Financial Management

A DETAILED STUDY ON WORKING OF NATIONAL STOCK EXCHANGE

PROJECT REPORT

Project report submitted in partial fulfillment of the requirement of South Asia University for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION2010

Submitted By

NAME : SONA.K

ENROLMENT NO :

Under the guidance of

Dr. Nirmal Kumar. R. T M.Com.,M.B.A.,AMIBM.,Ph.D.,

SOUTH ASIA UNIVERSITY LONDON

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GEMS B SCHOOL PONDICHERRY

CERTIFICATE

This is to certify that project entitled “ NATIONAL STOCK EXCHANGE“ is submitted by K.SONA GEMS B SCHOOL, PONDICHERRY in partial fulfillment of the first trimester requirement in financial Management for the award of the degree Master of Business Administration and is certified to be an original and bonifide work.

PLACE : Guide Signature

DATE :

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CHAPTERS TITLE PAGE

ACKNOWLEDGEMENT 5

EXECUTIVE SUMMARY 6

CHAPTER-1 INTRODUCTION 7

1.1. INTRODUCTION ABOUT THE NATIONAL 8

STOCK EXCHANGE

1.2. NEED OF THE STUDY 17

1.3. OBJECTIVES OF THE STUDY 18

1.4. PERIOD OF STUDY 19

1.5. RESEARCH METHODOLOGY 19

1.6. LIMITATION OF THE STUDY 20

CHAPTER-2: EQUITIES 21

CHAPTER-3: FUTURES AND OPTIONS 36

CHAPTER-4: DEBT 66

CHAPTER-5: INITIAL PUBLIC OFFERINGS 75

CHAPTER-6: INDICES 81

CHAPTER-7: INDEX FUNDS 85

CHAPTER-8: EXCHANGE TRADED FUNDS 95

CHAPTER-9: MUTUAL FUNDS 102

CHAPTER-10: MEMBERS 106

CHAPTER-11: HISTORICAL DATA 122

CHAPTER-12: INVESTOR SERVICES CELL 126

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CHAPTER-13: CONCLUSIONS 130

BIBLIOGRAPHY 131

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ACKNOWLEDGEMENT

I am indebted to all powerful almighty God for all the blessings he showered on me

and for being with me throughout the study.

I also express with great pleasure and sincerity to record my thanks, gratitude

and honour to Mr. L. Alphonse Liguori-Managing Director, Mr. M. Tamijuddin-Director

academics, Mrs. Marudam-Office Assistant for their valuable advice and

for timely help concerning various aspects of project.

I place on record my sincere gratitude and appreciation to my project guide

Dr. NIRMALKUMAR.R.T for his kind co-operation and guidance which enable me to

complete this project.

I take this opportunity to dedicate my project to our loving faculty

Dr. NIRMALKUMAR.R.T who was a constant source of motivation and I express my deep

gratitude for his never ending support and encouragement during this project.

Finally I thank each and every one who helped me to complete this project.

DATE : SONA.K

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EXECUTIVE SUMMARY

This study makes an in-depth analysis of the working of the national stock exchange. It brings out in a very lucid manner. The manner in which the various financial products are traded and how the Indian capital market system through the NSE synchronises itself with the global markets.

This study highlights the unparalleled transparency, speed and efficiency, safety and market integrity of the system.

NSE has played a catalytic role in talking the Indian capital market to disy heights.

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CHAPTER-1 INTRODUCTION

1.1 INTRODUCTION ABOUT THE NATIONAL STOCK EXCHANGE

1.2 NEED OF THE STUDY1.3 OBJECTIVES OF THE STUDY1.4 PERIOD OF STUDY1.5 RESEARCH METHODOLY1.6 LIMITATION OF THE STUDY

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1.1 INTRODUCTION ABOUT THE NATIONAL STOCK EXCHANGE

The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges. It recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country.

On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000.

The following years witnessed rapid development of Indian capital market with introduction of internet trading, Exchange traded funds (ETF), stock derivatives and the first volatility index - IndiaVIX in April 2008, by NSE.

August 2008 saw introduction of Currency derivatives in India with the launch of Currency Futures in USD INR by NSE. Interest Rate Futures was introduced for the first time in India by NSE on 31st

August 2009,exactly after one year of the launch of Currency Futures.

With this, now both the retail and institutional investors can participate in equities, equity derivatives, currency and interest rate derivatives, giving them wide range of products to take care of their evolving needs

The National Stock Exchange (NSE) is India's leading stock exchange covering various cities and towns

across the country. NSE was set up by leading institutions to provide a modern, fully automated screen-

based trading system with national reach. The Exchange has brought about unparalleled transparency,

speed & efficiency, safety and market integrity. It has set up facilities that serve as a model for the

securities industry in terms of systems, practices and procedures. 

NSE has played a catalytic role in reforming the Indian securities market in terms of microstructure,

market practices and trading volumes. The market today uses state-of-art information technology to

provide an efficient and transparent trading, clearing and settlement mechanism, and has witnessed

several innovations in products & services viz. demutualization of stock exchange governance, screen

based trading, compression of settlement cycles, dematerialization and electronic transfer of securities,

securities lending and borrowing, professionalization of trading members, fine-tuned risk management

systems, emergence of clearing corporations to assume counterparty risks, market of debt and derivative

instruments and intensive use of information technology

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Mission:

Our NSE's mission is setting the agenda for change in the securities markets in India. The NSE was set-up with the main objectives of:

establishing a nation-wide trading facility for equities, debt instruments and hybrids,

ensuring equal access to investors all over the country through an appropriate communication network,

providing a fair, efficient and transparent securities market to investors using electronic trading systems,

enabling shorter settlement cycles and book entry settlements systems, and Meeting the current international standards of securities markets.

The standards set by NSE in terms of market practices and technology have become industry benchmarks and are being emulated by other market participants. NSE is more than a mere market facilitator. It's that force which is guiding the industry towards new horizons and greater opportunities.

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The logo of the NSE symbolises a single nationwide securities trading facility ensuring equal and fair access to investors, trading members and issuers all over the country. The initials of the Exchange viz., N, S and E have been etched on the logo and are distinctly visible. The logo symbolises use of state of the art information technology and satellite connectivity to bring about the change within the securities industry. The logo symbolises vibrancy and unleashing of creative energy to constantly bring about change through innovation.

Promoters

NSE has been promoted by leading financial institutions, banks, insurance companies and other financial intermediaries:

Industrial Development Bank of India Limited Industrial Finance Corporation of India Limited Life Insurance Corporation of India State Bank of India ICICI Bank Limited IL & FS Trust Company Limited Stock Holding Corporation of India Limited SBI Capital Markets Limited Bank of Baroda Canara Bank General Insurance Corporation of India National Insurance Company Limited The New India Assurance Company Limited The Oriental Insurance Company Limited United India Insurance Company Limited Punjab National Bank Oriental Bank of Commerce Indian Bank

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Corporate Structure

NSE is one of the first de-mutualised stock exchanges in the country, where the ownership and management of the Exchange is completely divorced from the right to trade on it. Though the impetus for its establishment came from policy makers in the country, it has been set up as a public limited company, owned by the leading institutional investors in the country.

From day one, NSE has adopted the form of a demutualised exchange - the ownership, management and trading is in the hands of three different sets of people. NSE is owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries and is managed by professionals, who do not directly or indirectly trade on the Exchange. This has completely eliminated any conflict of interest and helped NSE in aggressively pursuing policies and practices within a public interest framework.

The NSE model however, does not preclude, but in fact accommodates involvement, support and contribution of trading members in a variety of ways. Its Board comprises of senior executives from promoter institutions, eminent professionals in the fields of law, economics, accountancy, finance, taxation, etc, public representatives, nominees of SEBI and one full time executive of the Exchange.

While the Board deals with broad policy issues, decisions relating to market operations are delegated by the Board to various committees constituted by it. Such committees include representatives from trading members, professionals, the public and the management. The day-to-day management of the Exchange is delegated to the Managing Director who is supported by a team of professional staff.

NSE Milestones

November 1992

Incorporation

April 1993 Recognition as a stock exchangeMay 1993 Formulation of business plan

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June 1994 Wholesale Debt Market segment goes liveNovember 1994

Capital Market (Equities) segment goes live

March 1995 Establishment of Investor Grievance CellApril 1995 Establishment of NSCCL, the first Clearing CorporationJune 1995 Introduction of centralised insurance cover for all trading

membersJuly 1995 Establishment of Investor Protection FundOctober 1995 Became largest stock exchange in the countryApril 1996 Commencement of clearing and settlement by NSCCLApril 1996 Launch of S&P CNX NiftyJune 1996 Establishment of Settlement Guarantee FundNovember 1996

Setting up of National Securities Depository Limited, first depository in India, co-promoted by NSE

November 1996

Best IT Usage award by Computer Society of India

December 1996 Commencement of trading/settlement in dematerialised securities

December 1996 Dataquest award for Top IT UserDecember 1996 Launch of CNX Nifty JuniorFebruary 1997 Regional clearing facility goes liveNovember 1997

Best IT Usage award by Computer Society of India

May 1998 Promotion of joint venture, India Index Services & Products Limited (IISL)

May 1998 Launch of NSE's Web-site: www.nse.co.inJuly 1998 Launch of NSE's Certification Programme in Financial MarketAugust 1998 CYBER CORPORATE OF THE YEAR 1998 awardFebruary 1999 Launch of Automated Lending and Borrowing MechanismApril 1999 CHIP Web Award by CHIP magazineOctober 1999 Setting up of NSE.ITJanuary 2000 Launch of NSE Research InitiativeFebruary 2000 Commencement of Internet TradingJune 2000 Commencement of Derivatives Trading (Index Futures)September 2000

Launch of 'Zero Coupon Yield Curve'

November 2000

Launch of Broker Plaza by Dotex International, a joint venture between NSE.IT Ltd. and i-flex Solutions Ltd.

