing Corporation / Clearing House of Interest Rate Futures shall be the same as for currency derivatives segment.
4.Clearing Member and Trading Member: The members registered by SEBI for trading in Currency/Equity Derivative Segment shall be eligible to trade in Interest Rate Derivatives also, subject to fulfilling the requirements mentioned in Annexure III.
5.To operationalise 10-Year Notional Coupon-bearing GoI security Futures, the following is clarified:
1.Deliverable Grade Securities: Exchanges shall select their own basket of securities from the eligible Deliverable Grade Securities, , GoI securities maturing at least 7.5 years but not more than 15 years from the first day of the delivery month with a minimum total outstanding stock of Rs 10,000 crore. Exchanges shall disclose upfront to the market participants the composition of the basket of deliverable grade securities and the associated conversion factors for each of the quarterly contracts.
2.Revision of Basket of Deliverable Grade Securities: To the basket of deliverable grade securities disclosed upfront by the Exchange for each of the quarterly contracts, additions, if any,
shall be made not later than 10 business days before the first business day of the delivery month.
3.Daily Settlement Price: The daily settlement price (DSP) shall
be determined in the following manner:
Step 1: The DSP is the volume weighted average price (VWAP) of the trades in the last 30 minute of trading, provided there are at least 5 trades for a minimum aggregate notional value of Rs. 10 crore. Failing which, trades during the last 60 minutes shall be used for the calculation of VWAP, subject to at least 5 trades for Rs.10 crore. Failing which trades during the last 120 minutes shall be used for the calculation of VWAP, subject to at least 5 trades for Rs.10 crore.
Step 2: If the DSP cannot be calculated as above, a theoretical price shall be used. This theoretical price shall be the minimum of the theoretical futures prices of all the securities in the delivery basket chosen by the Exchange. The theoretical futures price of each security is the weighted average cash price of outright trades of that security during the day on the NDS Order Matching platform, adjusted for cost of carry, subject to at least 5 trades for Rs.10 crore. If there are not enough trades as required above or there is a material market event during the trading hours, the theoretical futures price of each security shall be the FIMMDA / PDAI / Bloomberg revaluation price(s) (published on the FIMMDA website on a daily basis: URL http://www.fimmda.org/default.asp?access=na), adjusted for cost of carry. The cost of carry shall be computed for the period upto the last business day of the delivery month.
If, however, the near quarter contract is liquid (5 trades for Rs. 10 crore during the last 30 minutes, 60 minutes or 120 minutes, as the case may be), the VWAP of the near quarter contract shall be adjusted for cost of carry to arrive at the theoretical price for subsequent quarter contracts. Further, if near quarter contract is illiquid while the next quarter contract is liquid, then the VWAP of the nearest liquid quarter contract shall be used to derive the prices of the illiquid previous as well as the subsequent quarter contracts.
The cost of carry for the above purpose shall include the financing cost @ 91-day treasury bill rate and the coupon of the particular security.
4.Delivery Schedule and Delivery Process/Mechanism: Buyer and seller in Interest rate Futures on 10-year Notional Coupon bearing GoI security shall take and give securities respectively in the demat mode through the depository system. The delivery schedule shall be as follows:
T +0 day
Delivery notice: It is the day when the selling Clearing Member (CM) sends a notice to the Clearing Corporation (CC) expressing his intention to deliver along with details of the security to be delivered. CM shall send the notice before 6:00 pm IST on the second business day prior to the day he wishes to deliver. For example, if he wishes to deliver on 4th September 2009 and 2nd and 3rd are business days, he shall give notice before 6 PM on 2nd September 2009. He can deliver on any business day during the delivery month of the contract. Along with the notice, he shall
provide the notional face value (equal to its short position in the expiring contract), security ISIN, coupon, maturity date, issuance date, coupon convention, and other details as may be sought by the CC. Based on these details, the CC shall calculate the invoice price.
Allocation: The CC shall identify the eligible long positions for allocation and assign the deliveries to long position holders at client level starting with the highest vintage till the allocation is over. Vintage data shall be computed and maintained at client level for every contract and shall be tracked by the CC on end of day basis. For a given vintage, if the contracts to be allocated (Short) are less than the total long positions, the allocation to such long position holders shall be done on a ‘random’ basis.
Based on the client level allocations as above, CC shall compute CM level deliverable/receivable obligations using multilateral netting and intimate the identified long position holders, by 8 pm IST on the date of receipt of notice, the details of the securities that they would be receiving and the invoice price.
