Scheme for introduction of Single Stock Futures and the Risk Containment Measures

SMDRP/DC/CIR- 10/01 · 2001-11-02 · SEBI

Summary

This document outlines the scheme for introducing Single Stock Futures and associated risk containment measures following in-principle approval by the SEBI Board. It mandates that these contracts be cash-settled, have a maximum maturity of 12 months, and adhere to lot sizes symmetrical with existing options contracts. The regulatory framework requires portfolio-based margining using worst-case scenario loss calculations and specific calendar spread charges to manage risk. This section establishes exposure limits for index futures, stock options, and single stock futures based on liquid networth. It mandates real-time computation of worst scenario loss with specific update frequencies for single stock futures. Additionally, it defines margin collection procedures, mark-to-market settlement methods, and position limits at both market-wide and client levels. Exchanges must implement systems to monitor client positions across trading members and enforce specific position limits at the trading member and market-wide levels. Trading members are restricted to offsetting positions once their individual limits are breached, while market-wide caps are defined by daily turnover or free float

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The Single Stock Futures 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.

The Exchanges shall initially introduce Single Stock Futures Contract, which shall be settled in cash.

In order to maintain symmetry between Futures and Options Contract on the same underlying, the lot size of the option contract and the multiplier for the futures contract shall remain the same for the given underlying.

Single Stock Futures contract shall be permitted upto maximum maturity of 12 months. Initially, Single Stock Futures contract shall have maturity of three months and at the time of its introduction, three contracts of maturity of one-month, two-month and three-month would be introduced simultaneously. Therefore, at any point in time atleast three Single Stock Futures contracts on a particular underlying would be available for trading.

Any adjustments in contract specifications of Single Stock Futures Contract at the time of corporate actions would be in line with international best practices and the sub-committee on adjustment of corporate actions for Stock Options would decide on any such adjustments.

The Board has approved the introduction of Single Stock Futures Contracts on 31 stocks on which option contracts have been introduced on BSE & NSE. The Advisory Committee on Derivatives shall review the eligibility criteria for introduction of futures and options on any other stock from time to time.

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 all Derivative Contracts i.e. Index Futures, Index Option, Stock Options and Single Stock Futures.

The Initial Margin requirements are based on worst scenario loss of a portfolio of an individual client to cover 99% VaR over one day horizon across various scenarios of price changes and volatility shifts.

For Index products the price scan range is specified at three standard deviation (3 sigma) and the volatility scan range is specified at 4%. For stock option contracts the price scan range is specified at three and a half standard deviation (3.5 sigma) and the volatility scan range is specified at 10%.

There is also a minimum margin requirement. For index futures contracts it is specified that in no case the initial margin shall be less than 5% of the value of the contract. For index options a short option minimum charge of 3% of the notional value of all short index option has been prescribed and in the case of stock option contracts, a short option minimum charge of 7.5% of the notional value of all short stock option contract has been prescribed.

In the case of Single Stock Futures, the initial margin would be computed as the worst scenario loss of a portfolio comprising of all the positions of a client in all the futures and options contracts. For Single Stock Futures the price scan range would be 3.5 Standard Deviation (3.5 sigma) and in no case the initial margin for Single Stock Futures contract shall be less than 7.5% of the value of the Single Stock Futures contract.

However, in order to achieve the requirement of minimum margin for the Single Stock Futures contract, the price scan range would be adjusted so as to ensure that the initial margin for Single Stock Futures contracts does not fall below 7.5% in any scenario.

Source: SecMarx — Scheme for introduction of Single Stock Futures and the Risk Containment Measures. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.