Action Taken by SEBI on the Report

The SEBI Advisory Committee on Derivatives reviewed the report of the Dr. L.C.Gupta committee on derivatives in the context of the present market structure which is vastly different from the time the recommendations were made by Dr. L.C.Gupta Committee

The advisory committee reviewed the eligibility criteria for stocks on which derivatives are traded. The recommendation of the advisory committee were placed on the SEBI website for pubic comments. SEBI, after examining the public comments accepted the recommendations

Accordingly, the previous eligibility criteria was based on the turnover, market capitalisation, minimum non-promoter holding and volatility of the stock vis-à-vis the index. These were replaced by liquidity, market capitalization, average daily traded volume and quarter sigma order size.

Simultaneously, the risk containment measures were also modified with the change in the eligibility criteria. It has now been linked to the impact cost of the underlying scrip. The Derivatives Exchange/ Segment can also now determine the manner of adjustment in derivative contracts at the time of corporate actions.

The Advisory Committee on Derivatives had recommended that SEBI and RBI should consider utilising the exchange platform to introduce Interest Rate and Currency Derivatives. RBI had constituted a committee on OTC Rupee Derivative where SEBI was also a member. The committee recommended introduction of exchange traded Interest Rate derivative contracts. Steps are underway to introduce such derivatives shortly. The Derivative Exchange Segments are now required to work out an appropriate policy for inspecting its members and the stipulation of100 percent inspection has been removed.

As prescribed by SEBI in its Circular No. SMDRP/DC/CIR-13/02 dated 18th December 2002, the following criteria have been applied to determine the eligibility of scrips to trade in Futures & Options:

• The stocks have been chosen from amongst the top 500 stocks in terms of average daily market capitalization and average daily traded value in the previous six-month on a rolling basis.

• For a stock to be eligible, the median quarter-sigma order size over the last six months should be atleast Rs.5 lakh. The methodology used for calculating quarter sigma order size is as follows:

• Quarter sigma order size has been calculated taking four snapshots in a day from the order book of the stock in the past six months.

• The sigma (standard deviation) or volatility estimate has been calculated in the manner specified by Prof. J. R. Varma Committee on risk containment measures for Index Futures. This daily closing volatility estimate value is applied to the day's order book snapshots to compute the order size.

• The quarter sigma percentage is applied to the average of the best bid and offer price in the order book snapshot to compute the order size to move price of the stock by quarter sigma.

• The median order size to cause quarter sigma price movement is determined separately for the buy side and the sell side. The average of the median order size for the buy and the sell side is taken as the median quarter sigma order size. Risk Containment Measures.

In light of the broad eligibility criteria, as prescribed by SEBI, the following risk containment measures shall be followed by the exchange in respect of all the stocks on which futures and options are traded:

For the purpose of computing worst scenario loss on the portfolio, the price scan range for the stock option and single stock future contracts shall henceforth be linked to liquidity measured in terms of impact cost for an order size of Rs. 5 lacs, calculated on the basis of order book snapshots in the previous six months. Accordingly, if the mean value of impact cost exceeds 1%, the price scanning range would be scaled by square root of three. This would be in addition to the requirement of scaling up for the look ahead period i.e. the time in which mark to market margin is collected. The guidance for computation of impact cost for an order size of Rs. 5 lacs is as under:

• Impact cost is been calculated by taking four snapshots in a day from the order book in the past six months ending on 15th January 2003.

• The Impact cost is the percentage price movement caused by an order size of Rs. 5 lacs from the average of the best bid and offer price in the order book snapshot. The impact cost is calculated for both the buy and the sell side in each order book snapshot.

• The mean of the impact cost for both the buy and the sell side in each order book snapshot in the past six months ended 15th January, 2003 is computed to determine the applicable price scan range in the stock.

The mean impact cost is calculated considering the order book snapshots for the period from 15th July 2002 to 15th January 2003. If the mean impact cost of a stock moves from less than or equal to 1% to more than 1%, the price scan range in such stock will be scaled up by square root of three and the scaling would be dropped when the impact cost drops to 1% or less. Such changes will be applicable on all existing open position within three days from the 15th of each month.