December 2000 Commencement of WAP trading

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June 2001 Commencement of trading in Index OptionsJuly 2001 Commencement of trading in Options on Individual SecuritiesNovember 2001

Commencement of trading in Futures on Individual Securities

December 2001 Launch of NSE VaR for Government SecuritiesJanuary 2002 Launch of Exchange Traded Funds (ETFs)May 2002 NSE wins the Wharton-Infosys Business Transformation

Award in the Organization-wide Transformation categoryOctober 2002 Launch of NSE Government Securities IndexJanuary 2003 Commencement of trading in Retail Debt Market June 2003 Launch of Interest Rate FuturesAugust 2003 Launch of Futures & options in CNXIT Index June 2004 Launch of  STP InteroperabilityAugust 2004 Launch of  NSE’s electronic interface for listed companies March 2005 ‘India Innovation Award’ by EMPI Business School, New

DelhiJune 2005 Launch of Futures & options in BANK Nifty Index December 2006 'Derivative Exchange of the Year', by Asia Risk magazine January 2007 Launch of  NSE – CNBC TV 18 media centre March 2007 NSE, CRISIL announce launch of IndiaBondWatch.com June 2007 NSE launches derivatives on Nifty Junior & CNX 100 October 2007 NSE launches derivatives on Nifty Midcap 50January 2008 Introduction of Mini Nifty derivative contracts on 1st January

2008 March 2008 Introduction of long term option contracts on S&P CNX Nifty

Index April 2008 Launch of India VIXApril 2008 Launch of Securities Lending & Borrowing SchemeAugust 2008 Launch of Currency DerivativesAugust 2009 Launch of Interest Rate FuturesNovember 2009

Launch of Mutual Fund Service System

December 2009 Commencement of settlement of corporate bondsFebruary 2010 Launch of Currency Futures on additional currency pairsMarch 2010 NSE- CME Group & NSE - SGX product cross listing

agreement April 2010 Financial Derivative Exchange of the Year Award' by Asian

BankerJuly 19, 2010 Commencement of trading of S&P CNX Nifty Futures on

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CMEJuly 19, 2010 Real Time dissemination of India VIX.July 28, 2010 LOI signed with London Stock Exchange Group

Indian Securities Market, A Review (ISMR) – 2009

Chapter 1 : Securities Market in India and Abroad - An Overview Chapter 2 : Primary Market Chapter 3 : Collective Investment Vehicles Chapter 4 : Capital Market Chapter 5 : Capital Market - Clearing & Settlement Chapter 6 : Debt Market Chapter 7 : Derivatives Market Chapter 8 : Foreign Investments in India Chapter 9 : Knowledge Initiatives

CAPITAL MARKET (EQUITIES) SEGMENT1 Settlement Guarantee Fund 31-MAR-2009 Rs.4,843.50 crores2 Investor Protection Fund 30-APR-2010 Rs.307.02 crores3 Number of securities available for trading 31-JUL-2010 1,9874 Record number of trades 19-MAY-2009 112603925 Record daily turnover (quantity) 19-MAY-2009 19225.95 lakhs6 Record daily turnover (value) 19-MAY-2009 Rs.40151.91 crores7 Record market capitalization 07-JAN-2008 Rs.67,45,724 crores8 Record value of S&P CNX Nifty Index 08-JAN-2008 6357.19 Record value of CNX Nifty Junior Index 04-JAN-2008 13209.35 CLEARING & SETTLEMENT1 Record Pay-in/Pay-out (Rolling Settlement):

Funds Pay-in/Pay-out (N2007200) 23-OCT-2007* Rs.4,567.70 croresSecurities Pay-in/Pay-out (Value) (N2009088) 21-MAY-2009* Rs.9,523.33 croresSecurities Pay-in/Pay-out (Quantity) (N2009088) 21-MAY-2009* 4,385.75 lakhs*Settlement Date

 DERIVATIVES (F&O) SEGMENT1 Settlement Guarantee Fund 31-MAR-2009 Rs.23,655.86 crores2 Investor Protection Fund 30-APR-2010 Rs.54.53 crores3 Record daily turnover (value) 28-JAN-2010 Rs.166,193.03 crores

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4 Record number of trades 07-JAN-2009 1874697 CURRENCY DERIVATIVES SEGMENT1 Record daily turnover (value) 20-APR-2010 Rs.21,903.34 crores2 Record number of trades 11-JAN-2010 789353 Record number of contracts 20-APR-2010 48849354 Investor Protection Fund 30-APR-2010 Rs.0.01 crores WHOLESALE DEBT SEGMENT1 Number of securities available for trading 31-JUL-2010 4,2962 Record daily turnover (value) 25-AUG-2003 Rs. 13,911.57 crores

Technology

Across the globe, developments in information, communication and network technologies have created paradigm shifts in the securities market operations. Technology has enabled organisations to build new sources of competitive advantage, bring about innovations in products and services, and to provide for new business opportunities. Stock exchanges all over the world have realised the potential of IT and have moved over to electronic trading systems, which are cheaper, have wider reach and provide a better mechanism for trade and post trade execution.

NSE believes that technology will continue to provide the necessary impetus for the organisation to retain its competitive edge and ensure timeliness and satisfaction in customer service. In recognition of the fact that technology will continue to redefine the shape of the securities industry, NSE stresses on innovation and sustained investment in technology to remain ahead of competition. NSE's IT set-up is the largest by any company in India. It uses satellite communication technology to energise participation from around 200 cities spread all over the country. In the recent past, capacity enhancement measures were taken up in regard to the trading systems so as to effectively meet the requirements of increased users and associated trading loads. With upgradation of trading hardware, NSE today can handle up to 15 million trades per day in Capital Market segment. In order to capitalise on in-house expertise in technology, NSE set up a separate company, NSE Technology Services Ltd. which is expected to provide a platform for taking up all IT related assignments of NSE.

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NEAT is a state-of-the-art client server based application. At the server end, all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users. The trading server software runs on a fault tolerant STRATUS main frame computer while the client software runs under Windows on PCs.

The telecommunications network which was using X.25 protocol and is the backbone of the automated trading system is being upgraded to use the more popular and modern IP Protocol. This is a major project involving use of X.25 and IP in parallel and ensuring smooth transition to IP. Each trading member trades on the NSE with other members through a PC located in the trading member's office, anywhere in India. The trading members on the various market segments such as CM / F&O, WDM are linked to the central computer at the NSE through dedicated leased lines and VSAT terminals. The Exchange uses powerful RISC -based UNIX servers, procured from HP for the back office processing. The latest software platforms like ORACLE 10g RDBMS, SQL/ORACLE FORMS Front - Ends, etc. have been used for the Exchange applications. The Exchange currently manages its data centre operations, system and database administration, design and development of in-house systems and design and implementation of telecommunication solutions.

NSE is one of the largest interactive VSAT based stock exchanges in the world. Today it supports more than 2000 VSATs and 3000 leased lines across the country. The NSE- network is the largest private wide area network in the country and the first extended C- Band VSAT network in the world. Currently more than 9000 users are trading on the real time-online NSE application. There are over 15 large computer systems which include non-stop fault-tolerant computers and high end UNIX servers, operational under one roof to support the NSE applications. This coupled with the nation wide VSAT network makes NSE the country's largest Information Technology user.

In an ongoing effort to improve NSE's infrastructure, a corporate network has been implemented, connecting all the offices at Mumbai, Delhi, Calcutta and Chennai. This corporate network enables speedy inter-office communications and data and

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voice connectivity between offices.

In keeping with the current trend, NSE has gone online on the Internet. Apart from having multiple internet links and our own domain for internal browsing and e-mail purposes, we have also set up our own Web site.

1.2 NEED OF THE STUDY

The national stock exchange(NSE) in India s’ leading stock exchange in the country. It has played a great role in reforming the securities market.

This study will enlighten the growth of the national stock exchange across a variety of financial products. A stock market has been rightly said as the barometer of any economy.

The national stock exchange needs to be studied by every studied by every student, academician and investor.

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1.3 Objectives of the study

The objectives of the study are as follows.

a) To study in depth about equities.b) To know in detail the working of futures and options market.c) To study the debt market.d) To analyses the initial public offerings.e) To know about indices and other allied products.

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1.4 Period of study:

The period of the study is limited for a span of 3 months

1.5 Research methodology:

Research methodology is a very important aspect of any research. The research design of this project is as follows.

a) Literature serviceb) Compilation of data and c) Analysis and conclusion of data

In short the research designed has been closely followed for this project.

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1.6 Limitation of the study

It is hereby stated that, the study was conducted for a span of 3 months and as a result the inferences and conclusions may be slightly biased due to the constraint of time.

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CHAPTER-2: EQUITIES

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Equities

NSE started trading in the equities segment (Capital Market segment) on November 3, 1994 and within a short span of 1 year became the largest exchange in India in terms of volumes transacted.

Trading volumes in the equity segment have grown rapidly with average daily turnover increasing from Rs.17 crores during 1994-95 to Rs.14,148 crores during FY 2007-08. During the year 2007-08, NSE reported a turnover of Rs.3,551,038 crores in the equities segment.

The Equities section provides you with an insight into the equities segment of NSE and also provides real-time quotes and statistics of the equities market. In-depth information regarding listing of securities, trading systems & processes, clearing and settlement, risk management, trading statistics etc are available here.

Listing

Listing means admission of securities of an issuer to trading privileges on a stock exchange through a formal agreement. The prime objective of admission to dealings on the Exchange is to provide liquidity and marketability to securities, as also to provide a mechanism for effective management of trading.

Listing on NSE provides qualifying companies with the broadest access to investors, the greatest market depth and liquidity, cost-effective access to capital, the highest visibility, the fairest pricing, and investor benefits. NSE trading

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terminals are now situated in various cities and towns across the length and breath of India.

Securities listed on the Exchange are required to fulfill the eligibility criteria for listing. Various types of securities of a company are traded under a unique symbol and different series.

Trading

NSE introduced for the first time in India, fully automated screen based trading. It uses a modern, fully computerised trading system designed to offer investors across the length and breadth of the country a safe and easy way to invest.

The NSE trading system called 'National Exchange for Automated Trading' (NEAT) is a fully automated screen based trading system, which adopts the principle of an order driven market.

Clearing & Settlement (Equities)

NSCCL carries out clearing and settlement functions as per the settlement cycles provided in the settlement schedule.

The clearing function of the clearing corporation is designed to work out a) what members are due to deliver and b) what members are due to receive on the settlement date. Settlement is a two way process which involves transfer of funds and securities on the settlement date.

NSCCL has also devised mechanism to handle various exceptional situations like security shortages, bad delivery, company objections, auction settlement etc.

Risk Management (Capital Market)

1. Categorization of stocks for imposition of margins

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2. Margins

3. Margins collection from Client

4. Margin Shortfall

5. Liquid assets

6. Margins for institutional deals

7. Exemption upon early pay-in of securities

8. Exemption upon early pay-in of funds

9. Cross Margin Formats for Collaterals

1. Categorization of stocks for imposition of margins

Stocks are classified into three categories on the basis of their liquidity and impact cost.

The Stocks which have traded at least 80% of the days for the previous six months shall constitute the Group I and Group II.