The seller CM shall not be permitted to fulfill an individual futures contract by delivering a mixed portfolio of deliverable security (for example, Rs.1,20,000 face value of one issue and Rs. 80,000 face value of another issue is not permissible). However, a selling CM making delivery for more than one futures contract, say two contracts, may deliver two deliverable securities for two different contracts (Rs.2,00,000 face value of one issue for one contract and Rs.2,00,000 face value of another issue for the other contract).
T + 2 day
On the second business day following the receipt of the delivery notice, the CMs shall discharge their obligations and the CC shall complete the settlement accordingly.
5.Initial Margin: Methodology, as specified in the Annexure IV, shall be adopted for computation of initial margin. For this purpose, the yield for 10-Year benchmark GoI security, as published by FIMMDA, shall be used. In respect of FIIs, margin shall be collected either in cash or foreign sovereign securities rated AAA.
For the purpose of intra-day updation of VaR, the Exchanges shall use the yield of the benchmark 10-Year bond, from the NDS Order Matching platform.
6.Delivery Month: The delivery month shall be the last month of the expiring contract, i.e., March, June, September and December
7. In case there is a failure to honour the settlement obligation by the
CM, the following action shall be followed:
i Selling CM fails to deliver the securities
T +0 day: Selling CM gives intention to deliver the securities
T+2 day: Buying CM pays-in funds and the selling CM fails to deliver the securities
T+2 or T+3 day: CC shall conduct buy-in auction of the securities. In case of successful auction, the defaulting CM shall be debited by:the actual auction price,difference in invoice price and auction price, if the auction price is less than the invoice price, and a penalty of 2% of the face value of security short delivered.
In case of unsuccessful auction, transaction shall be closed out wherein the defaulting CM shall be debited by:
invoice price, and
a penalty of 5% of the face value of security short delivered.
In respect of the seller in an auction failing to honour the auction obligations, he shall be debited by:
invoice price, and
a penalty of 3% of the face value of security short delivered
These penalties shall be passed on to the buying CM, who shall pass it on to the buying client.
ii Buying CM fails to pay-in funds
T +0 day: Selling CM gives intention to deliver the securities
T+2 day: Selling CM delivers securities and the buying CM fails to pay-in funds.
The CC shall pay-out funds to the selling CM on T+2 day
♦ In case of a settlement shortage of Rs. 5 lakh or more, the trading facility of all trading members clearing through the buying CM shall be withdrawn in the Currency Derivatives Segment and the securities pay-out to the buying CM shall be withheld.
♦ If the buying CM is short for an amount of Rs. 2 lakh or more on six or more occasions in the preceding three months, the trading
facility of all the trading members clearing through the buying CM shall be withdrawn in the Currency Derivatives Segment and the securities pay-out to the buying CM shall be withheld.
♦ A penalty of 0.07% per day shall be levied on the amount of the shortage.
The trading facility shall be restored and securities withheld shall be released on the buying CM making good the shortage amount in all the above cases.
Regulatory Penalty: In case a selling CM defaults in delivering securities 5 times during a period of preceding 6 months, the trading facility of all the trading members clearing through the CM shall be withdrawn for 7 days.
8.Margins and action on deliverable positions
i Margins on physical delivery positions: For positions marked for delivery, a margin equal to VaR of the futures on the invoice price plus 5% of face value along with mark to market adjustments shall be charged both to the buying client and selling client. The margins shall be levied from the intention day and shall be released on the completion of the settlement.
ii Margins from last trading day to last intention day: For positions from last trading date till date of intention in cases where no intention is provided, a margin amount equal to VaR of the futures on the invoice price of the costliest security from the deliverable basket plus 5% of face value along with mark to
market adjustments based on the underlying closing prices of the costliest security from the deliverable basket shall be charged on both buying client and selling client. The margins shall be levied from the last trading day till the day of receipt of intention to deliver.
iii Action in case no intent to deliver is provided: In case no intent is provided by the selling CM till two business days prior to the last delivery date, it shall be presumed that selling CM has failed to deliver the security and the auction mechanism, as specified for security shortages, shall be activated. The auction shall take place one business day prior to the last delivery date.
This Circular is being issued in exercise of the powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act 1992, read with Section 10 of the Securities Contracts (Regulation) Act, 1956 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.
This Circular is available on SEBI website at www.sebi.gov.in., under the category “Derivatives- Circulars”.