December 18, 2002


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

Dear Sir,

Sub: Review of recommendation of Dr. L.C Gupta Committee on Derivatives.

This is in continuation of SEBI Circular No. FITTC/DC/CIR-1/98 dated June 16, 1998 and Circular No. IES/DC/ 8726/00 dated May 31, 2000 regarding the eligibility criteria, market structure and governance of Derivative Exchange/Segment and their Clearing House/Corporation.

SEBI had setup an Advisory Committee on Derivatives headed by Prof. J. R Varma to inter alia review the recommendation of Dr. L.C Gupta Committee in the present context. The Advisory Committee gave its recommendation in its report on “Development and Regulation of Derivative Markets in India”. The report of the Advisory Committee was placed on the SEBI website for public comments. The SEBI Board in its meeting on November 29, 2002 considered the recommendations made in the report and also considered the comments received from the public. Based on the recommendations of the Advisory Committee on Derivatives, the Board decided that the following norms for market structure and governance shall be adopted by Derivative Segment and its Clearing House/Corporation (hereinafter referred to as derivative segment) .

Separation of Cash and Derivative Segment of an Exchange and its Clearing House/Corporation.
The Dr. L.C Gupta Committee on Derivatives had permitted exiting stock exchanges having cash trading to trade in derivative contracts through a separate segment with separate membership.

Henceforth, the derivative segment of an exchange and its Clearing House/Corporation shall be separate from the cash segment in the following areas-

The legal framework governing trading, clearing and settlement of the derivative segment should be separate from the cash market segment. In other words, the Regulations and/or Bye-laws of derivative segment, as the case may be for specific exchanges, shall be separate from the cash market.
Trade Guarantee Fund (TGF) /Settlement Guarantee Fund (SGF) of the derivative segment shall be separate from the TGF/SGF of cash market segment.
Membership of the derivative segment shall be separate from the cash market segment.
The Governing Council / Clearing Council / Executive Committees of the derivative segment shall be separate from the cash market segment.
The separation, if any, as regard the functional, operational and administrative modalities shall be at the discretion of the Exchange. The cash and derivative segment of an Exchange may have common personnel, trading terminal and infrastructure.
The condition of mandatory appointment of a Chief Executive Officer (CEO) of the derivative segment and its clearing house / corporation, as specified in SEBI circular dated May 31, 2002 is withdrawn. Henceforth, the Executive Director or the Managing Director of the Exchange and the clearing house/corporation, as the case may be, shall assume all responsibility for the duties specified for CEO’s in SEBI Circular No. IES/DC/ 8726/00 dated May 31, 2002.
The stipulation of 100% inspection of derivative trading and clearing members, by the Derivative Exchange/Segment, in a year, stands withdrawn. The quantum of members to be inspected may now be linked to the cost and benefit of inspections and the level of activity of members. The Derivative Exchange/Segment shall work out an appropriate policy and plan for selecting members to be inspected. The inspection strategy should lay down:
The criteria for identifying the top members (in terms of level of activity) to be taken up for compulsory inspection.
The percentage of remaining members to be inspected selected on a sampling basis.
Mechanisms should ensure that active members do not go un-inspected for several years in succession.
The inspection policy and plan for the year shall be submitted to SEBI for approval.

Yours sincerely,


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