SEBI : Procedure for re-introduction of derivatives contracts and modified position limits

Securities and Exchange Broad of India

CHIEF GENERAL MANAGER
DERIVATIVES AND NEW PRODUCTS DEPARTMENT

SEBI/DNPD/Cir-31/2006
September 22, 2006

To,

The Managing Director/Executive Director of Derivative Segment of NSE & BSE and their Clearing House/Corporation.

Dear Sir,

Sub: Procedure for re-introduction of derivatives contracts and modified position limits

This circular is in continuation of SEBI Circular No. SMDRP/DC/CIR-13/02 dated December 18, 2002, Circular No SEBI/DNPD/Cir-26/2004/07/1 6 dated July 16, 2004, Circular No SEBI/DNPD/Cir-27/2004/07/16 dated July 16, 2004 and Circular No DNPD/Cir-29/2005 dated September 14, 2005 issued to Derivative Exchange / Segment and their Clearing House / Corporation (hereinafter collectively referred to as Exchange).

The procedure for introduction, dropping and re-introduction of derivatives contracts, market wide position limits for stock based derivatives and position limits for index derivatives were reviewed by the Secondary Market Advisory Committee (SMAC). Based on the recommendations of the SMAC the procedure for re-introduction of derivative contracts and modified position limits are as under.

I. PROCEDURE FOR RE-INTRODUCTION OF DERIVATIVES CONTRACTS

1. The procedure for introducing futures and option contracts on stocks for the first time shall continue to be in the manner specified under Clause I(3) of Circular No. SMDRP/DC/CIR-13/02 dated December 18, 2002.

2. The exit criteria shall be more flexible as compared to entry criteria in order to prevent frequent entry and exit of stocks in the derivatives segment. Therefore, for a stock to become ineligible, the criteria for market wide position limit shall be relaxed upto 10% of the criteria applicable for the stock to become eligible for derivatives trading. The other eligibility conditions would be applicable mutas mutandis for the stock to become ineligible. The stock should fail to meet the criteria for three consecutive months for the stock to be dropped out of the derivatives segment. The procedure for dropping the stock would continue to be in the manner specified in Circular No. SMDRP/DC/CIR- 13/02 dated December 18, 2002.

3. A stock which is dropped from derivatives trading may become eligible once again. In such instances, the stock is required to fulfill the eligibility criteria for three consecutive months (instead of one month as specified earlier) to be re-introduced for derivatives trading. Derivative contracts on such stocks may be re-introduced by the exchange itself. However, introduction of futures and option contracts on a stock for the first time would continue to be subject to SEBI approval.

II. POSITION LIMITS

1. Market wide position limits for single stock futures and stock option contracts

The market wide position limit for single stock futures and stock option contracts prescribed under sub-clause 4(i) of clause II of Circular No. SEBI/DNPD/Cir­26/2004/07/16 dated July 16, 2004 stands modified. The market wide position limit shall henceforth be linked to the free float market capitalisation and shall be equal to 20% of the number of shares held by non-promoters in the relevant underlying security (i.e., free-float holding).

This limit would be applicable on aggregate open positions in all futures and all option contracts on a particular underlying stock.

2. Trading Member/ FII/ Mutual Fund position limits in index derivative contracts

Sub clause 4 (ii) of clause II of Circular No. SEBI/DNPD/Cir-26/2004/07/16 dated July 16, 2004, Clause I of Circular No. SEBI/DNPD/Cir-27/2004/07/16 dated July 16, 2004 and Clause II of Circular No. DNPD/Cir-29/2005 dated September 14, 2005 on trading member/foreign institutional investor (FII)/mutual fund position limits in equity index derivative contracts stand modified in the following manner–

a. Trading Member/FII/Mutual Fund Position limits in equity index option contracts:

The trading member/FII/mutual fund position limits in equity index option contracts shall be higher of:

• Rs.500 Crore

or

• 15% of the total open interest in the market in equity index option contracts.

This limit would be applicable on open positions in all option contracts on a particular underlying index.

b. Trading Member/FII/Mutual Fund Position limits in equity index futures contracts:

The trading member/FII/mutual fund position limits in equity index futures contracts shall be higher of:

• Rs. 500 Crore

or

• 15% of the total open interest in the market in equity index futures contracts.

This limit would be applicable on open positions in all futures contracts on a particular underlying index.

In addition to the above, the position limit prescribed for hedging purposes by Mutual Fund and FII, under clause II (iii) of Circular No. DNPD/Cir-29/2005 dated September 14, 2005 and Clause I of Circular No. SEBI/DNPD/Cir-27/2004/07/16 dated July 16, 2004 shall continue to be applicable.

This circular is being issued in exercise of powers conferred by 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.

Yours sincerely,

N.PARAKH