SECURITIES AND EXCHANGE BOARD OF INDIA
INVESTIGATIONS ENFORCEMENT
& SURVEILLANCE DEPARTMENT
Mittal Court, A Wing, Gr. Floor,
224, Nariman Point, Mumbai 400 021
IES/DC/CIR- 5/00
December 11, 2000
To,
The Chief Executive Officer/President/
Managing Director of Derivative Segment of NSE & BSE and their Clearing House / Corporation.
Dear Sir,
Sub: Risk containment measures for Option on Indices.
This is in continuation of SEBI Circular No. IES/DC/CIR-4/99 dated July 28, 1999 wherein SEBI had laid down the risk containment measures for Exchange traded Index Futures Contracts.
SEBI has setup a ‘Technical Group’ headed by Prof. J.R Varma to prescribe risk containment measures for new derivative products. The group has recommended the introduction of Exchange traded Options on Indices which is also in conformity with the sequence of introduction of derivative products recommended by Dr. L.C Gupta Committee.
The ‘Technical Group’ has recommended the risk containment measure for Exchange traded Options on Indices. While SEBI would not mandate any particular risk management product, the framework shall be consistent with the risk management guidelines mandated by the L. C. Gupta Committee. The Exchanges are free to decide whether they want to adopt any of the risk management models available globally or else may like to develop their own models for risk management.
The following are the risk containment measures to be adopted by the derivative exchange/segment and the Clearing House/Corporation for the trading and settlement of both Index Futures and Index Option Contracts:
1. The Index option contracts to be traded on the derivative exchange/segments shall have prior approval of SEBI. The Contract should comply with the disclosure requirements, if any, laid down by SEBI.
2. Initially, the Exchanges shall introduce premium style index options.
3. Initially the Exchanges shall introduce European style Index Options which shall be settled in cash. The risk containment measures described hereunder are only for premium style European option contracts.
4. The Index Option Contract shall have a minimum contract size of Rs. 2 lakhs at the time of its introduction in the market.
5. The Index Option contract shall have maximum maturity of 12 months and shall have a minimum of 3 strikes (in the money, near the money and out of the money)
6. The Initial Margin requirements shall be based on worst case loss of a portfolio of an individual client to cover a 99% VaR over a one day horizon. The Initial Margin requirement shall be netted at level of individual client and it shall be on gross basis at the level of Trading/Clearing Member. The Initial margin requirement for the proprietary position of Trading/Clearing member shall also be on net basis.
7. A portfolio based margining approach shall be adopted which will takes an integrated view of the risk involved in the portfolio of each individual client comprising of his positions in index futures and index options contracts. The parameters for such a model should include‑
A) Worst Scenario Loss
The worst case loss of a portfolio would be calculated by valuing the portfolio under several scenarios of
