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6. Derivatives Market
The emergence and growth of the market for derivative instruments can be traced back to the willingness of riskaverse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. Derivatives are meant to facilitate the hedging of price risks of inventory holdings or a financial/commercial transaction over a certain period. By locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors, and thereby, serve as instruments of risk management. By providing investors and issuers with a wider array of tools for managing risks and raising capital, derivatives improve the allocation of credit and the sharing of risk in the global economy, lowering the cost of capital formation and stimulating economic growth. Now that world markets for trade and finance have become more integrated, derivatives have strengthened these important linkages between global markets, increasing market liquidity and efficiency, and have facilitated the flow of trade and finance. Following the growing instability in the financial markets, the financial derivatives gained prominence after 1970. In recent years, the market for financial derivatives has grown in terms of the variety of instruments available, as well as their complexity and turnover. Financial derivatives have changed the world of finance through the creation of innovative ways to comprehend, measure, and manage risks. India’s tryst with derivatives began in 2000 when both the NSE and the BSE commenced trading in equity derivatives. In June 2000, index futures became the first type of derivate instruments to be launched in the Indian markets, followed by index options in June 2001, options in individual stocks in July 2001, and futures in single stock derivatives in November 2001. Since then, equity derivatives have come a long way. New products, an expanding list of eligible investors, rising volumes, and the best risk management framework for exchange-traded derivatives have been the hallmark of the journey of equity derivatives in India so far. India’s experience with the equity derivatives market has been extremely positive. The derivatives turnover on the NSE has surpassed the equity market turnover. The turnover of derivatives on the NSE increased from ` 23,654 million in 2000–2001 to ` 292,482,211 million in 2010–2011, and reached ` 157,585,925 million in the first half of 2011–2012. The average daily turnover in these market segment on the NSE was ` 1,151,505 million in 2010–2011 compared to ` 723,921 in 2009–2010. India is one of the most successful developing countries in terms of a vibrant market for exchange-traded derivatives. This reiterates the strengths of the modern development in India’s securities markets, which are based on nationwide market access, anonymous electronic trading, and a predominant retail market. There is an increasing sense that the equity derivatives market plays a major role in shaping price discovery.
Table 6-1: Benchmark Indices—Contracts and Volume in Futures and Options Segment of NSE for the Fiscal Year 2010–2011 and the ﬁrst half of 2011–2012 Indices/ Period No of Contracts Traded Value (` mn.) Traded Value (US $ mn.) Percentage of Contracts to total contracts (%) No of Contracts Traded Value (` mn.) Traded Percentage Value of (US $ mn.) Contracts to total contracts (%)
2010-2011 Index Futures NIFTY MINIFTY BANKNIFTY CNXIT NFTYMCAP50 DJIA S&P500 Index Options NIFTY MINIFTY BANKNIFTY CNXIT NFTYMCAP50 S&P500 649,332,017 183,313,790 165,856 1,102,592 1,237 36,855 * * 18,800 313,348 426 7,294 * 5,088,941 4,938,375 4,105,572 421 7,018 10 163 * 79.61 423,444,062 0.02 0.14 0.00 0.00 112,011 853,488 0 1,725 20,252 * * 133,368,752 14,658,741 16,927,993 66,951 1,216 * * 37,184,645 1,626,215 4,733,010 23,249 427 * * 832,803 36,421 106,002 521 10 * * 16.35 1.80 2.08 0.01 0.00 57,212,398 6,980,517 7,606,559 34,025 188 48,003 22,910
April - September 2011
15,340,099 751,194 2,006,688 10,582 39 13,375 6,711
313,541 15,354 41,015 216 1 273 137
11.53 1.41 1.53 0.01 0.00 0.01 0.00
114,618,092 2,342,716 12,453 226,257 0 343 6,124 255 4,625 0 7 125
85.31 0.02 0.17 0.00 0.00 0.00 100.00 96.84
Total of all Indices 815,662,210 227,221,203 Total of Nifty Index Futures and Options 782,700,769 220,498,435
100.00 496,336,138 95.96 480,656,460
132,991,956 2,718,266 129,958,191 2,656,257
*:- With effective 29th August 2011, two new indices i.e. DJIA and S&P500 have been included.
Global Derivatives Markets
After the credit crisis took its toll in 2009, the global futures and options industry returned to rapid growth in 2010 after leveling off in 2009. Looking at the global trends in derivatives volume by category, we find that the currency sector was the most powerful driver of increase in the volumes of exchange-traded derivative contracts in 2010, followed by trading in agricultural derivative products, which grew at 40.73 percent (Table 6-2). The trading volume in non-precious metals, on the other hand, continued to gain in 2010 when compared to the volume in 2009, with an increase in volume by 39.17 percent.
204.18% 291.87 36.90 5.7% 39.com .67 150.52% -11. the Kospi option was responsible for most of the trading volume of the Korea Exchange.20 462. The total number of futures and options contracts traded on the 70 exchanges worldwide tracked by the Futures Industry Association went up from 17. accounting for 39.467.208.60 655. with growth rates of 42. These products are traded all across the regions.70 44.40 17.66 22.45 Jan-Dec 2009 6. For many years.19 3.08% 32. making it the second most actively traded contract across all derivatives exchanges in the world.7 billion in 2009 to 22. The newest of the group is the CSI 300 stock index futures. Most of the increase in volume came from exchanges in China.05 113.9 percent.79 6.8 percent of the global volume.3 million contracts. In India.97 % change 62. the growth story was driven mainly by financial contracts. In 2010.40 157. Table 6-3: Top 5 Exchanges in various Derivative Contracts (in million) Top 5 exchanges by number of single stock futures contracts traded in 2010 2010 1 NYSE Liffe Europe 2 National Stock Exchange of India 3 Eurex 4 Johannesburg Stock Exchange 5 Korea Exchange Top 5 exchanges by number of single stock options contracts traded in 2010 2010 1 Chicago Board Options Exchange (CBOE) 2 BM&FBOVESPA 3 International Securities Exchange (ISE) 4 NASDAQ OMX PHLX 5 Eurex 806.51% 46.305.23 733.27 175. India.40 151.678.60 Jan-Dec 2010 7.2% 30.79 946.91 282.707.285.554.401.38 723.2 percent for North America and 19.94% Contd.71 2009 179.295.40 198.ISMR Table 6-2: Global Exchange-traded Derivatives Volume by Category Derivatives Market 152 (in millions) GLOBAL Equity Index Individual Equity Interest Rate Agricultural Energy Currency Precious Metal Non-precious metal Other Total Volume Jan-Dec 2008 6.90 597.34 2009 911.99 802.2% 13.61 554.00 2. a growth of about 25.70 927.80 17.511. which began trading in April on the China Financial Futures Exchange in Shanghai. www.8 percent.83 % change -11. One of the most interesting stories in the Asia-Pacific region is the growth of equity index futures and options.75 78.3 billion in 2010. compared to 32. and the Kospi 200 index options is the region’s most actively traded equity index contract.59 2.62 5.00 643. and Korea.49 3.488.03 161.413.3% 25.90 992.0% 40.0% 15.72% -22. foreign exchange contracts in particular.2% 20.45% 0.76 44.8 percent for Europe.08 283.84 894.81 1.50 114.9% Source: Futures Industry Annual Volume Survey.nseindia.7% 10.51% -4. with some being relatively new to the market and others being very well-established. March 2011 Exchanges in Asia grew especially rapidly in 2010.60 580.3% 142. the dollar-rupee contract traded on the MCX-SX had a volume of 821.98 546.25 (%) Change 16. which is no longer the case.381.65 137.69 579.75 88.87 175.38% 20.69% 9.
5 741.01 88.9 403.71% In terms of the number of single stock futures contracts traded in 2010.1 227.9 Volume (in million) Jan-Dec 2009 3102. Table 6-4: Global Futures and Options Volume Rank 2010 1 3 2 4 7 6 5 8 10 11 13 9 14 12 2009 1 Korea Exchange 2 Eurex (includes ISE) 3 CME Group (includes CBOT and Nymex) 4 NYSE Euronext (includes all EU and US markets) 5 Chicago Board Options Exchange 6 BM&F Bovespa 7 National Stock Exchnage of India 8 Nasdaq OMX Group 9 Russian Trading systems stock exchange 10 Shanghai Futures Exchange 11 Dalian Commodity Exchange 12 Multi Commodity Exchange of India (includes MCX-SX) 13 Intercontinental Exchange (includes US.5 1422.1 1615.2 1081.7 3277.0 621.55 195.18 % change 20.4 222.04% 21.1 Jan-Dec 2008 2865.6 1675.9 495.07 367.13% 13.9 920.13% 10.96 % change -1.90% -6.8 1194.7 257.1 238.95 222. www.0 234.35 147.3 319.9 601.15 407.4 2589.9 2647.1 103. Derivatives Market ISMR Top 5 exchanges by number of Stock index options contracts traded in 2010 2010 1 Korea Exchange 2 National Stock Exchange of India 3 Eurex 4 Chicago Board Options Exchange (CBOE) 5 Taifex Top 5 exchanges by number of Stock index futures contracts traded in 2010 2010 1 CME Group 2 Eurex 3 National Stock Exchange of India 4 Osaka Securities Exchange 5 NYSE Liffe Europe Source:WFE Market Highlights 2010 695.91 2009 2.77 342.11 85. It was second in terms of the number of stock index options contracts traded and third in terms of the number of stock index futures contracts traded in 2010.920.9 1135.90 529.27 364.76 130.525.153 Contd.8 1099.5 722.78 76.8 384.71% 64.77 156.5 814.99 321.20% 16.2 140. the NSE held the second position.4 624. These rankings are based on the World Federation of Exchanges (WFE) Market Highlights 2010 (Table 6-3).5 1729.44% 9.60 94.92 270.94% -20.com .67% 3.1 3080.8 328.8 416.7 1123. UK and Canada Markets) 14 Zhengzhou Commodity Exchange Exchange Jan-Dec 2010 3748.9 2642.27 2009 703.4 434.6 Contd.5 2154.nseindia.5 3172.3 918.6 474.