Out of the scripts identified above, the scripts having mean impact cost of less than or equal to 1% are categorized under Group I and the scripts where the impact cost is more than 1, are categorized under Group II.

The remaining stocks are classified into Group III.

The impact cost is calculated on the 15th of each month on a rolling basis considering the order book snapshots of the previous six months. On the basis of the impact cost so calculated, the scripts move from one group to another group from the 1st of the next month.

For securities that have been listed for less than six months, the trading frequency and the impact cost are computed using the entire trading history of the security.

1.1Categorisation of newly listed securities

For the first month and till the time of monthly review a newly listed security is

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categorised in that Group where the market capitalization of the newly listed security exceeds or equals the market capitalization of 80% of the securities in that particular group. Subsequently, after one month, whenever the next monthly review is carried out, the actual trading frequency and impact cost of the security is computed, to determine the liquidity categorization of the security.

In case any corporate action results in a change in ISIN, then the securities bearing the new ISIN are treated as newly listed security for group categorization.

2. Margins

Daily margins payable by members consists of the following:

2.1Value at Risk Margin

2.2Extreme Loss Margin

2.3Mark to Market Margin

Daily margin, comprising of the sum of VaR margin, Extreme Loss Margin and mark to market margin is payable.

2.1 Value at Risk Margin

All securities are classified into three groups for the purpose of VaR margin

For the securities listed in Group I, scrip wise daily volatility calculated using the exponentially weighted moving average methodology is applied to daily returns. The scrip wise daily VaR is 3.5 times the volatility so calculated subject to a minimum of 7.5%.

For the securities listed in Group II, the VaR margin is higher of scrip VaR (3.5 sigma) or three times the index VaR, and it is scaled up by root 3.

For the securities listed in Group III the VaR margin is equal to five times the index VaR and scaled up by root 3.

The index VaR, for the purpose, is the higher of the daily Index VaR based on S&P CNX NIFTY or BSE SENSEX, subject to a minimum of 5%.

NSCCL may stipulate security specific margins from time to time.

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The VaR margin rate computed as mentioned above is charged on the net outstanding position (buy value-sell value) of the respective clients on the respective securities across all open settlements. There is no netting off of positions across different settlements. The net position at a client level for a member is arrived at and thereafter, it is grossed across all the clients including proprietary position to arrive at the gross open position.

For example, in case of a member, if client A has a buy position of 1000 in a security and client B has a sell position of 1000 in the same security, the net position of the member in the security is taken as 2000. The buy position of client A and sell position of client B in the same security is not netted. It is summed up to arrive at the member’s open position for the purpose of margin calculation.

The VaR margin is collected on an upfront basis by adjusting against the total liquid assets of the member at the time of trade.

The VaR margin so collected is released on completion of pay-in of the settlement or on individual completion of full obligations of funds and securities by the respective member/custodians after crystallization of the final obligations on T+1 day

2.2 Extreme Loss Margin

The Extreme Loss Margin for any security is higher of:

1. 5%, or2. 5times the standard deviation of daily logarithmic returns of the security

price in the last six months. This computation is done at the end of each month by taking the price data on a rolling basis for the past six months and the resulting value is applicable for the next month.

The Extreme Loss Margin is collected/ adjusted against the total liquid assets of the member on a real time basis.

The Extreme Loss Margin is collected on the gross open position of the member. The gross open position for this purpose means the gross of all net positions across all the clients of a member including its proprietary position.

There is no netting off of positions across different settlements. The Extreme Loss Margin collected is released on completion of pay-in of the settlement or on

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individual completion of full obligations of funds and securities by the respective member/custodians after crystallization of the final obligations on T+1 day.

2.3 Mark-to-Market Margin

Mark to market loss is calculated by marking each transaction in security to the closing price of the security at the end of trading. In case the security has not been traded on a particular day, the latest available closing price at NSE is considered as the closing price. In case the net outstanding position in any security is nil, the difference between the buy and sell values shall be is considered as notional loss for the purpose of calculating the mark to market margin payable.

The mark to market margin (MTM) is collected from the member before the start of the trading of the next day.

The MTM margin is collected/adjusted from/against the cash/cash equivalent component of the liquid net worth deposited with the Exchange.

The MTM margin is collected on the gross open position of the member. The gross open position for this purpose means the gross of all net positions across all the clients of a member including its proprietary position. For this purpose, the position of a client is netted across its various securities and the positions of all the clients of a member are grossed.

There is no netting off of the positions and setoff against MTM profits across two rolling settlements i.e. T day and T+1 day. However, for computation of MTM profits/losses for the day, netting or setoff against MTM profits is permitted.

Trade for Trade segment –Surveillance segment

In case of securities in Trade for Trade –Surveillance segment (TFT-S segment) the upfront margin rates (VaR Margin + Extreme Loss Margin) applicable is 100 % and each trade is marked to market based on the closing price of that security.

Capping of margins

In case of a buy transaction, the VaR margins, Extreme loss margins and mark to market losses together cannot exceed the purchase value of the transaction. In case of a sale transaction, the VaR margins and Extreme loss margins together are capped to the extent of the sale value of the transaction and mark to market losses

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are also levied.

The details of all margins VAR, extreme loss margin and mark to market as at end of each day are downloaded to members in their respective Extranet directory.

Release of margins

All margins collected for a settlement for a member/custodian are released on their individual completion of full obligations of funds and securities by the respective member/custodians after crystallization of the final obligations on T+1 day. Further, members are provided a facility to provide confirmation from their clearing banks towards their funds pay-in obligations on settlement day before prescribed pay-in time through the prescribed procedure.

3. Margins collection from Client

Members should have a prudent system of risk management to protect themselves from client default. Margins are likely to be an important element of such a system. The same should be well documented and be made accessible to the clients and the Stock Exchanges. However, the quantum of these margins and the form and mode of collection are left to the discretion of the members.

4. Margin Shortfall

In case of any shortfall in margin:

The members shall not be permitted to trade with immediate effect. There is a penalty for margin violation

Penalty applicable for margin violation is levied on a monthly basis based on slabs as mentioned below:  

Instances of Disablement

Penalty to be levied

1st instance 0.07% per day

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2nd to 5th instance of disablement

0.07% per day +Rs.5000/- per instance from 2nd to 5th instance

6th to 10th instance of disablement

0.07% per day+ Rs. 20000 ( for 2nd to 5th instance) +Rs.10000/- per instance from 6th to 10th instance

11th instance onwards

0.07% per day +Rs. 70,000/- (for 2nd to 10th instance) +Rs.10000/- per instance from 11th instance onwards. Additionally, the member will be referred to the Disciplinary Action Committee for suitable action

Instances as mentioned above shall refer to all disablements during market hours in a calendar month. The penal charge of 0.07% per day shall is applicable on all disablements due to margin violation anytime during the day.

5. Liquid assets

Members are required to provide liquid assets which adequately cover various margins and Security Deposit requirements. A member may deposit liquid assets in the form of cash, bank guarantees, fixed deposit receipts, approved securities and any other form of collateral as may be prescribed from time to time. The total liquid assets comprise of the cash component and the non cash component wherein the cash component shall be at least 50% of liquid assets.

5.1. Cash Component:

Cash Bank fixed deposits (FDRs) issued by approved banks and deposited with

approved custodians or NSCCL. Bank Guarantees (BGs) in favour of NSCCL from approved banks in the

specified format. Units of money market mutual fund and Gilt funds where applicable haircut

is 10%. Government Securities and T-Bills

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5.2. Non Cash Component:

Liquid (Group I) Equity Shares in demat form, as specified by NSCCL from time to time deposited with approved custodians.

Mutual fund units other than those listed under cash component decided by NSCCL from time to time deposited with approved custodians.

6. Margins for institutional deals

Institutional businesses i.e., transactions done by all institutional investors are margined from T+1 day subsequent to confirmation of the transactions by the custodians. For this purpose, institutional investors include

Foreign Institutional Investors registered with SEBI. (FII) Mutual Funds registered with SEBI. (MF) Public Financial Institutions as defined under Section 4A of the Companies

Act, 1956. (DFI) Banks, i.e., a banking company as defined under Section 5(1)(c) of the

Banking Regulations Act, 1949. (BNK) Insurance companies registered with IRDA. (INS)  Pension Funds registered with PFRDA (PNF)

6.1. LEVIEY OF MARGINS

Institutional transactions are identified by the use of the participant code at the time of order entry.

In respect of institutional transactions confirmed by the custodians the margins are levied on the custodians.

In respect of institutional transactions rejected/not accepted by the custodians the margins are levied on the members who have executed the transactions.

The margins are computed and levied at a client (Custodial Participant code) level in respect of institutional transactions and collected from the custodians/members.

6.2. Retail Professional Clearing Member:

In case of transactions which are to be settled by Retail Professional Clearing Members (PCM), all the trades with PCM code are included in the trading

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member’s positions till the same are confirmed by the PCM. Margins are collected from respective trading members until confirmation of trades by PCM.

On confirmation of trades by PCM, such trades are reduced from the positions of trading member and included in the positions of PCM. The PCMs are then liable to pay margins on the same.

7. Exemption upon early pay-in of securities

In cases where early pay-in of securities  is made prior to the securities pay-in, such positions for which early pay-in (EPI) of securities is made are exempt from margins. Members are required to provide client level early pay-in file in a specified format. The EPI of securities is allocated to clients having net deliverable position, on a random basis unless specific client details are provided by the member/ custodian. However, member/ custodian shall ensure to pass on appropriate early pay-in benefit of margin to the relevant clients. Additionally, member/custodian can specify the clients to whom the early pay-in may be allocated.

8. Exemption upon early pay-in of funds

In cases where early pay-in of funds is made prior to the funds pay-in, such positions for which early pay-in (EPI) of funds is made shall be exempt from margins subject to bank confirmation.

Members/Custodians shall make early pay-in funds through a screen-based request in the Collateral Interface for Members (CIM). The facility for making early pay-in of funds will be separate from the facility of allocation of the early pay-in of funds which can be done either through Screen based request or file upload.

Members/Custodians may provide early pay-in of funds from any of their settlement accounts.

Early pay in of funds may be allocated at client level or at client-security level. The allocation can be revised through a screen based request or through the file upload facility in the specified format.

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Members can make early pay-in of funds along with details of client-security allocation before execution of a trade and shall be able to avail the benefit of early pay-in of funds on execution of the trade.

Where no allocation is made, Early pay in of funds would be allocated against the clients in the descending order of their net buy value of outstanding positions.

