The Futures & Options segment of NSE commenced operations with S&P CNX Nifty Index Futures on June 12, 2000. Trading in options based on S&P CNX Nifty, options on securities and futures on securities commenced in June, 2001, July, 2001 and November, 2001 respectively.

The derivatives trading system at NSE, called NEAT-F&O trading system, provides a fully automated screen-based trading for derivatives on a nationwide basis. It supports an anonymous order driven market, which operates on a strict price/time priority. It provides tremendous flexibility to users in terms of kinds of orders that can be placed on the system. Various time and price related conditions like Good-till-Cancelled, Good-till-Date/Day, Immediate or Cancel, Limit/ Market Price, Stop Loss, etc. can be built into an order.

The NEAT-F&O trading system distinctly identifies two groups of users. The trading user more popularly known as trading member has access to functions such as, order entry, order matching, order and trade management. The clearing user (clearing member) uses the trader workstation for the purpose of monitoring the trading member(s) for whom he clears the trades. Additionally, he can enter and set limits on positions, which a trading member can take.

The trading terminals of F&O segment are available in 291 cities at the end of March, 2003. Besides the trading terminals can also be accessed through the Internet by the investors from anywhere.

The contract specification for derivatives traded on NSE are summarised in Table below. The index futures and index options contracts traded on NSE are based on S&P CNX Nifty Index, while stock futures and options are based on individual securities. Presently stock futures and options are available on 41 securities. While the index options are European style, stock options are American style. There are a minimum of 5 strike prices, two 'in-the-money', one 'at-the-money' and two 'out-of-the-money' for every call and put option. The strike price is the price at which the buyer has a right to purchase or sell the underlying.

At any point of time there are only three contracts available for trading, with 1 month, 2 months and 3 months to expiry. These contracts expire on last Thursday of the expiry month and have a maximum of 3-month expiration cycle. A new contract is introduced on the next trading day following the expiry of the near month contract. All the derivatives contracts are presently cash settled.

The F&O segment reported a total trading volume (notional) of Rs. 439,864 crore during 2002-03 as against Rs. 101,926 crore during the preceding year. The trading volume witnessed a sharp rise with the introduction of stock futures in November 2001.. The trading volumes in the F&O segment indicate that near month contracts are more popular than far month contracts; futures are more popular than options; contracts on securities are more popular than those on indexes; and call options are more popular than put options.

The F&O segment provides a nationwide market. Mumbai accounts for 41.2% of total turnover. The share of Mumbai in total turnover has been declining over years reinforcing nationwide presence of NSE.

The maximum brokerage chargeable by a trading member in relation to trades effected in the contracts admitted to dealing on the F&O segment of NSE is fixed at 2.5% of the contract value in case of index futures and stock futures. In case of index options and stock options it is 2.5% of notional value of the contract [(Strike Price + Premium) × Quantity)], exclusive of statutory levies. The transaction charges payable to the exchange by the trading member for the trades executed by him on the F&O segment are fixed at the rate of Rs. 2 per lakh of turnover (0.002%) subject to a minimum of Rs. 1,00,000 per year.

The trading members contribute to Investor Protection Fund of F&O segment at the rate of Rs. 10 per crore of turnover (0.0001%).

NSCCL undertakes clearing and settlement of all trades executed on the F&O segment of the Exchange. It also acts as legal counterparty to all trades on this segment and guarantees their financial settlement. The Clearing and Settlement process comprises of three main activities, viz., Clearing, Settlement and Risk Management.

The first step in clearing process is working out open positions and obligations of clearing (selfclearing/trading-cum-clearing/professional clearing) members (CMs). The open positions of a CM is arrived at by aggregating the open positions of all the trading members (TMs) and all custodial participants (CPs) clearing though him, in the contracts which they have traded. The open position of a TM is arrived at by summing up his proprietary open position and clients' open positions, in the contracts which they have traded. While entering orders on the trading system, TMs identify orders as either proprietary or client. Proprietary positions are calculated on net basis for each contract and that of clients are arrived at by summing together net positions of each individual client. A TM's open position is the sum of proprietary open position, client open long position and client open short position.

All futures and options contracts are cash settled at present. The settlement amount for a CM is netted across all their TMs/clients, across various settlements. For the purpose of settlement, all CMs are required to open a separate bank account with NSCCL designated clearing banks for F & O segment.

Futures contracts have two types of settlements, the MTM settlement which happens on a continuous basis at the end of each day, and the final settlement which happens on the last trading day of the futures contract.

All futures contracts for each member are marked-tomarket to the daily settlement price of the relevant futures contract at the end of each day. The profits/ losses are computed as the difference between

1. the trade price and the day's settlement price in respect of contracts executed during the day but not squared-up,

2. the previous day's settlement price and the current day's settlement price in respect of brought forward contracts,

3. the buy price and the sell price in respect of contracts executed during the day and squared-up.

The CMs who have suffered a loss are required to pay the mark-to-market (MTM) loss amount in cash which is in turn passed on to the CMs who have made a MTM profit. This is known as daily mark-to-market settlement. CMs are responsible to collect and settle the daily MTM profits/losses incurred by the TMs and their clients clearing and settling through them. Similarly, TMs are responsible to collect/pay losses/ profits from/to their clients by the next day. The pay-in and pay-out of the mark-to-market settlement are effected on the day following the trade day.

After completion of daily settlement computation, all the open positions are reset to the daily settlement price. Such positions become the open positions for the next day.

On the expiry day of the futures contracts, after the close of trading hours, NSCCL marks all positions of a CM to the final settlement price and the resulting profit/loss is settled in cash. Final settlement loss/profit amount is debited/ credited to the relevant CM's clearing bank account on the day following expiry day of the contract.

Daily settlement price on a trading day is the closing price of the respective futures contracts on such day. The closing price for a futures contract is currently calculated as the last half an hour weighted average price of the contract in the F&O Segment of NSE. Final settlement price is the closing price of the relevant underlying index/security in the Capital Market segment of NSE, on the last trading day of the Contract. The closing price of the underlying Index/security is currently its last half an hour weighted average value in the Capital Market Segment of NSE.

Options contracts have three types of settlements, daily premium settlement, exercise settlement, interim exercise settlement in the case of option contracts on securities and final settlement.

Buyer of an option is obligated to pay the premium towards the options purchased by him. Similarly, the seller of an option is entitled to receive the premium for the option sold by him. The premium payable amount and the premium receivable amount are netted to compute the net premium payable or receivable amount for each client for each option contract.

Although most option buyers and sellers close out their options positions by an offsetting closing transaction, an understanding of exercise can help an option buyer determine whether exercise might be more advantageous than an offsetting sale of the option. There is always a possibility of the option seller being assigned an exercise. Once an exercise of an option has been assigned to an option seller, the option seller is bound to fulfill his obligation.

Interim exercise settlement takes place only for option contracts on securities. An investor can exercise his in-the-money options at any time during trading hours, through his trading member. Interim exercise settlement is effected for such options at the close of the trading hours, on the day of exercise. Valid exercised option contracts are assigned to short positions in the option contract with the same series (i.e. having the same underlying, same expiry date and same strike price), on a random basis, at the client level.

The CM who has exercised the option receives the exercise settlement value per unit of the option from the CM who has been assigned the option contract.

Final Exercise settlement is effected for all open long inthe- money strike price options existing at the close of trading hours, on the expiration day of an option contract. All such long positions are exercised and automatically assigned to short positions in option contracts with the same series, on a random basis. The investor who has long in-the-money options on the expiry date will receive the exercise settlement value per unit of the option from the investor who has been assigned the option contract.

Settlement Statistics