1 32.9 53.0 0.nseindia.6 79.0 42.8 0.1 1.7 0.1 1.6 163.7 135.8 0.0 137.8 62.8 3.8 120.9 8.7 13.5 92.3 0.2 0.0 4.0 38.9 13.1 111.6 8.8 26.3 2.2 1.2 0.1 131.0 83.2 121.1 0.ISMR Contd.7 178.3 28.0 3.8 42.1 51.2 13.8 7.9 98.7 0.4 91.2 29.9 40.4 1.4 12.6 0. 16 15 22 17 19 20 25 18 26 23 28 27 31 33 34 30 35 32 38 40 37 46 41 44 43 39 51 45 48 47 49 50 53 52 15 JSE Securities Exchange South Africa 16 Osaka Securities Exchange 17 Boston Options Exchange 18 Taiwan Futures Exchange 19 London Metal Exchange 20 Hong Kong Exchanges & Clearing 21 Mercado Espanol de Opciones y Futuros Financieros 22 Tokyo Financial Exchange 24 Turkish Derivatives Exchange 25 Tel-Aviv Stock Exchange 26 Singapore Exchange 27 Mercado a Termino de Roasario 28 Mexican Derivatives Exchange 34 Moscow Interbank Currency Exchange 32 Tokyo Commodity Exchange 30 Bourse de Montreal 33 Tokyo Stock Exchange 31 National Commodity & Derivatives Exchange (India) 36 Oslo stock Exchange 37 Budapest Stock Exchange 35 Warsaw Stock Exchange 42 Tokyo Grain Exchange 38 Athens Derivatives Exchange 45 One Chicago 43 Kansas City Board of Trade 41 ELX 46 Central Japan Commodity Exchanges 44 Thailand Futures Exchange 47 New Zealand Futures Exchange 49 Minneapolis Grain Exchange 50 Wiener Boerse 51 Dubai Mercantile Exchange 53 Kansai Commodities Exchange 52 Mercado a Termino de Buenos Aires 169.9 54.2 4.1 0.5 11.0 1.7 113.5 1.4 66.8 139.5 5.4 61.2 70.4 7.8 14.0 3.3 26.9 41.1 0.6 16.0 83.5 1.6 32.6 166.9 3.6 11.1 70.7 4.5 93.8 5.5 48.0 27.1 0.4 1.2 Derivatives Market 154 166. March 2011 Notes: # new entrants in the list by way of new exchange or new merged exchange Ranking does not include exchanges that do not report their volume to the FIA www.0 5.2 513.7 136.8 4.4 70.2 Source: Futures Industry Annual Volume Survey.9 196.1 13.8 13.6 44.com .6 61.3 116.0 80.7 2.5 24.8 19.2 64.8 34.2 105.
the SEBI—based on the recommendations of the Derivatives Market Review Committee and in consultation with stock exchanges—decided to provide flexibility to the stock exchanges to offer: a) b) c) d) Cash settlement (settlement by payment of differences) for both stock options and stock futures. III. the SEBI had specified that the margin shall be the higher of 10 percent or 1. improving its worldwide ranking from 15th in 2006 to eighth position in 2008. 2001 and November 02. The NSE improved its ranking in 2010 in terms of traded volumes in futures and options taken together.5 times the standard deviation (of daily logarithmic returns of the stock price). the SEBI decided to permit the stock exchanges to introduce option contracts on the SENSEX and the Nifty with a tenure up to five years. and the gross short open position in stock options in a particular underlying.155 Derivatives Market ISMR Table 6-4 provides ranking of the various exchanges in terms of the number of futures and options traded and/or cleared in 2010 and 2009. in consultation with the stock exchanges. seventh in 2009. respectively. vide its circular dated April 27. decided to permit stock exchanges to introduce derivatives contracts on volatility index. The stock exchanges shall review the lot size once in six months. or Physical settlement (settlement by delivery of underlying stock) for both stock options and stock futures. and fifth in 2010. 2010. or Physical settlement for stock options and cash settlement for stock futures. Policy Developments I. V. the capital market regulator. regarding the introduction of index options with a tenure up to three years. 2001 regarding the settlement of stock options and stock futures contracts. Introduction of derivative contracts on Volatility Index In continuation to the SEBI circular dated January 15. the SEBI decided (vide its circular dated July 7. www. Physical settlement of stock derivatives In continuation to SEBI’s circular dated June 20. 2008. and three quarterly contracts of the cycle March/June/September/December. Revised exposure margin for exchange-traded equity derivatives In a modification to SEBI’s circular on exposure margin.92 percent in 2010. 2010) that the exposure margin for exchange-traded equity derivatives shall be the higher of 5 percent or 1. decided to standardize the lot size for derivative contracts on individual securities. In its earlier circular on October 15.com . 2008. revise the lot size by giving an advance notice of at least two weeks to the market. 2008 regarding the introduction of the volatility index. Introduction of index options with tenure up to ﬁve years Further to SEBI’s circular dated January 11. The traded volumes in the derivatives segment of the NSE saw an increase of 75. and wherever warranted. The stock exchanges shall ensure that the lot size is the same for an underlying traded across exchanges. on the said exposure margin. Standardized lot size for derivative contracts on individual securities The SEBI. The introduction of derivatives contracts on volatility index is subject to the condition that the underlying volatility index has a track record of at least one year. IV. based on the average of the closing price of the underlying for the last one month. II. or Cash settlement for stock options and physical settlement for stock futures. The introduction of such five-year option contracts will be subject to the condition that there are eight semi-annual contracts of the cycle June/December together with three serial monthly contracts.5 times the standard deviation (of daily logarithmic returns of the stock price) of the notional value of the gross open position in single stock futures. compared to the volumes in 2009.nseindia.
c) That index is “broad based”.com . Futures on 91-day Government of India Treasury Bill (T-Bill) As a continuation of the SEBI circular no. Trading in derivatives on foreign stock indices shall be restricted to the residents of India. www. After the introduction of derivatives on a particular stock index.ISMR Derivatives Market 156 Vide its circular dated July 15. and the final settlement price would be the RBI Reference Rate on the date of expiry of the contracts. a stock exchange may change to another style of exercise only after seeking prior approval from the SEBI. OR That Index has a market capitalization of at least US $ 100 billion. A stock exchange may introduce derivatives on a foreign stock index if: a) b) Derivatives on that index are available on any of the stock exchanges prescribed by the SEBI. and No single constituent stock has more than 25 percent of the weight—computed in terms of free-float market capitalization—in the index. and new strikes may be introduced on those contracts. the SEBI has decided that the stock exchanges may introduce physical settlement in a phased manner. Further. the existing unexpired contracts would be traded until expiry. traded. VI. shall apply to the European-style stock options. 2010. European-style stock options In continuation of SEBI’s circular dated June 20. VIII. Premium styled European call and put options can be introduced on the USD-INR spot rate. however. the derivatives on that index figure among the top 15 index derivatives globally. On introduction. Options on USD-INR spot rate The SEBI. vide its circular dated July 30. the SEBI decided to permit the introduction of futures on 91-day Government of India Treasury Bills (T.Bill) on the currency derivatives segment of the stock exchanges. physical settlement for all stock options and/or all stock futures must be completed within six months of its introduction. 2001 on the exercise style of stock option contracts.nseindia. has allowed for the introduction of options on USD-INR spot rate on the currency derivatives segment of the stock exchanges. 2009 regarding Exchange Traded Interest Rate Futures. including the risk management framework applicable for American-style stock options. SEBI/DNPD/Cir-46/2009 dated August 28. The derivatives contracts on that foreign stock index would be denominated. However. a stock exchange shall offer options contracts of the same style on all eligible stocks. In terms of trading volumes (number of contracts). no fresh contract shall be introduced on that index. and settled in Indian Rupees. The absolute numerical value of the underlying foreign stock index shall be denominated in Indian Rupees (`). The contract would be settled in cash in Indian rupees. After opting for a particular style of exercise. VII. if that stock index fails to meet any of the eligibility criteria for three months consecutively. The contracts specifications. 2010. Introduction of derivative contracts on foreign stock indices The SEBI has decided to permit the stock exchanges to introduce derivative contracts (Futures and Options) on foreign stock indices in the equity derivatives segment. An index is broad based if: • • The index consists of a minimum of 10 constituent stocks. the SEBI (in consultation with the stock exchanges) decided to provide flexibility to the stock exchanges to offer either Europeanstyle or American-style stock options. IX.