9. Cross Margin

Salient features of the cross margining available are as under:

Cross margining benefit is available across Cash and Derivatives segment

Cross margining benefit is available to all categories of market participants

through Collateral Interface for Members (CIM) to avail the benefit of Cross margining

For client/entities clearing through different clearing member in Cash and Derivatives segments they are required to enter into necessary agreements for availing cross margining benefit.

For the client/entities who wish to avail cross margining benefit in respect of positions in Index Futures and Constituent Stock Futures only, the entity’s clearing member in the Derivatives segment has to provide the details of the clients and not the copies of the agreements. The details to be provided by the clearing members in this regard are stipulated in the Format.

9.1. Position eligible for cross margin benefit:

Cross margining is available across Cash and F&O segment and to all categories of market participants. The positions of clients in both the Cash and F&O segments to the extent they offset each other are being considered for the purpose of cross margining as per the following priority

a. Index futures and constituent stock futures in F&O segmentb. Index futures and constituent stock positions in Cash segmentc. Stock futures in F&O segment and stock positions in Cash segment

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i. In order to extend the cross margin benefit as per (a) and (b) above, the basket of constituent stock futures/ stock positions should be a complete replica of the index futures. NSCCL specifies the number of units of the constituent stocks/ stock futures required in the basket to be considered as a complete replica of the index on the website of the exchange (www.nseindia.com/NSCCL/Notification) from time to time.

ii. The number of units are changed only in case of change in share capital of the constituent stock due to corporate action or issue of additional share capital or change in the constituents of the index.

iii. The positions in F&O segment for the stock futures and index futures should be in the same expiry month to be eligible for cross margining benefit.

iv. The position in a security is considered only once for providing cross margining benefit. E.g. Positions in Stock Futures of security ‘A’ used to set-off against index futures positions will not be considered again if there is an off-setting positions in the security ‘A’ in Cash segment.

v. Positions in option contracts are not considered for cross margining benefit.

9.2. Entities/clients eligible for cross margining

The clearing member has to inform NSCCL the details of client to whom cross margining benefit is to be provided. The cross margining benefit is available only if clearing members provide the details of clients in such manner and within such time as specified by NSCCL from time to time.

1.Client/entity settling through same clearing member in both Cash and F&O segment

i. The clearing member has to ensure that the code allotted (code used while executing client trade) to client/entity in both Cash and F&O segment is same

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ii. The clearing member must inform the details of clients to whom cross margining benefit is to be provided through a file upload facility provided in Collateral Interface for Members (CIM).

2. Client/entity settling through different clearing member in Cash and F&O segment

i. In case a client settles in the Cash segment through a trading member / custodian and clears and settles through a different clearing member in F&O segment, then they are required to enter into necessary agreements.

ii. In case where the client/entity settles through Custodian in Cash segment, then the client/entity, custodian and the clearing member in F&O segment are required to enter into a tri-partite agreement as per the format

iii. In case where the client/entity clears and settles through a member in Cash segment, and a different clearing member in F&O segment, then the member in Cash segment and the clearing member in F&O segment have to enter into an agreement as per the format. Further, the client/entity must enter into an agreement with the member as per the format.

iv. The clearing member in the F&O segment must intimate to NSCCL the details of the client/entity in F&O segment along-with letter from trading member/custodian giving details of client/entity in Cash segment who wish to avail cross margining benefit.

3. Facility of maintaining two client accounts

As specified by SEBI, a client may maintain two accounts with their respective members to avail cross margin benefit only. The two accounts namely arbitrage account and a non-arbitrage account may be used for converting partially replicated portfolio into a fully replicated portfolio by taking opposite positions in two accounts. However, for the purpose of compliance and reporting requirements, the positions across both accounts shall be taken together and client shall continue to have unique client code.

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4. Computation of cross margining benefit

i. The computation of cross margining benefit is done at client level on an online real time basis and provided to the trading member / clearing member / custodian, as the case may be, who, in turn, shall pass on the benefit to the respective client.

ii. For institutional investors the positions in Cash segment are considered only after confirmation by the custodian on T+1 basis and on confirmation by the clearing member in F&O segment.

iii. The positions in the Cash and F&O segment are considered for cross margining only till time the margins are levied on such positions.

iv. While reckoning the offsetting positions in the Cash segment, positions in respect of which margin benefit has been given on account of early pay-in of securities or funds are not considered.

v. The positions which are eligible for offset, are subject to spread margins. The spread margins are 25% of the applicable upfront margins on the offsetting positions or such other amount as specified by NSCCL from time to time.

vi. The difference in the margins on the total portfolio and on the portfolio excluding off-setting positions considered for cross margining, less the spread margins is considered as cross margining benefit. Example

5. Provisions in respect of default

In the event of default by a trading member / clearing member / custodian, as the case may be, whose clients have availed cross margining benefit, NSCCL may:

i. Hold the positions in the cross margin account till expiry in its own name.ii. Liquidate the positions / collateral in either segment and use the proceeds to

meet the default obligation in the other segment.iii. In addition to the foregoing provisions, take such other risk containment

measures or disciplinary action as it may deem fit and appropriate in this regard.

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6. Additional reports

Additional reports providing details of cross margin benefit and off-setting positions at client level are provided to members as per the format specified

CHAPTER-3 Futures & Options

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Futures & Options

The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with the launch of index futures on June 12, 2000. The futures contracts are based on the popular benchmark S&P CNX Nifty Index.

The Exchange introduced trading in Index Options (also based on Nifty) on June 4, 2001. NSE also became the first exchange to launch trading in options on individual securities from July 2, 2001. Futures on individual securities were introduced on November 9, 2001. Futures and Options on individual securities are available on 202 securities stipulated by SEBI.

The Exchange has also introduced trading in Futures and Options contracts based on CNX-IT, BANK NIFTY, and  NIFTY MIDCAP 50 indices.

This section provides you with an insight into the derivatives segment of NSE. Real-time quotes and information regarding derivative products, trading systems & processes, clearing and settlement, risk management, statistics etc. are available here.

Risk Management (Derivatives)

1. Liquid Assets2. Margins3. NSCCL SPAN | PC SPAN | SPAN Risk Parameter Files4. Payment of Margins5. Position Limits

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6. Violations7. FII/MF position limits8. Client Margin Reporting9. Data and Reports Download10.Formats for collaterals11.Cross Margin

1.Liquid assets

Clearing members are required to provide liquid assets which adequately cover various margins and liquid net worth requirements. A clearing member may deposit liquid assets in the form of cash, bank guarantees, fixed deposit receipts, approved securities and any other form of collateral as may be prescribed from time to time. The total liquid assets comprise of the cash component and the non cash component wherein the cash component shall be at least 50% of liquid assets.

1.1 Cash Component:

Cash Bank fixed deposits (FDRs) issued by approved banks and deposited with

approved custodians or NSCCL. Bank Guarantees (BGs) in favour of NSCCL from approved banks in the

specified format. Units of money market mutual fund and Gilt funds where applicable haircut

is 10%.

Government Securities and T-Bills

1.2 Non Cash Component:

Liquid (Group I) Equity Shares as per Capital Market Segment which are in demat form, as specified by NSCCL from time to time deposited with approved custodians

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Mutual fund units other than those listed under cash component decided by NSCCL from time to time depo Margins

NSCCL has developed a comprehensive risk containment mechanism for the Futures & Options segment. The most critical component of a risk containment mechanism for NSCCL is the online position monitoring and margining system. The actual margining and position monitoring is done on-line, on an intra-day basis. NSCCL uses the SPAN® (Standard Portfolio Analysis of Risk) system for the purpose of margining, which is a portfolio based system.

2. Margin

2.1 Initial Margin:

a. Span Margin

NSCCL collects initial margin up-front for all the open positions of a CM based on the margins computed by NSCCL-SPAN®. A CM is in turn required to collect the initial margin from the TMs and his respective clients. Similarly, a TM should collect upfront margins from his clients.

Initial margin requirements are based on 99% value at risk over a one day time horizon. However, in the case of futures contracts (on index or individual securities), where it may not be possible to collect mark to market settlement value, before the commencement of trading on the next day, the initial margin is computed over a two-day time horizon, applying the appropriate statistical formula. The methodology for computation of Value at Risk percentage is as per the recommendations of SEBI from time to time.

Initial margin requirement for a member:

For client positions - is netted at the level of individual client and grossed across all clients, at the Trading/ Clearing Member level, without any setoffs between clients.

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For proprietary positions - is netted at Trading/ Clearing Member level without any setoffs between client and proprietary positions. 

For the purpose of SPAN Margin, various parameters are specified from time to time.

In case a trading member wishes to take additional trading positions his CM is required to provide Additional Base Capital (ABC) to NSCCL. ABC can be provided by the members in the form of Cash, Bank Guarantee, Fixed Deposit Receipts and approved securities.

b. Premium Margin

In addition to Span Margin, Premium Margin is charged to members. The premium margin is the client wise premium amount payable by the buyer of the option and is levied till the completion of pay-in towards the premium settlement.

c. Assignment Margin

Assignment Margin is levied on a CM in addition to SPAN margin and Premium Margin. It is levied on assigned positions of CMs towards interim and final exercise settlement obligations for option contracts on index and individual securities till the pay-in towards exercise settlement is complete.

The Assignment Margin is the net exercise settlement value payable by a Clearing Member towards interim and final exercise settlement and is deducted from the effective deposits of the Clearing Member available towards margins.

Assignment margin is released to the CMs for exercise settlement pay-in.

Initial Margin requirement = Total SPAN Margin Requirement + Buy Premium + Assignment Margin

2.2 Exposure Margin:

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a) The exposure margins for options and futures contracts on index are as follows:

For Index options and Index futures contracts:3% of the notional value of a futures contract. In case of options it is charged only on short positions and is 3% of the notional value of open positions.

b) For option contracts and Futures Contract on individual Securities:The higher of 5% or 1.5 standard deviation of the notional value of gross open position in futures on individual securities and gross short open positions in options on individual securities in a particular underlying. The standard deviation of daily logarithmic returns of prices in the underlying stock in the cash market in the last six months is computed on a rolling and monthly basis at the end of each month.

c) For this purpose notional value means :- For a futures contract – the contract value at last traded price/ closing price.- For an options contract – the value of an equivalent number of shares as conveyed by the options contract, in the underlying market, based on the last available closing price.

In case of calendar spread positions in futures contract, exposure margins are levied on one third of the value of open position of the far month futures contract. The calendar spread position is granted calendar spread treatment till the expiry of the near month contract.

