Capital Markets in India by Chakrabarti Rajesh;De Sankar;

Author:Chakrabarti, Rajesh;De, Sankar;
Language: eng
Format: epub
Publisher: SAGE Publications India Pvt, Ltd.

Margins

Equity derivatives are subject to initial margins and mark to market margins, broadly similar to that in global markets. The margins are computed in accordance with the SPAN system originally developed by the Chicago Mercantile Exchange (CME) and now used by many derivative exchanges worldwide.

Margins are applied at the client level and the settlement guarantee of the clearing corporation also extends to the clients and does not stop at the trading member level.

Volatility is computed daily using the exponentially weighted moving average method similar to that used by Risk Metrics. Margins are revised based on this estimated volatility.

Cross margining is available between positions in the futures market and the cash market. Specifically, positions in index futures can be offset against positions in the constituent stocks in the cash market or in the single stock futures market. Positions in single stock futures can also be offset against positions in the cash market in these stocks. Where cross margining is applicable, a spread margin of 25 percent of the applicable positions is applied on both positions. Calendar spreads are also eligible for margin benefits.

Position Limits

Market-wide Position Limit

There is no market-wide position limit for index derivatives. For single stock derivatives, there is a market-wide limit of open position (in terms of the number of underlying stock) equal to 20 percent of the free float (number of shares held by non-promoters) in the relevant underlying security. This limit is applicable on all open positions in all futures and option contracts on a particular underlying stock.

At the end of each day, the exchange tests whether the market-wide open interest for any scrip exceeds 95 percent of the market-wide position limit for that scrip. In case it does so, the exchange makes an announcement of this and from the next day onwards brokers and their clients can trade only to decrease their positions through offsetting positions. The normal trading in the scrip is resumed after the open outstanding position comes down to 80 percent or below of the market-wide position limit.

Position Limits for Foreign Institutional Investors (FIIs) and Domestic Mutual Funds

Index Options

The position limit for institutional investors in all option contracts on a particular underlying index is Rs 5 billion, or 15 percent of the total open interest of the market in index options, whichever is higher. This limit would be applicable on open positions in all options contracts on a particular underlying index.

Index Futures

The position limit for institutional investors in all index futures contracts on a particular underlying index is Rs 5 billion, or 15 percent of the total open interest of the market in index futures, whichever is higher. This limit would be applicable on open positions in all futures contracts on a particular underlying index.

Hedging Restrictions

In addition to the above, institutional investors’ exposure in equity index derivatives is subject to the following limits:

Short positions in index derivatives (short futures, short calls, and long puts) should not exceed (in notional value) the investor’s holding of stocks.

Long positions in index derivatives (long futures, long calls,

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