whichever is higher crore. where yf is the weighted average discount yield obtained from the weekly auction of 91-day T-Bills conducted by the RBI on the day of expiry Settled in cash in Indian Rupees Price quotation Contract value Quantity freeze Base price Price operating range Position limits Initial margin Extreme loss margin Settlement Daily settlement Daily settlement price & Value Daily contract settlement value Final contract settlement value Mode of settlement X. 2011). Liquidity enhancement schemes for illiquid securities in equity derivatives segment (Circular date : June 02. where y is the futures discount yield e. LADNRO/ GN/2011-12/01/11486 dated April 6. In the absence of trading in the prescribed time limit.0.25 paise (i.1 percent of the notional value of the contract on the first day and 0.03 percent of the notional value of the contract for all gross open positions Daily settlement MTM: T + 1 in cash Delivery settlement: Last business day of the expiry month.com .0.25 * 5) = ` 197500 7. whichever is higher SPAN ® (Standard Portfolio Analysis of Risk) based subject to minimum of 0. Mark to Mark (MTM): T + 1 in cash ` (100 . Self clearing member in the currency derivatives (Circular date : May 13.157 Derivatives Market ISMR Contracts Speciﬁcations Symbol Market type Instrument type Unit of trading Underlying Tick size Trading hours Contract trading cycle Last trading day 91DTB N FUTIRT One contract denotes 2000 units (face value ` 2 lakh) 91-day Government of India (GOI) Treasury Bill 0. for a futures discount yield of 5 percent p. has the SEBI clarified that such self clearing member shall have a minimum net worth of ` 5 crore.e. the quote shall be 100 .0. the SEBI has decided to permit stock exchanges www.5 = ` 95 ` 2000 * (100 . the contract value shall be 2000 * (100 .25 * yw). for a futures discount yield of 5 percent p. XI. theoretical futures yield shall be considered. 2011) In consultation with the BSE. the NSE. the expiry day would be the previous working day 100 minus futures discount yield e.25 * yf).. and the USE.nseindia. ` 0.. 2011) With regard to the newly created category of self clearing member in the currency derivatives segment of a stock exchange (communicated vide notification no.00 pm In case last Wednesday of the month is a designated holiday.001 lots or greater Theoretical price of the first day of the contract On all other days.0025) Monday to Friday 9:00 am to 5:00 pm 3 serial monthly contracts followed by 3 quarterly contracts of the cycle March/June/ September/December Last Wednesday of the expiry month at 1. where yw is the weighted average futures yield of trades during the time limit as prescribed by the NSCCL.a.05 percent of the notional value of the contract thereafter 0..g.a.0.25 * y). ` 2000 * daily settlement price ` 2000 * (100 . the MCX-SX.g.. the quote price corresponding to the daily settlement price of the contracts +/-1 percent of the base price Clients Trading Members 6 percent of total open interest or ` 300 15 percent of the total open interest or ` 1000 crore..
however. or 25 percent of the free reserves of the stock exchange. and that its implementation and outcome are monitored by the Board at quarterly intervals. www. There are four entities in the trading system: a. The stock exchange shall ensure that the LES. it shall be discontinued as soon as the average trading volume on the stock exchange during the last 60 trading days reaches 1 percent of the market capitalization of the underlying. and clear trades for themselves and/or others.com . called the NEAT-F&O trading system. including participants. and Securities where the average trading volume for the last 60 trading days on the stock exchange is less than 0. The LES can be introduced in any of the following securities: a) b) c) New securities permitted on the stock exchange after the date of this circular. or six months from the introduction of the scheme. screen-based. the market design enumerated in this section is with reference to the derivative segment of the NSE (hereafter referred to as the F&O segment). including options and warrants. and clear and settle for their trading members. Securities in the case of a new stock exchange /new segment. Typically. The different aspects of the market design for the F&O segment of the exchanges can be summarized as follows: Trading Mechanism The futures and options trading system of the NSE. d. or Shares. who are members of the NSE. whichever is higher. who are members of the NSCCL. including any modifications therein or its discontinuation. The LES can be discontinued at any time with an advance notice of 15 days. a stock exchange chooses option ‘b’. has the prior approval of the Board. but settle their trades through a single clearing member only. Professional clearing members (PCM) are clearing members who are not trading members. Hence. These clients may trade through multiple trading members. Trading members. provides a fully automated. The incentives under the LES shall be transparent and measurable. of the stock exchange. b. anonymous order driven trading system for derivatives on a nationwide basis.nseindia. and its outcome (incentives granted and volume achieved. banks and custodians become PCMs. and carry out risk management activities and confirmation/inquiry of trades through the trading system. and an online monitoring and surveillance mechanism. The exchanges have to disclose to the market at least 15 days in advance. cash payment. adjustment in fees in other segments. The NSE’s market share in the total turnover of the derivatives market is a tad lower than the 100 percent mark. These may take one of two forms: a) b) Discount in fees. However.ISMR Derivatives Market 158 to introduce one or more liquidity enhancement schemes (LES) to enhance the liquidity of illiquid securities in their equity derivatives segments. whichever is earlier. the shares—including the shares that may accrue on the exercise of warrants or options—given as incentives under all LES during a financial year shall not exceed 25 percent of the issued and outstanding shares of the stock exchange as on the last day of the preceding financial year. If. If a stock exchange chooses option ‘a’. the incentives under all the LES during a financial year shall not exceed 25 percent of the net profits. Clearing members. liquidity enhancer-wise and security-wise) should be disseminated monthly within a week of the close of the month. and can trade either on their own account or on behalf of their clients.1 percent of the market capitalization of the underlying. Market Design Only two exchanges in India have been permitted to trade in equity derivatives contracts—the NSE and the BSE. Participants are clients of trading members such as financial institutions. These clearing members are also trading members. c. as per the audited financial statements of the preceding financial year.
85 each side tal volume) More than ` 7500 crore and up to ` 15000 crore (on incremen.com . the Bank Nifty Index. • Stock futures and options based on 228 individual securities. Taxable securities transaction Sale of an option in securities Sale of an option in securities. • Index as well as stock options and futures are cash settled. e. i. • Index futures contracts on the global indices Dow Jones Industry Average and the S&P 500. subject to a minimum of ` 1. w.80 each side tal volume) Exceeding ` 15000 crore (on incremental volume) ` 1.017 Taxable Value Option premium Settlement Price Price at which such ‘futures’ are traded Payable by Seller Purchaser Seller Clearing and Settlement The value of taxable securities transaction relating to an “option in securities” shall be the option premium.017 0. and option contracts on the S&P 500. 2008. instead of on the strike price as levied in the previous case.) • Index futures and index options contracts on the NSE based on the Nifty 50 Index.` 1. 2009. in the case of the sale of an option in securities. in the case of the sale of an option in securities.. where option is exercised Sale of a futures in securities Rate (percent) 0. Contribution to Investor Protection Fund The trading members contribute to the Investor Protection Fund of the F&O segment at the rate of ` 1 per ` 100 crore of the traded value (each side) in the case of the futures segment.e.` 1. however. and the Nifty Midcap 50.75 each side Securities Transaction Tax The trading members are also required to pay a securities transaction tax (STT) on non-delivery transactions at the rate of 0. through the exchange of cash. and ` 1 per ` 100 crore of the premium amount (each side) in the case of the options segment.002 percent). June 1.017 percent (payable by the seller) for derivatives. the transaction charges are levied on the premium value at the rate of 0. The NSE has reduced the transaction charges for trades done in the futures segment from its present level to a slab-based structure as given below. the CNX IT Index. w. (The eligibility criteria for membership on the F&O segment are discussed in Chapter 4.125 0.05 percent (each side). October 1.nseindia. The value of taxable securities transaction relating to an “option in securities” will be the settlement price. Total Traded Value in a Month Up to first ` 2500 crore Revised Transaction Charges (` per lakh of Traded Value) ` 1. www.000 per year.f. For the transactions in the options sub-segment. f.e.00.159 Derivatives Market ISMR Membership Contracts available Charges The members are admitted by the NSE for its F&O segment in accordance with the rules and regulations of the Exchange and the norms specified by the SEBI. • The National Securities Clearing Corporation Limited (NSCCL) undertakes the clearing and settlement of all trades executed on the futures and options (F&O) segment of the NSE. where the option is exercised. The transaction charges payable to the exchange by the trading member for the trades executed by him/her on the F&O segment are fixed at ` 2 per lakh of turnover (0.90 each side More than ` 2500 crore and up to ` 7500 crore (on incremen.