2.3 Margin Reports:

The following margin reports are downloaded to members on a daily basis:

a. Margin Statement of Clearing Members : MG-09 b. Margin Statement of Trading Member/ Custodial Participant : MG-10 c. Margin Payable Statement of Clearing Member : MG-11 d. Detail Margin File of Clearing Members : MG - 12 e. Client Level Margin File of Trading Members : MG-13f. Cross margin benefit report for clearing member: MG – 14g. Cross margin benefit report for trading member: MG – 15h. Offset positions report for trading member (XM_01)i. Offset positions report for clearing member (XM_02)

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3.1NSCCL SPAN

The objective of SPAN is to identify overall risk in a portfolio of futures and options contracts for each member. The system treats futures and options contracts uniformly, while at the same time recognizing the unique exposures associated with options portfolios like extremely deep out-of-the-money short positions, inter-month risk and inter-commodity risk.

Because SPAN is used to determine performance bond requirements (margin requirements), 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.

In standard pricing models, three factors most directly affect the value of an option at a given point in time:

1. Underlying market price2. Volatility (variability) of underlying instrument3. Time to expiration

As these factors change, so too will the value of futures and options maintained within a portfolio. SPAN constructs 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. It then sets the margin requirement at a level sufficient to cover this one-day loss.

1.1 Mechanics of SPAN1.2 Risk Arrays1.3 Price Scan Range1.4 Composite Delta1.5 Calendar Spread or Intra-commodity or Inter-month Risk Charge1.6 Short Option Minimum Charge1.7 Net Option Value (only for option contracts)1.8 Computation of Initial Margin - Overall Portfolio Margin Requirement1.9 Black-Scholes Option Price calculation model

1.1 Mechanics of SPANThe complex calculations (e.g. the pricing of options) in SPAN are executed by the Clearing Corporation. The results of these calculations are called Risk arrays. Risk arrays, and other necessary data inputs for margin calculation are then provided to members on a daily basis in a file called the SPAN Risk

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Parameter file.

Members can apply the data contained in the Risk parameter files to their specific portfolios of futures and options contracts to determine their SPAN margin requirements.

Hence members need not execute complex option pricing calculations which are performed by NSCCL. SPAN has the ability to estimate risk for combined futures and options portfolios and re-value the same under various scenarios of changing market conditions.

1.2 Risk Arrays

The SPAN risk array represents how a specific derivative instrument (for example, an option on NIFTY index at a specific strike price) will gain or lose value from the current point in time to a specific point in time in the near future (typically it calculates risk over a one day period called the ‘look ahead time’), for a specific set of market conditions which may occur over this time duration.

The specific set of market conditions evaluated are called the risk scenarios, and these are defined in terms of :(a) how much the price of the underlying instrument is expected to change over one trading day and (b) how much the volatility of that underlying price is expected to change over one trading day.

The results of the calculation for each risk scenario – i.e. the amount by which the futures and options contracts will gain or lose value over the look-ahead time under that risk scenario - is called the risk array value for that scenario. The set of risk array values for each futures and options contract under the full set of risk scenarios, constitutes the Risk Array for that contract.

In the Risk Array losses are represented as positive values and gains as negative values. Risk array values are typically represented in the currency (Indian Rupees) in which the futures or options contract is denominated.

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SPAN further uses a standardized definition of the risk scenarios defined in terms of (i) the underlying ‘price scan range’ or probable price change over a one day period, (ii) and the underlying price ‘volatility scan range’ or probable volatility change of the underlying over a one day period. These two values are often simply referred to as the ‘price scan range’ and the ‘volatility scan range’. There are sixteen risk scenarios in the standard definition. These scenarios are listed as under:

1. Underlying unchanged; volatility up2. Underlying unchanged; volatility down3. Underlying up by 1/3 of price scanning range; volatility up4. Underlying up by 1/3 of price scanning range; volatility down5. Underlying down by 1/3 of price scanning range; volatility up6. Underlying down by 1/3 of price scanning range; volatility down7. Underlying up by 2/3 of price scanning range; volatility up8. Underlying up by 2/3 of price scanning range; volatility down9. Underlying down by 2/3 of price scanning range; volatility up 10. Underlying down by 2/3 of price scanning range; volatility down11. Underlying up by 3/3 of price scanning range; volatility up12 . Underlying up by 3/3 of price scanning range; volatility down13. Underlying down by 3/3 of price scanning range; volatility up14. Underlying down by 3/3 of price scanning range; volatility down15. Underlying up extreme move, double the price scanning range (cover 35% of loss)16. Underlying down extreme move, double the price scanning range (cover 35% of loss)

SPAN uses the risk arrays to scan probable underlying market price changes and probable volatility changes for all contracts in a portfolio, in order to determine value gains and losses at the portfolio level. This is the single most important calculation executed by the system.

As shown above in the sixteen standard risk scenarios, SPAN starts at the last underlying market settlement price and scans up and down three even intervals of price changes (‘price scan range’).

At each ‘price scan point’, the program also scans up and down a range of

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probable volatility from the underlying market's current volatility (‘volatility scan range’). SPAN calculates the probable premium value at each price scan point for volatility up and volatility down scenario. It then compares this probable premium value to the theoretical premium value (based on last closing value of the underlying) to determine profit or loss.

Deep-out-of-the-money short options positions pose a special risk identification problem. As they move towards expiration, they may not be significantly exposed to "normal" price moves in the underlying. However, unusually large underlying price changes may cause these options to move into-the-money, thus creating large losses to the holders of short option positions. In order to account for this possibility, two of the standard risk scenarios in the Risk Array (sr. no. 15 and 16) reflect an "extreme" underlying price movement, currently defined as double the maximum price scan range for a given underlying. However, because price changes of these magnitudes are rare, the system only covers 35% of the resulting losses.

After SPAN has scanned the 16 different scenarios of underlying market price and volatility changes, it selects the largest loss from among these 16 observations. This "largest reasonable loss" is the ‘Scanning Risk Charge’ for the portfolio - in other words, for all futures and options contracts.

1.3 Price Scan Range

The price scan range, as explained above, is the probable price change over a one-day period. In case of index products and stock products the price scan range is taken as three standard deviations (3 sigma ) and three and a half standard deviations (3.5 sigma) respectively as calculated for VaR purpose for the underlying index and underlying security or other price scan range as may be prescribed. The price scan range for options and futures on individual securities is also linked to liquidity. This is measured in terms of  impact cost  for an order size of Rs 5 lakh calculated on the basis of order book snapshots in the previous six months as  per defined methodology. Accordingly if the mean value of the impact cost exceeds 1%, the price scanning range is scaled up by square root of three. This is in addition to the requirement on account of look ahead period as may be applicable.

The mean impact cost as stipulated by SEBI is calculated on the 15th of each month on a rolling basis considering the order book snap shots of previous six

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months. If the mean impact cost of a security moves from less than or equal to 1% to more than 1%, the price scan range in such underlying is scaled by square root of three and scaling is dropped when the impact cost drops to 1% or less. Such changes are made applicable on all existing open positions from the third working day from the 15th of each month.

1.4 Composite Delta

SPAN uses delta information to form spreads between futures and options contracts. Delta values measure the manner in which a future's or option's value will change in relation to changes in the value of the underlying instrument. Futures deltas are always 1.0; options deltas range from -1.0 to +1.0. Moreover, options deltas are dynamic: a change in value of the underlying instrument will affect not only the option's price, but also its delta.

In the interest of simplicity, SPAN employs only one delta value per contract, called the "Composite Delta." It is the weighted average of the deltas associated with each underlying ‘price scan point’. The weights associated with each ‘price scan point’ are based upon the probability of the associated price movement, with more likely price changes receiving higher weights and less likely price changes receiving lower weights. Please note that Composite Delta for an options contract is an estimate of the contract's delta after the lookahead - in other words, after one trading day has passed.

1.5 Calendar Spread or Intra-commodity or Inter-month Risk Charge

As SPAN scans futures prices within a single underlying instrument, it assumes that price moves correlate perfectly across contract months. Since price moves across contract months do not generally exhibit perfect correlation, SPAN adds a Calendar Spread Charge (also called the Inter-month Spread Charge) to the Scanning Risk Charge associated with each futures and options contract. To put it in a different way, the Calendar Spread Charge covers the calendar (inter-month etc.) basis risk that may exist for portfolios containing futures and options with different expirations.

For each futures and options contract, SPAN identifies the delta associated with each futures and option position, for a contract month. It then forms spreads using these deltas across contract months. For each spread formed, SPAN assesses a specific charge per spread which constitutes the Calendar

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Spread Charge.

The margin for calendar spread shall be calculated on the basis of delta of the portfolio in each month. Thus a portfolio consisting of a near month option with a delta of 100 and a far month option with a delta of –100 would bear a spread charge equivalent to the calendar spread charge for a portfolio which is long 100 near month futures contract and short 100 far month futures contract.

The calendar spread position shall be granted calendar spread treatment till the expiry of the near month contract.

1.6 Short Option Minimum Charge

Short options positions in extremely deep-out-of-the-money strikes may appear to have little or no risk across the entire scanning range. However, in the event that underlying market conditions change sufficiently, these options may move into-the-money, thereby generating large losses for the short positions in these options. To cover the risks associated with deep-out-of-the-money short options positions, SPAN assesses a minimum margin for each short option position in the portfolio called the Short Option Minimum charge, which is set by the NSCCL. The Short Option Minimum charge serves as a minimum charge towards margin requirements for each short position in an option contract.

For example, suppose that the Short Option Minimum charge is Rs. 50 per short position. A portfolio containing 20 short options will have a margin requirement of at least Rs. 1,000, even if the scanning risk charge plus the inter month spread charge on the position is only Rs. 500.

1.7 Net Option Value (only for option contracts)

In the above scenario only sell positions are margined and offsetting benefits for buy positions are given to the extent of long positions in the portfolio by computing the net option value.

1.8 Requirement

Computation of Initial Margin - Overall Portfolio Margin RequirementThe total margin requirements for a member for a portfolio of futures and options contract are computed as follows:

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(i) SPAN will add up the Scanning Risk Charges and the Intracommodity Spread Charges. (ii) SPAN will compare this figure (as per i above) to the Short Option Minimum charge(iii) It will select the larger of the two values between (i) and (ii)(iv)Total SPAN Margin requirement is equal to SPAN Risk Requirement (as per iii above), less the ‘net option value’, which is mark to market value of difference in long option positions and short option positions

1.9 Black-Scholes Option Price calculation model

The options price for a Call, computed as per the following Black Scholes formula:C = S * N (d1) - X * e- rt * N (d2)and the price for a Put is : P = X * e- rt * N (-d2) - S * N (-d1)

where :d1 = [ln (S / X) + (r + σ2 / 2) * t] / σ * sqrt(t)d2 = [ln (S / X) + (r - σ2 / 2) * t] / σ * sqrt(t)     = d1 - σ * sqrt(t)

C = price of a call optionP = price of a put optionS = price of the underlying assetX = Strike price of the optionr = rate of interestt = time to expirationσ = volatility of the underlying

N represents a standard normal distribution with mean = 0 and standard deviation = 1ln represents the natural logarithm of a number. Natural logarithms are based on the constant e (2.71828182845904).

Rate of interest may be the relevant MIBOR rate or such other rate as may be specified.

SPAN® is a registered trademark of the Chicago Mercantile Exchange, used herein under License. The Chicago Mercantile Exchange assumes no liability

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in connection with the use of SPAN by any person or entity.

3.2 PC SPAN®

NSCCL has received copies of PC-SPAN CD from the Chicago Mercantile Exchange and provides the same to members at a charge of Rs. 8,598/- per CD.

To obtain a copy of PC-SPAN as above, members are required to:

1. Execute an undertaking in the specified format. The undertaking is required to be executed on non-judicial stamp paper of Rs.20/- or the value prevailing in the State where executed, whichever is higher. The undertaking needs to be notarized and the common seal of the company needs to be affixed on the last page

2. Provide a DD payable at Mumbai in favour of National Stock Exchange of India Ltd. for Rs.8,598/-

3. Provide an acknowledgement letter in specified format.

3.1NSCCL SPAN®

SPAN Risk Parameter Files

Begin Day File nsccl.20100907.i1.zip nsccl.20100907.i1_1.zip

1st Intra-day File nsccl.20100907.i2.zip nsccl.20100907.i2_1.zip

4. Payment of Margins The initial and exposure margin is payable upfront by Clearing Members. Initial margins can be paid by members in the form of Cash, Bank Guarantee, Fixed Deposit Receipts and approved securities.

Clearing members who are clearing and settling for other trading members can specify the maximum collateral limit towards initial margins, for each trading member and custodial participant clearing and settling through them.

Such limits can be set up by the clearing member, through the facility

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provided on the trading system upto the time specified in this regard. Such collateral limits once set are applicable to the trading members/custodial participants for that day, unless otherwise modified by clearing member.

Non-fulfillment of either whole or part of the margin obligations will be treated as a violation of the Rules, Bye-Laws and Regulations of NSCCL and will attract penalty.

In addition NSCCL may at its discretion and without any further notice to the clearing member, initiate other disciplinary action, inter-alia including, withdrawal of trading facilities and/ or clearing facility, close out of outstanding positions, imposing penalties, collecting appropriate deposits.

5. Position Limits

Clearing Members are subject to the following position limits in addition to initial margins requirements.

Market Wide Position Limits (for Derivative Contracts on Underlying Stocks)

Trading Memberwise Position Limit Client Level Position Limits FII/MF position limits

5.1 Market Wide Position Limits (for Derivative Contracts on Underlying Stocks)At the end of each day the Exchange disseminates the aggregate open interest across all Exchanges in the futures and options on individual scrips along with the market wide position limit for that scrip and tests whether the aggregate open interest for any scrip exceeds 95% of the market wide position limit for that scrip. If yes, the Exchange takes note of open positions of all client/ TMs as at the end of that day in that scrip, and from next day onwards the client/ TMs should trade only to decrease their positions through offsetting positions till the normal trading in the scrip is resumed.

The normal trading in the scrip is resumed only after the aggregate open interest across Exchanges comes down to 80% or below of the market wide position limit.

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A facility is available on the trading system to display an alert once the open interest on the NSE in the futures and options contract in a security exceeds 60% of the market wide position limit specified for such security. Such alerts are presently displayed at time intervals of 10 minutes.

5.2 Trading Memberwise Position Limit

The trading member-wise position limit in equity index option and index futures is as under: Index FuturesThe trading member position limits in equity index futures contracts is higher of Rs.500 crores or 15% of the total open interest in the market in equity index futures contracts. This limit is be applicable on open positions in all futures contracts on a particular underlying index.

Index OptionsThe trading member position limits in equity index option contracts is higher of Rs.500 crores or 15% of the total open interest in the market in equity index option contracts. This limit would be applicable on open positions in all option contracts on a particular underlying index

Futures and Option contracts on individual securities :The trading member-wise position limit in futures and options in individual stocks is related to the market-wide position limit for the individual stocks.

i. For stocks having applicable market-wide position limit (MWPL) of Rs. 500 crores or more, the combined futures and options position limit is 20% of applicable MWPL or Rs. 300 crores, whichever is lower and within which stock futures position cannot exceed 10% of applicable MWPL or Rs. 150 crores, whichever is lower.

ii. For stocks having applicable market-wide position limit (MWPL) less than Rs. 500 crores, the combined futures and options position limit is 20% of applicable MWPL and futures position cannot exceed 20% of applicable MWPL or Rs. 50 crore which ever is lower.

5.3 Client Level Position Limits

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The gross open position for each client, across all the derivative contracts on a underlying, should not exceed:

- 1% of the free float market capitalization (in terms of number of shares)or- 5% of the open interest in all derivative contracts in the same underlying stock (in terms of number of shares)whichever is higher

Client level position limits underlying-wise, are available to members on NSE's website.

6. Violations

PRISM (Parallel Risk Management System) is the real-time position monitoring and risk management system for the Futures and Options market segment at NSCCL. The risk of each trading and clearing member is monitored on a real-time basis and alerts/disablement messages are generated if the member crosses the set limits.  

Initial Margin Violation Exposure Limit Violation Trading Memberwise Position Limit Violation Client Level Position Limit Violation Market Wide Position Limit Violation Violation arising out of misutilisation of trading member/ constituent

collaterals and/or deposits Violation of Exercised Positions

Clearing members, who have violated any requirement and / or limits, may reduce the position by closing out its existing position or, bring in additional cash deposit by way of cash or bank guarantee or FDR or securities. Similarly, in case of margin violation by Trading members, clearing member has to set its limit for enablement.

6.1 Initial Margin violation

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The initial margin on positions of a CM is computed on a real time basis i.e. for each trade. The initial margin amount is reduced from the effective deposits of the CM with the Clearing Corporation. For this purpose, effective deposits are computed by reducing the total deposits of the CM by Rs. 50 lakhs (referred to as minimum liquid networth). The CM receives warning messages on his terminal when 70%, 80%, and 90% of the effective deposits are utilised. At 100% the clearing facility provided to the CM is withdrawn. Withdrawal of clearing facility of a CM in case of a violation will lead to withdrawal of trading facility for all TMs and/ or custodial participants clearing and settling through the CM.

Similarly, the initial margins on positions taken by a TM are computed on a real time basis and compared with the TM limits set by his CM. The initial margin amount is reduced from the TM limit set by the CM. Once the TM limit has been utilised to the extent of 70%, 80%, and 90%, a warning message is received by the TM on his terminal. At 100% utilization, the trading facility provided to the TM is withdrawn.

A member is provided with warnings at 70%, 80% and 90% level before his trading/ clearing facility is withdrawn. A CM may thus accordingly reduce his exposure to contain the violation or alternately bring in Additional Base Capital.

6.2 Exposure Limit Violation

This violation occurs when the exposure margin of a Clearing Member exceeds his liquid networth, at any time, including during trading hours. The liquid net worth means the effective deposits as reduced by initial margin and net buy premium. In case of violation, the clearing facility of the clearing member is withdrawn leading to withdrawal of the trading facilities of all trading members and/ or clearing facility of custodial participants clearing through the clearing member.

6.3 Trading Memberwise Position Limit Violation

This violation occurs when the open position of the trading member /custodial participant exceeds the Trading Member wise Position Limit at any time, including during trading hours. In case of violation the trading facility of the trading member is withdrawn.

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In respect of initial margin violation, exposure margin violation and position limit violation, penalty is levied on a monthly basis based on slabs as mentioned below.

6.4 Client Level Position Limit Violation

This occurs when the open position of any client exceeds the  client-wide positon limitThe TM/ CM through whom the client trades/ clears his deals is liable for such violation.In the event of such a violation, TM / CM should immediately ensure,(i) that the client does not take fresh positions and

(ii) reduces the positions of such clients to be within permissible limits.Additionally, in the event of such a violation, penalty would be charged to Clearing Members for every day of violation.1% of the value of the quantity in violation (i.e., excess quantity over the allowed quantity, valued at the closing price of the underlying stock) per clientorRs.1,00,000 per client, whichever is lower,subject to a minimum penalty of Rs.5,000/- per violation / per client.when the client level violation is on account of open position of client exceeding 5% of open interest, a penalty of Rs. 5,000/- per instance is charged to clearing member.The Clearing Member can recover the penalty so charged from the respective Trading Member / Client violating the requirement of position limits and in cases where it is levied and collected from Trading Member, such trading member, in turn, can recover the same from the respective clients who violated the position limits.

Disclosure for Client Positions in Index based contracts

Any person or persons acting in concert who together own 15% or more of the open interest on a particular underlying index is required to report this fact to the Exchange/ Clearing Corporation. Failure to do so is treated as a violation and attracts appropriate penal and disciplinary action in accordance with the Rules, Byelaws and Regulations of the Clearing Corporation.

For futures contracts, open interest is equivalent to the open positions in the futures

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contract multiplied by last available traded price or closing price, as the case may be. For option contracts, open interest is equivalent to the notional value which is computed by multiplying the open position in that option contract with the last available closing price of the underlying.

6.5 Market Wide Position Limits for derivative contracts on underlying stocks

At the end of each day during which the ban on fresh positions is in force for any scrip, when any member or client has increased his existing positions or has created a new position in that scrip the client/ TMs are charged a penalty.

The penalty is recovered from the clearing member affiliated with such trading members/clients on a T+1 day basis along with pay-in. The amount of penalty is informed to the clearing member at the end of the day.. 

6.6 Violation arising out of misutilisation of trading member/ constituent collaterals and/or deposits

This violation takes place when a clearing member utilises the collateral of one TM and/ or constituent towards the exposure and/ or obligations a TM/ constituent, other than the same TM and/ or constituent.

6.7 Violation of Exercised Positions

When option contracts are exercised by a CM, where no open long positions for such CM/ TM and/ or constituent exist at the end of the day, at the time the exercise processing is carried out, it is termed as violation of exercised positions.