• Eligibility criteria of stocks The stocks are to be chosen from among the top 500 stocks in terms of average daily market capitalization and average daily traded value in the previous six months on a rolling basis. based on the contract settlement price for each contract at the end of the day.ISMR Risk Management Framework Derivatives Market 160 The most critical component of the risk containment mechanism for the F&O segment is the margining system and the online position monitoring system. and so on) are quite stringent. and 90 percent. 1. g. 1 SPAN ® is a registered trademark of the Chicago Mercantile Exchange (CME) used here under license.com . The NSCCL assists the CM in monitoring the intra-day limits set up by a CM. based on the parameters defined by the SEBI. 80 percent. The actual position monitoring and margining is carried out online through the Parallel Risk Management System (PRISM). The open positions of the members are marked to market. f. The CMs are provided with a trading terminal for monitoring the open positions of all the TMs clearing and settling through him/her. A CM may set the limits for the TM clearing and settling through him/her. The salient features of the risk containment mechanism on the F&O segment are: a. The CM in turn collects the initial margin from the trading members (TMs) and their respective clients. Therefore. d. Risk Containment Measures Eligibility criteria for stock selection The eligibility of a stock/index for trading in the derivatives segment is based upon the criteria laid down by the SEBI through the various circulars issued from time to time. The NSCCL has developed a comprehensive risk containment mechanism for the F&O segment. It follows a Value-at-Risk (VaR) based margining computed through SPAN. it stops that particular TM from further trading. b. Margin violations result in the disablement of the trading facility for all TMs of a CM in the case of a violation by the CM. The NSCCL charges an upfront initial margin for all the open positions of a clearing member (CM). A member is alerted of his/her position to enable him/her to adjust his/her exposure or to bring in additional capital. Limits are set for each CM based on his/her effective deposits. The SPAN system is for the computation of online margins. The online position monitoring system generates alert messages whenever a CM reaches 70 percent. while the TMs are monitored for initial margin violation and position limit violation. and a disablement message at 100 percent of the limit. The NSCCL monitors the CMs for initial margin violation and exposure margin violation. The difference is settled in cash on a T+1 basis. e.nseindia. the requirements for membership in terms of capital adequacy (net worth. c. A separate settlement guarantee fund for this segment has been created out of the deposit made by the members. The NSCCL’s online position monitoring system monitors a CM’s open position on a real time basis. The financial soundness of the members is the key to risk management. www. security deposits. It specifies the initial margin requirements for each futures/options contract on a daily basis. The PRISM uses SPAN®1 (Standard Portfolio Analysis of Risk). and whenever a TM exceeds the limits. the following criteria have been adopted by the NSE for selecting stocks and indices on which futures and options contracts would be introduced. Based on the SEBI guidelines and as a surveillance measure.
In the subsequent contract months. middle month. or assets. • • In the contract month in which the post-restructured company begins to trade. the normal rules for entry and exit of stocks in terms of eligibility requirements would apply. the exchange shall not permit further derivative contracts on this stock. the stock is required to fulfill the eligibility criteria for three consecutive months to be reintroduced for derivatives trading. the exchange shall introduce near month. For this purpose.. Continued Eligibility • 2. the continued eligibility criteria is that the market wide position limit in the stock shall not be less than ` 60 crore. for eligibility to reintroduce derivative contracts on that company from the first day of listing of the postrestructured company’s/companies’ (as the case may be) stock (herein referred to as post-restructured company) in the underlying market: • • • The futures and options contracts on the stock of the original (pre-restructured) company were traded on any exchange prior to its restructuring. If these tests are not met. If an existing security fails to meet the eligibility criteria for three consecutive months. For an existing F&O stock. in the opinion of the exchange. then the exchange takes the following course of action in dealing with the existing derivative contracts on the pre-restructured company and the introduction of fresh contracts on the post-restructured company.e. Eligibility criteria of stocks for derivatives trading especially on account of corporate restructuring The eligibility criteria of stocks for derivatives trading on account of corporate restructuring are given below. The post-restructured company would be treated like a new stock if it is. The market wide position limit (MWPL) in the stock should not be less than ` 100 crore. and far month derivative contracts on the stock of the restructured company. likely to be at least one-third the size of the pre-restructured company in terms of revenues. or (where appropriate) analyst valuations. the existing unexpired contracts may be permitted to trade until expiry. The pre-restructured company had a market capitalization of at least ` 1000 crore prior to its restructuring. However. extremely low free-float) that would render the company ineligible for derivatives trading. and the stock’s median quarter-sigma order size over the last six months shall not be less than ` 2 lakh. 3. The MWPL of the open position (in terms of the number of underlying stock) on futures and option contracts on a particular underlying stock shall be 20 percent of the number of shares held by non-promoters in the relevant underlying security (i. • If the above conditions are satisfied. and In the opinion of the exchange. no fresh month contract shall be issued on that security. 4. a stock’s quarter-sigma order size shall mean the order size (in value terms) required to cause a change in the stock price equal to one-quarter of a standard deviation. free-float holding). and new strikes may also be introduced in the existing contract months. All the following conditions should be met in the case of the shares of a company undergoing restructuring through any means. once the stock is excluded from the F&O list.com . and future month series shall not be introduced. it shall not be considered for reinclusion for a period of one year. www. Further. In such instances. Reintroduction of dropped stocks A stock that is dropped from derivatives trading may become eligible once again.161 • Derivatives Market ISMR The stock’s median quarter-sigma order size over the last six months should be not less than ` 5 lakh. The market wide position limit (number of shares) shall be valued taking the closing prices of stocks in the underlying cash market on the date of expiry of contract in the month.nseindia. the scheme of restructuring does not suggest that the post-restructured company would have any characteristics (for example.
33 times the liquid net worth of the member Stock Options Stock Futures Higher of 5 percent Higher of 5 percent or 1. The above criteria are applied every month.5 sigma of the sigma of the notional value notional value of of gross open position gross open position www. • • • • Exposure Monitoring and Position Limit Another component of the risk management framework for the derivatives segment is the stipulation of exposure limits and position limits on trading in the different categories of contracts by the market participants. A CM is required to ensure the collection of adequate initial margins from his TMs upfront.33 times the liquid net worth of the member. Additionally. a premium margin is charged at the client level. one of the critical components of the risk containment mechanism for the F&O segment is the margining system. Client Margins: The NSCCL intimates all the members of the margin liability of each of their clients. no fresh month contract shall be issued on that index. the members are required to report the details of the margins collected from their clients to the NSCCL. and on a net basis for proprietary positions. However. Exposure margins: Clearing members are subject to exposure margins in addition to initial margins.com . and new strikes may also be introduced in the existing contracts. Assignment Margin for Options on Securities: An assignment margin is levied in addition to the initial margin and the premium margin.nseindia. no single ineligible stock in the index shall have a weightage of more than 5 percent in the index. It is required to be paid on the assigned positions of the CMs towards the final exercise settlement obligations for option contracts on individual securities. This margin is required to be paid by a buyer of an option until the premium settlement is complete. until such obligations are fulfilled. These are summarized below: Index Options Exposure Limit 33. • Margins Requirements As discussed earlier. This is explained below: • Initial margin: The margin in the F&O segment is computed by the NSCCL up to the client level for the open positions of CMs/TMs.5 or 1.ISMR 5. which holds the client margin monies in trust (to the extent reported by the member as having been collected from their respective clients). The index on which futures and options contracts are permitted shall be required to comply with the eligibility criteria on a continuous basis. LESS initial margin applicable to the total gross position at any given point of time of all trades cleared through the clearing member. However. Liquid net worth is the total liquid assets deposited with the exchange/clearing corporation towards initial margin and the capital adequacy. The TM is required to collect adequate initial margins upfront from his clients. the existing unexpired contacts shall be permitted to trade until expiry. The NSCCL collects the initial margin for all the open positions of a CM based on the margins computed by the NSE-SPAN. • Eligibility criteria of indices Derivatives Market 162 The futures and options contracts on an index can be introduced only if the stocks contributing to 80 percent weightage of the index are individually eligible for derivatives trading. if the index fails to meet the eligibility criteria for three months consecutively. Premium Margin: In addition to the initial margin. These are required to be paid upfront on a gross basis at the individual client level for client positions. Index Futures 33. The margin is charged on the net exercise settlement value payable by a CM towards the final exercise settlement.
open positions in whichever is lower. The market wide limit of open position (in terms of the number of underlying stock) on futures and option contracts on a particular underlying stock should be 20 percent of the number of shares held by non-promoters in the relevant underlying security. i. total open interest • For stocks having applicable MWPL less in the market than ` 500 crore. The trading member position limits The trading • For stocks having applicable market wide in equity index option contracts is member position limit (MWPL) of ` 500 crore or higher of ` 500 crore or 15 percent position limits more. This limit would be applicable on open positions in all futures contracts on a particular underlying index. whichever is lower. This limit is applicable on all open positions in all futures and option contracts on a particular underlying stock. across all the derivative contracts on an underlying should not exceed 1 percent of the free-float market capitalization (in terms of number of shares) or 5 percent of the open interest in all derivative contracts in the same underlying stock (in terms of number of shares). underlying index. whichever is lower. the combined futures and options of the total open interest in the in equity index position limit is 20 percent of applicable market in equity index option futures MWPL or ` 300 crore. all futures contracts on a particular underlying index. whichever is lower. whichever is higher. whichever is higher.163 Client Level Derivatives Market ISMR Trading Member Level Market wide The gross open position for each client. percent of the applicable MWPL. Position limits for FIIs and Mutual Funds: Index Options ` 500 crore or 15 percent of the total open interest of the market in index options. free–float holding. Stock Options Stock Futures For stocks having applicable market wide position limit (MWPL) of ` 500 crore or more. and the This limit futures position cannot exceed 20 percent is applicable on of the applicable MWPL or ` 50 crore. www. whichever is lower. the combined futures in equity index and options position limit would be 20 futures contracts. contracts. whichever is higher.e. within which stock futures position cannot exceed 10 percent of the applicable MWPL or ` 150 crore. the combined futures and options position limit is 20 percent of the applicable MWPL or ` 300 crore.com . This limit would be contracts is higher within which stock futures position cannot applicable on open positions in of ` 500 crore exceed 10 percent of the applicable MWPL all option contracts on a particular or 15 percent of the or ` 150 crore..nseindia. Index Futures ` 500 crore or 15 percent of the total open interest of the market in index futures. This limit would be applicable on open positions in all options contracts on a particular underlying index.