7. FII / MF Position Limits

Position Limits

The position limits for FII, Mutual Funds , FII sub-accounts & MF schemes are monitored based on the Custodian Participant (CP) Codes allotted to these entities by NSCCL. The applicable position limits are as under:

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7.1 At the level of the FII and MF

i. FII & MF Position limits in Index options contracts:

FII and MF position limit in all index options contracts on a particular underlying index are Rs.500 crores or 15 % of the total open interest of the market in index options, whichever is higher. This limit is applicable on open positions in all options contracts on a particular underlying index.

ii. FII & MF Position limits in Index futures contracts:FII and MF position limit in all index futures contracts on a particular underlying index is Rs.500 crores or 15 % of the total open interest of the market in index futures, whichever is higher. This limit is applicable on open positions in all futures contracts on a particular underlying index.

In addition to the above, FIIs & MF’s can take exposure in equity index derivatives subject to the following limits:

a) Short positions in index derivatives (short futures, short calls and long puts) not exceeding (in notional value) the FII’s / MF’s holding of stocks.

b) Long positions in index derivatives (long futures, long calls and short puts) not exceeding (in notional value) the FII’s / MF’s holding of cash, government securities, T-Bills and similar instruments.

In this regard, if the open positions of an FII / MF exceeds the limits as stated in item no a or b, such surplus is deemed to comprise of short and long positions in the same proportion of the total open positions individually. Such short and long positions in excess of the said limits are compared with the FII’s / MF’s holding in stocks, cash etc as stated above. Members are required to report their holdings in stocks, cash etc in a specified format.

iii. Stock Futures & Options:a) For stocks having applicable market-wide position limit (MWPL) of Rs. 500 crores or more, the combined futures and options position limit is 20% of applicable MWPL or Rs. 300 crores, whichever is lower and within which stock futures position cannot exceed 10% of applicable MWPL or Rs. 150 crores, whichever is lower.

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b) For stocks having applicable market-wide position limit (MWPL) less than Rs. 500 crores, the combined futures and options position limit is 20% of applicable MWPL and futures position cannot exceed 20% of applicable MWPL or Rs. 50 crore which ever is lower.

7.2 At the level of the FII sub-account / MF scheme

a) Index Futures & Options:

A disclosure is required from any person or persons acting in concert who together own 15% or more of the open interest of all futures and options contracts on a particular underlying index on the Exchange. Failure to do so is treated as a violation and l attracts appropriate penal and disciplinary action in accordance with the Rules, Bye-Laws and Regulations of NSE/NSCCL.

b) Stock Futures & Options:

The gross open position across all futures and options contracts on a particular underlying security, of a sub-account of an FII, / MF scheme should not exceed the higher of :

1% of the free float market capitalisation (in terms of number of shares)

or

5% of the open interest in the derivative contracts on a particular underlying stock (in terms of number of contracts). These position limits are applicable on the combined position in all futures and options contracts on an underlying security on the Exchange.

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Procedures

The Clearing Corporation monitors the FII position limits at the end of each trading day. For this purpose, FIIs/sub-account of FII intending to trade in the F&O segment of the Exchange are required to take a custodian participant (CP) code from NSCCL.

Only FIIs/ sub accounts of FIIs which have been allotted a unique CP code by Clearing Corporation are permitted to trade on the Exchange.

The FII/ sub-account of FII should ensure that all orders placed by them on the Exchange carry the relevant CP code allotted by Clearing Corporation in the relevant field in NEATFO trading system.

Clearing Member/s of the FII are required to submit the details of all the trades confirmed by FII to Clearing Corporation, by the end of each trading day, as per the mechanism specified.

Clearing Corporation monitors the open positions of the FII/ sub-account of the FII for each underlying security and index on which futures and option contracts are traded on the Exchange, against the position limits specified at the level of FII/ sub-accounts of FII respectively, at the end of each trading day.

In the event of an FII breaching the position limits on any underlying, Clearing Corporation advises the Exchange to withdraw the facility granted to such FII to take any fresh positions in any derivative contracts. Such FII is required to reduce their open position in such underlying, in accordance with the mechanism provided by Clearing Corporation from time to time. The facility withdrawn is reinstated upon due compliance of the position limits.

It is also obligatory on FIIs to report any breach of position limits by them / their sub-account/s, to Clearing Corporation and ensure that such sub-account/s does not take any fresh positions in any derivative contracts in such underlying. The sub-account of FII is required to reduce open position in such underlying, in accordance with the mechanism specified by Clearing Corporation and is permitted to take further positions only upon due compliance of the position limits.

Computation of Position Limits

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The position limits are computed on a gross basis at the level of a FII and on a net basis at the level of sub-accounts and proprietary positions.

The open positions for all derivative contracts are valued as the open interest multiplied with the closing price of the respective underlying in the cash market.

8. Client Margin Reporting Clearing Members (CMs) and Trading Members (TMs) are required to collect upfront initial margins from all their Trading Members/ Constituents.

CMs are required to compulsorily report, on a daily basis, details in respect of the margin amount due and collected, from the TMs/ Constituents clearing and settling through them, with respect to the trades executed/ open positions of the TMs/ Constituents, which the CMs have paid to NSCCL, for the purpose of meeting margin requirements.

Similarly, TMs are required to report on a daily basis details in respect of the margin amount due and collected from the constituents clearing and settling through them, with respect to the trades executed/ open positions of the constituents, which the trading members have paid to the CMs, and on which the CMs have allowed initial margin limit to the TMs.

CMs/ TMs are required to report details of initial margins collected from their TMs/ Constituents by uploading files to the /FAOFTP/F<CODE>/COLAT/UPLD directory on the Extranet Server or by uploading the files through the Collateral Interface for Members (CIM).

1. For TMs, the <CODE> specified in the directory is the 5 digit Trading Member Code allotted by NSCCL (e.g. 09999)

2. For CMs the <CODE> specified in the directory is the 5 digit Primary Member Code allotted by NSCCL (e.g. 09999 and not M12345 or C23456)

CMs who do not clear trades for other trading members (self- clearing members), need to report only the file as applicable to TMs and are not

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required to report the file as applicable to CMs.

A return file is generated for all client margin reporting files uploaded by members.

Due date for Margin Reporting

The cut off day upto which a member may report client margin details to NSCCL is referred to as the sign off date. It is 2 working days after the trade day.

Short reporting of margins in Client Margin Reporting FilesPenalty is levied in case of short reporting by trading/clearing member per instance. The amount of penalty varies as per the percentage of short reporting done by members.

9. Data & Reports

The following reports are downloaded to members on a daily basis:

A. SETTLEMENT REPORTS o Detailed Position File for Trading Members (F_PS03)o Detail Position File for Clearing Member (F_PS04)o Detailed Exercise Report for Trading Member (F_EX01)o Detailed Exercise Report for Clearing Member (F_EX02)o Detailed Trades Report for Trading Member (F_TR01)o Detailed Trades Report for Clearing Member (F_TR02)o Detailed Contracts Reports (F_CN01)o Bank Report for Next Day Obligations (F_BK01)o Bank Summary Report for Clearing Member (F_BK02)o Bank Transaction Report for Clearing Member (F_BK03)o Detailed STT Report for Trading Member (F_STT01) o Detailed STT Report for Clearing Member (F_STT02)

B. MARGIN REPORTS o Margin Statement of Clearing Members : MG-09 o Margin Statement of Trading Member/ Custodial Participant : MG-10 o Margin Payable Statement of Clearing Member : MG-11

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o Detail Margin File of Clearing Members : MG - 12 o Client Level Margin File of Trading Members : MG-13o Cross margin benefit report for clearing members: MG-14o Cross margin benefit report for trading members:MG-15o Offset positions report for trading member: XM 01o Offset positions report for clearing member: XM 02 o Details of Margin Reports

10. Cross Margin

Salient features of the cross margining available are as under:

1. Cross margining benefit is available across Cash and Derivatives segment

2. Cross margining benefit is available to all categories of market participants

3. For client/entities clearing through same clearing member in Cash and Derivatives segments, the clearing member is required to intimate client details through a file upload through Collateral Interface for Members (CIM) to avail the benefit of Cross margining

4. For client/entities clearing through different clearing member in Cash and Derivatives segments they are required to enter into necessary agreements for availing cross margining benefit.

5. For the client/entities who wish to avail cross margining benefit in respect of positions in Index Futures and Constituent Stock Futures only, the entity’s clearing member in the Derivatives segment has to provide the details of the clients and not the copies of the agreements. The details to be provided by the clearing members in this regard are stipulated in the Format Positions eligible for cross-margin benefit Entities/clients eligible for cross margining Facility of maintaining two client accounts

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Computation of cross margining benefit Provisions in respect of default Additional Reports for Cross Margin

1. Positions eligible for cross-margin benefit:

Cross margining is available across Cash and F&O segment and to all categories of market participants. The positions of clients in both the Cash and F&O segments to the extent they offset each other are being considered for the purpose of cross margining as per the following priority

a. Index futures and constituent stock futures in F&O segmentb. Index futures and constituent stock positions in Cash segmentc. Stock futures in F&O segment and stock positions in Cash segment

i. In order to extend the cross margin benefit as per (a) and (b) above, the basket of constituent stock futures/ stock positions should be a complete replica of the index futures. NSCCL specifies the number of units of the constituent stocks/ stock futures required in the basket to be considered as a complete replica of the index on the website of the exchange (www.nseindia.com/NSCCL/Notification) from time to time

ii. The number of units are changed only in case of change in share capital of the constituent stock due to corporate action or issue of additional share capital or change in the constituents of the index.

iii. The positions in F&O segment for the stock futures and index futures should be in the same expiry month to be eligible for cross margining benefit.

iv. The position in a security is considered only once for providing cross margining benefit. E.g. Positions in Stock Futures of security ‘A’ used to set-off against index futures positions will not be considered again if there is an off-setting positions in the security ‘A’ in Cash segment.

v. Positions in option contracts are not considered for cross margining benefit.

2.Entities/clients eligible for cross margining

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The clearing member has to inform NSCCL the details of client to whom cross margining benefit is to be provided. The cross margining benefit is available only if clearing members provide the details of clients in such manner and within such time as specified by NSCCL from time to time.

1. Client/entity settling through same clearing member in both Cash and F&O segment

i. The clearing member has to ensure that the code allotted (code used while executing client trade) to client/entity in both Cash and F&O segment is same

ii. The clearing member must inform the details of clients to whom cross margining benefit is to be provided through a file upload facility provided in Collateral Interface for Members (CIM).