short calls. at the same time.nseindia.com . Risk arrays and other necessary data inputs for margin calculation are provided to the members daily in a file called the SPAN Risk Parameter file. for this new product is summarized below as follows : www. such as extremely deep out-of-the-money short positions and inter-month risk. The SPAN considers the uniqueness of the option portfolios. and long puts) not exceeding (in notional value) the FII’s/MF’s holding of stocks. NSCCL-SPAN The objective of the NSCCL-SPAN is to identify the overall risk in the portfolio containing all the futures and options contracts for each member. while. The following factors affect the value of an option: • • • Underlying market price. The results of these calculations are called risk arrays. FIIs and MFs can take exposure in equity index derivatives subject to the following limits: a) Short positions in index derivatives (short futures. The NSCCL generates six risk parameter files for a day. b) Long positions in index derivatives (long futures. which are provided on the Website of the Exchange. to determine their SPAN margin requirements. 2008. Hence. and also to revalue the same under various scenarios of changing market conditions. The SPAN has the ability to estimate the risk for combined futures and options portfolios. and short puts) not exceeding (in notional value) the FII’s/MF’s holding of cash. The complex calculations (e. The market design. the combined futures and options position limit is 20 percent of the applicable MWPL. Volatility (variability) of underlying instrument. As these factors change. and similar instruments.g. taking into account prices and volatilities at various time intervals.ISMR In addition to the above. the pricing of options) in the SPAN are executed by the NSCCL. and the futures position cannot exceed 20 percent of the applicable MWPL or ` 50 crore. The members can apply the data contained in the Risk Parameter files to their specific portfolios of futures and options contracts. It then sets the margin requirement to cover this one-day loss. the members need not execute a complex option pricing calculation. Thus. the value of the options maintained within a portfolio also changes. whichever is lower. the SPAN constructs the scenarios of probable changes in underlying prices and volatilities in order to identify the largest loss a portfolio might suffer from one day to the next. T-Bills. based on the 99 percent VaR methodology. The system treats futures and options contracts uniformly. Derivatives Market 164 For stocks having applicable market wide position limit (MWPL) less than ` 500 crore. long calls. which is performed by the NSCCL. government securities. Currency derivatives were launched on the NSE in August. recognizing the unique exposures associated with options portfolios. Its overriding objective is to determine the largest loss that a portfolio might reasonably be expected to suffer from one day to the next day. and Time to expiration. including the risk management framework..
DSP of the contract Theoretical price on the 1st day of the contract. Pound–Indian Rupee (GBP-INR). and Japanese Yen–Indian Rupee (JPY-INR) are summarized in the table below. on all other days.nseindia. on all other days. DSP of the contract Theoretical price on the 1st day of the contract. Daily Settlement Price (DSP) of the contract Theoretical price on the 1st day of the contract.com .0025 Monday to Friday 9:00 am to 5:00 pm 12-month trading cycle Two working days prior to the last business day of the expiry month at 12 noon Last working day (excluding Saturdays) of the expiry month. on all other days. Symbol Market Type Instrument Type Unit of trading Underlying/Order Quotation Tick size Trading hours Contract trading cycle Last trading day Final settlement day Quantity Freeze Base price USD-INR Normal FUTCUR EUR-INR Normal FUTCUR GBP-INR Normal FUTCUR 1-1 unit denotes 1000 Pound Sterling The exchange rate in Indian Rupees for Pound Sterling JPY-INR Normal FUTCUR 1-1 unit denotes 100000 Japanese Yen The exchange rate in Indian Rupees for 100 Japanese Yen 1-1 unit denotes 1-1 unit denotes 1000 US $ 1000 Euro The exchange rate The exchange in Indian Rupees rate in Indian for US Dollars Rupees for Euro 0. The last working day will be the same as that for Interbank Settlements in Mumbai. Euro–Indian Rupee (EUR-INR). 10.165 Derivatives Market ISMR Market Design for Currency Futures The contract specifications for US Dollars–Indian Rupee (USD-INR).25 paise or ` 0.5 percent of base price Higher of 6 percent of the total open interest or US $ 10 million Higher of 15 percent of the total open interest or US $ 50 million Higher of 6 percent of the total open interest or Euro 5 million Higher of 6 Higher of 6 percent of the percent of the total open interest or JPY 200 total open interest million or GBP 5 million Higher of 15 Higher of 15 percent of the percent of the total total open interest or JPY 1000 open interest or million GBP 25 million Higher of 15 Higher of 15 percent of the percent of the total total open interest or JPY 2000 open interest or million GBP 50 million Trading Members Banks Initial margin higher of 15 percent of the total open interest or Euro 25 million Higher of 15 percent Higher of 15 of the total open percent of interest or US $ 100 the total open million interest or Euro 50 million SPAN-based margin www. on all other days. DSP of the contract Price operating range Position limits Tenure up to 6 months Tenure greater than 6 months Clients +/-3 percent of base price +/.001 or greater Theoretical price on the 1st day of the contract.
1999 as ‘AD Category-I bank’ are permitted to become trading and clearing members of the currency futures market of the recognized stock exchanges. and circulars of the Exchange: • • • • Individuals. or institutions.ISMR Extreme loss margin Derivatives Market 166 1 percent of the 0. 1932. and Banks recognized by the NSEIL/NSCCL for the issuance of bank guarantees. provided they fulfill the prescribed criteria: • • SEBI Registered Custodians.7 percent of the value of the value of the gross value of the gross value of the gross gross open position open position open position open position ` 400 for spread of 1 month ` 500 for spread of 2 months ` 700 for spread of 1 month ` 1000 for spread of 2 months ` 1500 for spread ` 600 for spread of 1 month of 1 month ` 1800 for spread ` 1000 for spread of 2 months of 2 months Calendar spreads ` 800 for spread of 3 ` 1500 for spread ` 2000 for spread ` 1500 for spread of 3 months months of 3 months and of 3 months and and more more more ` 1000 for spread of 4 months and more Settlement Mode of settlement Daily settlement price (DSP) Final settlement price (FSP) Daily settlement: T + 1 Final settlement: T + 2 Cash settled in Indian Rupees Calculated on the basis of the last half an hour weighted average price RBI reference rate RBI rate reference Exchange rate published by the RBI in its Press Release entitled “RBI reference Rate for US $ and Euro” Exchange rate published by the RBI in its Press Release entitled “RBI reference Rate for US $ and Euro” Eligibility criteria The following entities are eligible to apply for membership subject to the regulatory norms and provisions of the SEBI and as provided in the rules. or subsidiaries of such corporations. 1957. companies. Corporations. Banks authorized by the RBI under section 10 of the Foreign Exchange Management Act. Minimum CRAR of 10 percent.5 percent of the 0. or institutions set up for providing financial services. and Such other persons as may be permitted under the Securities Contracts (Regulation) Rules. subject to fulfilling the following minimum prudential requirements: • • Minimum net worth of ` 500 crore.nseindia. regulations. Partnership Firms registered under the Indian Partnership Act.com . www. Professional Clearing Member (PCM) The following persons are eligible to become PCMs of the NSCCL for currency futures derivatives.3 percent of the 0. on their own account and on behalf of their clients. bye-laws. companies.
etc.com . the applicant has to ensure that at least individual/one partner/one designated director/ compliance officer would have a valid NCFM certification as per the requirements of the Exchange. The above norm would be a continued admittance norm for membership of the Exchange. The initial margin requirements are based on a 99 percent VaR over a one-day time horizon. on an intra-day basis. subject to approval from the respective regulatory departments of the RBI. Strict enforcement of the “Know your customer” rule. which is a portfolio-based system. as applicable at the time of admission within three months of intimation of admission as a trading member. The members of the derivatives segment are also required to make their clients aware of the risks involved in derivatives trading by issuing the Risk Disclosure Document to the client. the applicant shall identify a dominant promoter group as per the norms of the Exchange at the time of making the application. Initial Margins: The NSCCL collects an initial margin upfront for all the open positions of a CM based on the margins computed by the NSCCL-SPAN®. However. Other applicable eligibility criteria • Where the applicant is a partnership firm. • • • • • • Margins The NSCCL has developed a comprehensive risk containment mechanism for the currency derivatives segment. or as may be specified by the relevant authority from time to time. Extreme Loss margins: In addition to initial margins. Similarly. The AD Category-I banks that do not meet the above minimum prudential requirements and the AD Category-I banks that are Urban Co-operative banks or State Co-operative banks can participate in the currency futures market only as clients. deposits. The Exchange may specify such standards for investor service and infrastructure with regard to any category of applicants as it may deem necessary. Made a net profit for the last three years. where it may not be possible to collect mark-to-market settlement value. At any point of time. for margining. The most critical component of a risk containment mechanism for the NSCCL is the online position monitoring and margining system. from time to time. ISMR The AD Category-I banks that fulfill the prudential requirements are required to lay down detailed guidelines with the approval of their Boards for the trading and clearing of currency futures contracts and the management of risks. Any change in the shareholding of the partnership firm including that of the said dominant promoter group or their shareholding interest shall be effected only with the prior permission of the NSEIL/SEBI. The applicable extreme loss margin on the mark to market value of the gross open positions is as shown below. FIIs and NRIs are not allowed to trade in currency futures market. An applicant must be in a position to pay the membership and other fees. The actual margining and position monitoring is done online. 1. A CM is in turn required to collect the initial margin from the TMs and his respective clients. the clearing members are subject to extreme loss margins. or as per the time schedule specified by the Exchange. before the commencement of trading on the next day. in the case of futures contracts. the initial margin is computed over a two-day time horizon. The trading members and sales persons in the currency futures market must have passed a certification program that is considered adequate by the SEBI. The NSCCL uses the SPAN® system.nseindia. and obtaining a copy of the same duly signed by the client.167 • • Derivatives Market Net NPA should not exceed 3 percent. applying the appropriate statistical formula. a TM is required to collect upfront margins from his clients. • www. which requires that every client shall be registered with the derivatives broker.
and December Two business days prior to the last working day of the delivery/expiry month 1251 lots or greater www. and circulars of the Exchange: • Existing members who are registered in either the currency derivatives segment or the F&O segment shall be eligible to trade in interest rate futures (IRF). whichever is higher Initial margin Extreme loss margin Settlement Daily settlement price Delivery Settlement SPAN-based margin 0. June. September.7 percent of the value of gross open position the gross open position the gross open position the gross open position Market Design for Interest Rate Futures Eligibility Criteria The following entities are eligible to apply for membership. • The contract specifications of IRF are as follows: Symbol Market Type Instrument Type Unit of trading Underlying Tick size Trading hours Contract trading cycle Last trading day Quantity Freeze Base price Theoretical price of the 1st day of the contract.com . whichever is higher ` 300 crore.3 percent of the value of 0. regulations. subject to the regulatory norms and provisions of the SEBI and as provided in the rules. DSP of the contract Price operating range +/.0025 Monday to Friday 9:00 am to 5:00 pm Four fixed quarterly contracts for the entire year. New members interested in participating in IRF would be required to get registered in the currency derivatives segment of the Exchange in order to trade in IRF.3 percent of the value of the gross open positions of the futures contract Daily settlement MTM: T + 1 in cash Delivery settlement: Last business day of the expiry month Closing price or theoretical price 10YGS7 Normal FUTIRD 1 lot-1 lot is equal to notional bonds of FV ` 2 lakh 10-Year Notional Coupon bearing Government of India (GOI) security (Notional Coupon 7 percent with semi-annual compounding) ` 0. bye-laws.nseindia.5 percent of the base price Position limits Clients Trading Members 6 percent of the total open interest or 15 percent of the total open interest or ` 1000 crore.5 percent of the value of 0. and ` 1000 lakh for trading cum clearing membership. subject to meeting the balance sheet net worth requirement of ` 100 lakh for trading membership. on all other days. ending March.ISMR USD-INR EUR-INR GBP-INR Derivatives Market JPY-INR 168 1 percent of the value of the 0.
6 percent thereafter. before the commencement of trading on the next day. and guarantees settlement. The NSCCL acts as the legal counterparty to all deals on IRF contracts. in the case of futures contracts. where it may not be possible to collect mark–to-market settlement. The CMs who have suffered a loss are required to pay the mark-to-market loss amount to the NSCCL. a clearing member would have either pay in or pay out obligations for funds and securities separately.33 percent on the first day of IRF trading.nseindia. The initial margin requirements are based on a 99 percent VaR over a one-day time horizon. Daily mark-to-market settlement in respect of admitted deals in interest rate futures contracts is settled by cash. based on the prices/yield at 11:00 am. and beginning of the day. up to the client level. 2:00 pm. Daily Mark-to-Mark Settlement: The positions in the futures contracts for each member are marked-to-market to the daily settlement price of the futures contracts at the end of each trade day. The risk parameters are updated six times a day. and final settlement. Delivery Settlement: Trades in interest rate futures are physically settled by the delivery of government securities in the expiry month. The delivery settlement day of for interest rate futures contracts shall be the last business day of the delivery month. The profits/losses are computed as the difference between the trade price or the previous day’s settlement price and the current day’s settlement price. For IRF. The initial margin includes the SPAN margins and other such additional margins. by the debit/credit of the clearing accounts of clearing members with the respective clearing bank. Margins Initial Margin: An initial margin is payable on all the open positions of the clearing members. the yields of the benchmark 10-year security as published by FIMMDA from the NDS Order Matching platform are used. 12:30 pm. which will be scaled up by the look ahead period as may be specified by the clearing corporation from time to time. and on an upfront basis by the clearing members in accordance with the margin computation mechanism and/or system. The minimum initial margin is 2. Final settlement involves the physical delivery of the bond and can happen only on the expiry date. However. the initial margin is computed over a two-day time horizon by applying an appropriate statistical formula.com . and 1. which happens on any day in the expiry month. A multilateral netting procedure is adopted to determine the net settlement obligations (delivery/receipt positions) of the clearing members. to yield 7 percent with semiannual compounding Daily settlement price times a conversion factor + accrued interest Last business day of the expiry month Two business days prior to the delivery settlement day Invoice Price Delivery day Intent to Deliver Clearing and Settlement for IRFs The National Securities Clearing Corporation Limited (NSCCL) is the clearing and settlement agency for all deals executed in interest rate futures. The expiry month of the respective futures contract shall be the delivery month. which is passed on to the members who have made a profit. Accordingly. settlement is done at two levels: mark-to-market (MTM) settlement. www.169 Derivatives Market Daily settlement in cash GOI securities ISMR Mode of settlement Deliverable Grade Securities Conversion Factor The conversion factor would be equal to the price of the deliverable security (per Indian Rupee of principal) on the first calendar day of the delivery month. A clearing member (CM) of the NSCCL has the responsibility of clearing and settlement of all the deals executed on the NSE by the trading members (TM) who clear and settle such deals through them. This is known as daily mark-to-market settlement. which is done on a daily basis. 3:30 pm. For the purpose of intra-day updation. end of the day.
and are aggregated at a clearing member level. • Interest Rate Futures (RBI) Directions. or as may be specified by the relevant authority from time to time. subject to the condition that the total gross long (bought) position in cash and IRF markets taken together does not exceed their individual permissible limit for investment in government securities. the Central Depository Services (India) Ltd. and Mark-to-market loss. the following margins are levied: • • Margin equal to VaR on the futures contract on the invoice price of the costliest to deliver security from the deliverable basket. covering the framework for the trading of IRFs in recognized exchanges for persons dealing in the instruments. the clearing corporation may require the clearing members to make a payment of additional margins as may be decided from time to time. it has been decided that GoI securities maturing at least eight years but not more than 12 years from the first day of the delivery month with a minimum total outstanding stock of ` 10. and the Public Debt Office of the RBI. The applicable extreme loss margin would be 0. www. Imposition of additional margins: As a risk containment measure. and Mark–to-market loss.3 percent of the value of the gross open positions of the futures contract.000 crore would be eligible deliverable grade securities. Delivery margins: Once the positions are intended for delivery. based on the underlying closing price of the security intended for delivery..nseindia. on August 28. 2009. The NSE has constituted a group of market participants to advise the Exchange/clearing corporation on the securities that may be included in the deliverable basket. The highlights of the directions are: • • These directions define the interest rate futures product. which are (or may have been) imposed from time to time. 2009 The RBI issued the Interest Rate Futures (Reserve Bank) Directions. and list out the permitted instruments and features of the product. based on the underlying closing price of the costliest to deliver security from the deliverable basket. Settlement of contracts • The contract will be settled by the physical delivery of deliverable grade securities using the electronic book entry system of the existing depositories. and are aggregated at a clearing member level.. The margins are levied from the intention day.com . and the total gross short (sold) position—for the purpose of hedging only—does not exceed their long position in the government securities and in IRF at any point in time. and are released on completion of the settlement. Based on the recommendations of this group. This is in addition to the initial margin and the extreme loss margin. plus 5 percent of the face value of the open positions. 2009. the National Securities Depositories Ltd. following which the margins on delivery positions are levied. The margins are levied from the last trading day until the day of receipt of intention to deliver. The above margins are levied on both the buyer and the seller at a client level. Foreign Institutional Investors registered with the SEBI have been permitted to purchase or sell interest rate futures.ISMR Derivatives Market 170 Extreme Loss Margin: The clearing members are required to pay extreme loss margins in addition to the initial margins. the following margins are levied: • • Margin equal to VaR on the futures contract on the invoice price plus 5 percent on the face value of the security to be delivered. namely. The above margins are levied on both the buyer and the seller at a client level. Non-Intent Margins: In the cases where the positions are open at the end of the last trading day and no intention to deliver has been received. and allocation has been done.
56 percent during the first half of 2011–2012 compared to the turnover in the corresponding period in the previous fiscal year.746 116.779.090 28.756.946.552 480.382.925 220.127.116.111 457. • Market Outcome Trading Volumes After recording a staggering year-on-year growth of 60.139 93.170 632.497 110.766 25. of Contracts Traded TOTAL Turnover (` mn.876 28.054.462 23.nseindia.250 80.008 29. of Contracts Traded Turnover (` mn.025 93.585.418 1.161 407.757 91.550.99 percent of the total turnover in this segment.026 54 158 93 40 114 122 180 37 435 39 3.418.133 472.362 524.537.771 90.0005 percent in 2010–2011.365.999 110.680 1.799.268 2.368.004 3.276 27.089 67. the Banking Regulation Act.744.952 453.220.544.509 3.089.515 77.948 176.299.887.922 176.530 498.010 18. or any other Act or instrument having the force of law is allowed to participate in the IRF market without prior permission from the respective regulatory department of the RBI.486 25.886.381.348 679.918 28.230.469 656.728.636.299.951 453.302.925 590.378 24.502 117.) (US$ Traded million) 496.337.991 29.101 20.400 14.370 2.913.0013 percent in 2009–2010 to 0.620 532.473 498.197 609.755 109.057 644.037 3.537. The agencies falling under the regulatory purview of any other regulator established by law are not allowed to participate in IRF market except with the permission of their respective regulators.553 480.746.950 BSE No.217.761 114.002 23.58 percent (Table 6-5).913.062 292.295 3.587 664.658.244.377.339 29.543 81.034. Table 6-5: Trade Details of Derivatives Market Month/ Year NSE No.014 116.161.868 105.958 28.054 2. 1949.) Turnover (US$ million) 2008-09 2009-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 2010-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Apr .182 67.002 26. The total turnover of the derivatives segment jumped by 26.347 524.355.623 4.051.483.305.941 157.038 372.547 6.363.885.638.571.911 636.111 20.931 29.072 28. The NSE further strengthened its dominance in the derivatives segment in 2010–2011 with a share of 99.960.330 157. of Turnover Turnover Contracts (` mn.293.361.639.908 636.244.448.104.550.801.650.Sep 2011 657.960.572 2.895.230.208 24.379.957 20.197 609.287 80.434 105.801.078 644.716.658.750 9.540.946 28.161 407.041.211 34 1.540 1.799.244.588 590.339 91.728. 1934.243 527.243 Source: NSE www.716.830 720 360 580 8.427 16.292.469 656.638 657.311 52 0 1 0 0 1 1 1 0 3 0 21 6 30 58 15 7 12 172 294 No. The share of the BSE in the total derivatives market turnover fell from 0.447.171 632.341 10 40 20 10 30 40 60 10 130 10 930 250 1.637.210 21.43 percent in trading volumn in 2009–2010.685 292.212.847 73.261 605.220 28.782 51.649 90.164 31.356.203 98.648 29.782 579.939 96.352. the NSE’s derivatives market continued its momentum in 2010–2011 by clocking a growth of 65.590 532.034.137 58.269 605.163.645 16.472 23.242.879 90.) Turnover (US$ million) 2.390.014 96.712.571.349 29.794 109.363.418.242.com .293.649.626 81.492 28.570 80.480 2.997 20.807 73.089.133 472.624 80.078. and the participation of such agencies as members or clients will be in accordance with the guidelines issued by the regulator concerned.770 579.482 26.085 372.200 21.222.611 2.306 27.482.319 98.779.600.171 • Derivatives Market ISMR No scheduled bank or other such agencies falling under the regulatory purview of the RBI under the Reserve Bank of India Act.925 9.673 77.252 23.756.990 18.050.822 679.712.023 98.663 58.754 98.585 664.751 6.825 90.078.434 917 5.514.243 527.371 457.513.
Theoretically. insurance cost. Cost of carry is more appropriately used for commodity futures. This trend continued in the first half of 2011–2012. The degree of relative costliness of a future rate can be assessed by comparing the implied rate with the spot rate.93 percent during the first half of 2011–2012. annualized on the basis of the number of days before the expiry of the contract.ISMR Derivatives Market 172 Chart 6-1: Product-wise distribution of turnover of F&O segment of NSE (2010–2011) Source: NSE The index options segment was the clear leader in the product-wise turnover of the futures and options segment in the NSE in 2010–2011 (Table 6-6 and Chart 6-1). the cost of carry is the cost of financing minus the dividend returns. followed by the stock futures and index futures that saw a year-on-year growth of 18. Assuming zero dividends. The implied interest rate for near month Nifty 50 futures as on the last trading day of the month is presented in Table 6-7. arbitrage opportunities exist. In the case of equity futures.79 percent and 14.com . The costs involved are storage cost.nseindia. Cost of carry or implied interest rate plays an important role in determining the price differential between the spot and the futures market.79 percent of the total turnover in the F&O segment of the NSE. the only relevant factor is the cost of financing.90 percent. and financing cost. Implied interest rate is the percentage difference between the future value of an index and the spot value. with index options constituting around 72. as by definition it means the total costs required to carry a commodity or any other good forward in time. www. the implied interest rate or cost of carry is often used interchangeably. The turnover in the index options category was 62. Implied interest rate is also a measure of the profitability of an arbitrage position. or if the futures price is greater than the spot price plus cost of carry. transportation cost. Implied Interest Rate In the futures market. if the futures price is less than the spot price plus cost of carry.89 percent of the total turnover in this segment. compared to the turnover in the corresponding period in the previous fiscal year. The turnover of index options zoomed by 59. respectively.
777 933.381.337.111.324 715.962.255 22.034.585.164.991.114 453.648 1.126 590.776 1.558 1.653 43.670 29 203.206.517 2.390.323.635.884.777 Jul-11 10.725 18.271.471. of contracts Turnover % No.268.326.567.664 3.174.200 295.462 1.240.260.931 1.771.534 20.634.712 3.122.335 817.537.653.907 12.513 27.309 28.038.430 47.315.491 15.840.262.398.325 67.620.935.807 73.848 808.926 982.306.064 4.892 Dec-10 11.796.225.304.218.684.642 212.485.326 3.211 1.996 4.043.436.555.598.055.574.795.604.184.937.315 3.343.883.919.310 1.888.226.744.922 176.700 2.447.024.112 1.474.740 73.366 3 5.com 425.319 98.802.600 18.089 67.283.325 66.219.156 20.800.098.965 64.002 1.451.723 May-10 16.106 723.498.838.420 No.838 3.649.825 90.895.444 37.573 2.632 32 221.209.378 1.761.311 5.057.990 18.104.337 3.810 21.278.380 3.020 3.010 2.147 3.016.036 17.045.673 2008-09 210.485.631 3.074.576 698.355.657 Jul-10 11.293.712.402 12. of contracts 58 58 52 58 32 29 25 20 21 23 24 20 22 18 18 14 14 13 19 15 13 13 14 73.299.137.329.487.442 18.957 1.248 73 16.957.066 14.443 80.309.365.844 Feb-11 15.296 17.728.692 42.538 114.895 12.027 May-11 11.699.180 4.116 3.418.104.22.1684.823.366.469.103 35.078.375 74.459.530 4 157.434.293.198 699.779.194 4.701 1.328 2.756.418.606.779 657.366.540.886 15.062 292.260.393 10.100 20.333.889.544 45.716.576 34.368.318 4.570 80.343 9.412 2.885.136 4 1.308 23.536 3 3 3 3 2 3 3 81.200 130.679 3.497 110.060.084.820 48.401 38.051.303.460.622.214.171.1241.844.) share tracts in total turnover 30 31 35 104.014 96.140 2005-06 58.952 75.580 4.008.843.363.658.823.088.029.031 4.242.025 93.545 Apr-11 10.765 5.918 1.764 4.859 2.095.970 45 14.984 11.018 55. of contracts Turnover (` mn) Notional Turnover (`mn.645 78.262 25.127 Jun-10 15.723 341.531.822 679.410 823.468.995.761 114.013.667 14.381.591.076.379.234.047 16.625.435 3.027.464.406.350.002 1.090 1.863.550 2006-07 81.880.865.587.436 55.305 Sep-10 13.038 13.356.278 26.905.649 90.095.716 Oct-10 13.192.795.647 28.048.619.970 47.833.470 101.430 521.579 38.694 3.705 18.894.585.028 63 32.614 2.431 15.621.993.077 732.851 83.439 2.580 764.904.566.184 2.189.303.609 2.300 424.736.339 1.757 663.292.912 836.466 17 19 18 16 15 14 14 14 14 14 14 14 15 186.420.352.263 Apr-Sep 2011 71.305.656 38.250 80.366.412 29.321 2.237 20.869 798.) % share in total turnover 5 7 11 10 34 13.341 3.687 ISMR Source: NSE .047 16.505 23.618.950 13.591.949.082 657. of contracts Notional Turnover (` mn) % share in total turnover No.335 2.443.523 80.071.886.946 1.626 16.952.395.709 2.976.306.997 29.921 835.643.656.721.137 58.432 13.013.636.887 Apr-10 10.412.845.089.430 Index Options Stock Options Total Average Daily Turnover (` mn.088.065 14.425 3.508.537 3.330 157.461 19.023.796.437 11 12 13 86.185 25.240 51.388 2.482.665 925.591 Mar-11 15.980 34.055.424 25.766 1.430 2.060 12.956.441 16.458.473.522 3.810 16.573 5.048.746 116.705 3.446 Jun-11 10.409.) Year Index Futures No.308.577.173 Table 6-6: Product wise turnover on the derivatives segment of NSE Stock Futures Turnover % (` mn.734.338.957 17.638 1.916.151.549.687 2009-10 178.657 56.954 2010-11 165.108.755 109.254.877.295.247.557 183.492 1.799.996 2.315.766 Sep-11 14.031.nseindia.054.515 77.562 11.513.082 4.364.105 1.438 7.268 70 73 73 73 75 74 2.955.088.933 Jan-11 14.157.411.722.530.279.741.409 Aug-11 14.351 3.271 216.360 7 77.785.154 24.) share in total turnover No.926 13.972 50.377.041.109 25.212.268 2 9.857.690 3.917 29.791.950 3 5.533 www.011.434 105.593 14.459 54.292.421 22 145.652 3 5 4 4 4 5 4 4 3 3 3 3 2 2.270 54 57 57 57 56 62 60 64 64 69 70 71 3.044 28.232 Aug-10 11.657 19.562.041.313.074 6.909 3.994 20.200 20.276 650.571.701.070 192.647 58.272 831.023 98.886 12.449 7.648 1.830 1.928.013 10.221.244.339 91.191 4.904.353 68.960.677.493 27.219 14.057.244.638.418.537.801.034.017. of con(`mn.433.567 12 12 11 10 12 12 12 13.076.740 2007-08 156.413 28.803 62.651.889 39.344.864 767.930 11.891.807 18.688.437 5.925 1.560 Derivatives Market 2004-05 21.573 Nov-10 14.975 126.96.36.1992 737.612 4.455 3.
40 5482.01 6.00 6043. the Black Scholes model solves for the fair price of the option by using the following parameters: days to expiry.25 Derivatives Market 174 Implied Interest Rate (%) -3. compared to ` 7. especially if they are based on options that are thinly traded samples.60 5886.05 5003. and vice versa.00 5086.30 Closing Spot Price 5278.50 5367.90 -9. spot price.17 4. then the options premiums are relatively expensive.00 4943. If the volatility is high. a time-series analysis of historical volatility may be carried out to know the future movements of the underlying.25 5374.95 6017. the implied volatility estimate can be biased.75 5749.89 1. and dividend.90 6162.00 5824.17 1.00 5001.ISMR Table 6-7: Implied Interest Rate for Near Month Nifty Futures (April 2010–September 2011) Month Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Expiry Date of near month Contract 29-Apr-2010 27-May-2010 24-Jun-2010 29-Jul-2010 26-Aug-2010 30-Sep-2010 28-Oct-2010 25-Nov-2010 30-Dec-2010 27-Jan-2011 24-Feb-2011 31-Mar-2011 28-Apr-2011 26-May-2011 30-Jun-2011 28-Jul-2011 25-Aug-2011 29-Sep-2011 Closing Future Price 5262.03 0.49 0.90 5333.15 2. To put it simply.083 million. To estimate the future volatility.01 -1.80 5554.69.55 5523. The detail of the settlement statistics in the F&O segment is presented in Table 6-8.29 7.90 5644. It is a measure of the amount and the speed of price change. Alternatively.15 5647.55 5338.50 5505. The reverse of this model could be used to arrive at the implied volatility by putting the current price of the option prevailing in the market.25 5833. interest rate. Settlement All derivative contracts are currently cash settled.nseindia.30 5403.30 5312. For example.49 -2. In 2010–2011. the cash settlement amounted to ` 376. implied volatility is the estimate of how volatile the underlying will be from the present until the expiry of the option.70 5862. and volatility of underlying.70 6030. strike price. one could work out the implied volatility by entering all the parameters into an option pricing model.com .65 Source: NSE Note: (1) The implied interest rate is calculated on the last trading day of the month for Near Month Nifty Futures (2) Number of days in a year have been taken as 365 Implied Volatility Volatility is one of the important factors that are taken into account while pricing options.009 million.80 5056.20 5753.05 8. During the first half of 2011–2012.87 1.10 5488.81 5. However. and then solving it for volatility.70 6134.40 6029.00 4934.428 million in 2009–2010.69 1. www.69 0.22 5.50 5560.20 5316. the cash settlement amounted to ` 837.60 5402.
096 43.050 1.796 11.605 110.356 million.111 7.037 54.959 9.590 760 15.654 1.355 299. Table 6-9 presents the growth in the currency futures volumes on the NSE.082 75.950 10.687 Business Growth in Currency Futures Segment After an impressive start in the latter half of 2008. compared to the figures in 2009–2010.320 10.272 3.170 6. The average daily trading volume zoomed to ` 131.607 53.951 70.329 1.405 972 1.222 62.041 Index/Stock Options Premium Settlement 31.945 1.521 2.100 8.204 18. During April 2011–September 2012.754 66.175 Derivatives Market ISMR Table 6-8: Settlement Statistics in F&O Segment Month/Year Index/Stock Futures MTM Settlement Final Settlement 2006-07 2007-08 2008-09 2009-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 2010-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Apr-Sep 2011 Source: NSE 613.231 11.942 Total (` mn) 664.577 79.852 50.24 percent in the first half of 2011–2012 compared to the volumes in the corresponding period in 2010– 2011.448 7.832 2.975 13.237 1.036 93.189 562 767 1.517 2.936 606.400 769. The number of traded contracts and the trading value in this segment increased by more than 80 percent each in 2010–2011.746 927 1.580 62.118 10.416 7.882 1.988 51.083 Total (US $ mn) 15.846 101.910 770 1.879 35.446.587 69.193 918.876 38.026 17.531 115.700 40.034 8.664 41.159 18.953 831 2.145 1. www.916 1.035 477 569 492 1.009 45.470 10.501 38.687 million in 2010–2011 compared to ` 74.529 10.nseindia.029 40.518 1. the average daily trading volume increased to ` 166.727 9.781 84.237 10.com .255 39.000 21.362 65. Similarly.327 672.045 952 1.760 1.110 7.017 1.019 1.547 751.602 109.826 2.825 14.005 1.655 127.751 62.557 32.672 45.742 12.906 1.050 1.493 612 2.565.944 67.623 51.384 1.259 376.742 837.323 16.036 1.263 695 1.971 85.549 78.436 55.888 37.551 63.815 34.180 81.373 9.700 72.338 1.983 13.346 1.808 1.597 1.990 Exercise Settlement 11.042 1.428 42.913 1.923 41.783 1.820 1.512 7.275 million in 2009–10. the trading volumes in the currency futures segment grew by 15.601 3.424 64.043 1.166 33. the currency futures on the NSE witnessed an exponential growth in 2009–2010 and continued to flourish in 2010–2011.628 1.121 14.137 1.
586.810 47.443.444 2.927 87.641 Nov-10 53.673.190.742 2.038 2.438.362 58.152 Jun-10 68.019 16.297.360.836 2.786 467 55.240 255.670 24.673 2.854 42.273.212 92.696 1.678.415 323.270 49.761 Feb-11 45.653 23.012.Table 6-9: Business Growth of Currency Futures EURINR No.392.665 7.609 2.475 19.387.766 2. 2010.709.608.793.048 16.637.355.273.181.659.870 69.355 58.832. of Contracts Traded Value (Notional) in ` mn 17.343 125.744.401.300 55.585 3.847.837.092.603 3.928 22.991 202.459.076 296.042.171 15.131 5.113 961.895 151.697.844 1.868 63.073 46.859 1.021.031 771.783.187.989 149.688 201.nseindia.233 85.302 Apr-11 53. of Contracts Traded Value (Notional) in ` mn No.116 47.749 2010-11 691.024 808.950.079 24.600.667 317.262 308.201 2.495.806 2.577 64.379 95.940.411.413 3.710 712.596.566 46.935 1.f February 01.538.680 78.271 32.562.240 8.317 846.659 3.681 89.794 82.870 1. GBP-INR and JPY-INR futures contracts) 176 .612 36.978 1.068.396.544.779.959 3.179 443.080 3.905 3.773 308. of Contracts Traded Value (Notional) in ` mn 358.370 71.519 3.903 163.854 4.530 2.874.204 Aug-11 83.772.477 18.564.711 48.481 5.958 Jun-11 68.322 3.619 13.833 2.977 7.528 31.842 903 114.073 Sep-10 60.897.786 77.472.000.463 3.013 Aug-10 41.028.283 920.332.983 No.911 Sep-11 57.383.613 3.968.106.789 12.com Derivatives Market Apr-Sep 2011 412.090 59.810 494.288 351.826.298.834 Note: Currency Futures on Additional Currency Pairs were introduced w.549 473.080 3.146 378.083.895 806.677 JPYINR GBPINR Total ISMR Month/Year Traded Value (Notional) in ` mn 17.755.482 2.267.919 172.985 343.511.102.705. (New currency pairs EUR-INR.294.929.591 3.437 May-10 75.533 44.094 2.326.371.776 62.847 10.635 www.572 309.433.416 2.799 3.945 271.924.959 11.183 19.342 Jan-11 52.391 2.240 1.799 34.862 55.134.696 9.576 305.402.010 2.467 85.724.891 135.252 Dec-10 47.359.010 173.021 2.905 775.079 431.783 95.556 22.979 USDINR No.066.858 3. of Contracts 2009-10 372.055 Oct-10 66.692.e.894 479.121 199.389 331.910 27803 187.411.854 71.712.383 79.420 2.151 63.591.269.224 2.639.422 54.532 2.005 14.535 1.825 2.135 2.935.616 2.985 17.580 Apr-10 75.785 45.934 59.360 34.534 2.211 1.193 9188.8.131.526 57.072 71.638 61.465 17.294.522 110.468 976.041 3.235.923 3.982 18.350 Jul-11 80.003 7.589.716 16.522.720 Mar-11 61.599.107 Jul-10 43.167 77.790.184 284.707.871.858.177.013 2.438 605.525.421.159 146.535.419 9.340 4.026 748.888.341.776 May-11 68.554 2.334 831.609 1.962.876 79.531.502 191.198 15.199.474 67.838 235.544 26.869 71.361 3.606.774.389 2.161 3.085.133. of Contracts Traded Value (Notional) in ` mn No.
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