2. Client/entity settling through different clearing member in Cash and F&O segment

i. In case a client settles in the Cash segment through a trading member / custodian and clears and settles through a different clearing member in F&O segment, then they are required to enter into necessary agreements.

ii. In case where the client/entity settles through Custodian in Cash segment, then the client/entity, custodian and the clearing member in F&O segment are required to enter into a tri-partite agreement as per the format

iii. In case where the client/entity clears and settles through a member in Cash segment, and a different clearing member in F&O segment, then the member in Cash segment and the clearing member in F&O segment have to enter into an agreement as per the format. Further, the client/entity must enter into an agreement with the member as per the format.

iv. The clearing member in the F&O segment must intimate to NSCCL the details of the client/entity in F&O segment along-with letter from trading member/custodian giving details of client/entity in Cash segment who wish to avail cross margining benefit.

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3. Facility of maintaining two client accountsAs specified by SEBI, a client may maintain two accounts with their respective members to avail cross margin benefit only. The two accounts namely arbitrage account and a non-arbitrage account may be used for converting partially replicated portfolio into a fully replicated portfolio by taking opposite positions in two accounts. However, for the purpose of compliance and reporting requirements, the positions across both accounts shall be taken together and client shall continue to have unique client code.

4. Computation of cross margining benefit

i. The computation of cross margining benefit is done at client level on an online real time basis and provided to the trading member / clearing member custodian, as the case may be, who, in turn, shall pass on the benefit to the respective client.

ii. For institutional investors the positions in Cash segment are considered only after confirmation by the custodian on T+1 basis and on confirmation by the clearing member in F&O segment.

iii. The positions in the Cash and F&O segment are considered for cross margining only till time the margins are levied on such positions.

iv. While reckoning the offsetting positions in the Cash segment, positions in respect of which margin benefit has been given on account of early pay-in of securities or funds are not considered.

v. The positions which are eligible for offset, are subject to spread margins. The spread margins are 25% of the applicable upfront margins on the offsetting positions or such other amount as specified by NSCCL from time to time.

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vi. The difference in the margins on the total portfolio and on the portfolio excluding off-setting positions considered for cross margining, less the spread margins is considered as cross margining benefit.

5. Provisions in respect of default

In the event of default by a trading member / clearing member / custodian, as the case may be, whose clients have availed cross margining benefit, NSCCL may:

i. Hold the positions in the cross margin account till expiry in its own name.ii. Liquidate the positions / collateral in either segment and use the proceeds to

meet the default obligation in the other segment.iii. In addition to the foregoing provisions, take such other risk containment

measures or disciplinary action as it may deem fit and appropriate in this regard.

6. Additional reports

Additional reports providing details of cross margin benefit and off-setting positions at client level are provided to members as per the format specified

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CHAPTER-4 DEBT

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Debt

Corporate Bonds Wholesale Debt Market Retail Debt Market

Corporate Bonds

Corporate bonds are debt securities issued by private and public corporations. Companies issue corporate bonds to raise money for a variety of purposes, such as building a new plant, purchasing equipment, or growing the business. When one buys a corporate bond, one lends money to the "issuer," the company that issued the bond. In exchange, the company promises to return the money, also known as "principal," on a specified maturity date. Until that date, the company usually pays you a stated rate of interest, generally semiannually. While a corporate bond gives an IOU from the company, it does not have an ownership interest in the issuing company, unlike when one purchases the company's equity stock.

Need for Corporate Bonds

Yields

Valuation of Corporate Bonds

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Circular on Corporate Bonds – Reporting Platform

Need for Corporate Bonds

One of the announcements in the Budget 2005-06 was to appoint a high level expert committee on corporate bonds and securitization to look into the legal, regulatory, tax and market design issues in the development of corporate bond market.

A committee was formed under the Chairmanship of Dr. R.H. Patil to look into the factors inhibiting the development of an active debt market and recommend policy actions necessary to develop an appropriate market infrastructure for the growth of an active corporate bond market.

A few of the recommendations for the development of an active secondary market for corporate bonds are :-

Establish a system to capture all information related to trading in corporate bonds as accurately and as close to execution as possible and disseminate it to the market in real time.

Clearing and settlement of transactions in this market must adhere to the IOSCO standards.

Based on increase of awareness amongst the participants to introduce online order matching system.

Yields

Yield is a critical concept in bond investing, because it is the tool used to measure the return of one bond against another. It enables one to make informed decisions about which bond to buy. In essence, yield is the rate of return on bond investment. However, it is not fixed, like a bond’s stated interest rate. It changes to reflect the price movements in a bond caused by fluctuating interest rates. The following example illustrates how yield works.

You buy a bond, hold it for a year while interest rates are rising and then sell it.

You receive a lower price for the bond than you paid for it because, no one would otherwise accept your bond’s now lower-than-market interest rate.

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Although the buyer will receive the same amount of interest as you did and will also have the same amount of principal returned at maturity, the buyer’s yield, or rate of return, will be higher than yours, because the buyer paid less for the bond.

Yield is commonly measured in two ways, current yield and yield to maturity.

a)Current yield

The current yield is the annual return on the amount paid for a bond, regardless of its maturity. If you buy a bond at par, the current yield equals its stated interest rate. Thus, the current yield on a par-value bond paying 6% is 6%.

However, if the market price of the bond is more or less than par, the current yield will be different. For example, if you buy a Rs. 1,000 bond with a 6% stated interest rate at Rs. 900, your current yield would be 6.67% (Rs.1,000 x .06/Rs.900).

b)Yield to maturity

It tells the total return you will receive if you hold a bond until maturity. It also enables you to compare bonds with different maturities and coupons. Yield to maturity includes all your interest plus any capital gain you will realize (if you purchase the bond below par) or minus any capital loss you will suffer (if you purchase the bond above par).

Valuation of Corporate Bonds

Corporate bonds tend to rise in value when interest rates fall, and they fall in value when interest rates rise. Usually, the longer the maturity, the greater is the degree of price volatility. By holding a bond until maturity, one may be less concerned about these price fluctuations (which are known as interest-rate risk, or market risk), because one will receive the par, or face, value of the bond at maturity. The inverse relationship between bonds and interest rates—that is, the fact that bonds are worth less when interest rates rise and vice versa can be explained as follows :-

When interest rates rise, new issues come to market with higher yields than older securities, making those older ones worth less. Hence, their prices go down.

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When interest rates decline, new bond issues come to market with lower yields than older securities, making those older, higher-yielding ones worth more. Hence, their prices go up.

As a result, if one sells a bond before maturity, it may be worth more or less than it was paid for.

Wholesale Debt Market

The Wholesale Debt Market segment deals in fixed income securities and is fast gaining ground in an environment that has largely focussed on equities.

The Wholesale Debt Market (WDM) segment of the Exchange commenced operations on June 30, 1994. This provided the first formal screen-based trading facility for the debt market in the country.

This segment provides trading facilities for a variety of debt instruments including Government Securities, Treasury Bills and Bonds issued by Public Sector Undertakings/ Corporates/ Banks like Floating Rate Bonds, Zero Coupon Bonds, Commercial Papers, Certificate of Deposits, Corporate Debentures, State Government loans, SLR and Non-SLR Bonds issued by Financial Institutions, Units of Mutual Funds and Securitized debt by banks, financial institutions, corporate bodies, trusts and others.

Large investors and a high average trade value characterize this segment. Till recently, the market was purely an informal market with most of the trades directly negotiated and struck between various participants. The commencement of this segment by NSE has brought about transparency and efficiency to the debt market.

Retail Debt Market

With a view to encouraging wider participation of all classes of investors across the country (including retail investors) in government securities, the Government, RBI and SEBI have introduced trading in government securities for retail investors.

Trading in this retail debt market segment (RDM) on NSE has been introduced w.e.f. January 16, 2003. Trading shall take place in the existing Capital Market segment of the Exchange.

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In the first phase, all outstanding and newly issued central government securities would be traded in the retail segment. Other securities like state government securities, T-Bills etc. would be added in subsequent phases.

Products & Services

FIMMDA-NSE MIBID MIBOR NSE Zero Coupon Yield Curve (ZCYC) NSE VaR for Government Securities NSE Government Securities Index

Reference Rates – FIMMDA-NSE MIBID MIBOR

reference rate is an accurate measure of the market price. In the fixed income market, it is an interest rate that the market respects and closely watches. It plays a useful role in a variety of situations.

In particular, a call money reference rate can find the following applications:

Traders can make many decisions as offsets compared with the prevailing reference rate.

Derivatives require a clearly defined reference rate as a foundation, off which the pay-off from the derivative is defined.

A variety of contracts can be structured as offsets from the future levels of a reference rate. The simplest example may be a floating rate bond that uses an interest rate which is a given 'n' offsets above a given reference rate.

Apart from its accuracy, such a reference rate needs to have other qualities. The methodology of collation and computation should be scientific, should eliminate noise, and resist manipulation. It should be from an unbiased source, be representative of the market, transparent, reliable and continuously available. Moreover, it should find applicability across a wide range of products. A reference rate, which embodies all these qualities, would be widely acceptable to the market as the benchmark rate.

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NSE Zero Coupon Yield Curve (ZCYC)

With NSEIL's strong focus on debt market segment and the long felt need to create standardized market practices, NSEIL has embarked upon developing products that will be used by the market participants to address themselves to issues relating to this market segment.

In its continuing effort to innovate, the Exchange has developed a 'Zero Coupon Yield Curve' (ZCYC) that will help in valuation of sovereign securities across all maturities irrespective of its liquidity. It aims to create uniform valuation standards in the market. The product has been developed keeping in mind the requirements of the banking industry, financial institutions, mutual funds, insurance companies, etc. that have substantial investment in sovereign papers. NSE ZCYC aims to help in improving Asset Liability Management of institutions with realistic valuations of portfolio of sovereign papers. It has been developed keeping in mind the emergence of a scientific forward curve for the market that will be useful in developing derivative products and STRIPS in the emerging scenario.

NSE VaR for Government Securities

Value-at-Risk (VaR) has been widely promoted by regulatory authorities as a way of monitoring and managing market risk and as a basis for setting regulatory minimum capital standards. The revised Basle Accord, implemented in January 1998, makes it mandatory for banks to use VaR as a basis for determining the amount of regulatory capital adequate for covering market risk beyond that required for credit risk. Within the realm of the fixed income portfolios of financial sector players, market related risk has become more relevant and important on account of their trading activities and market positions. For players in the Indian financial sector, the need to develop risk measurement models would prove critical as regulation progressively moves from uniform prudential standards to entity-specific risk coverage requirements. Specifically, the guidelines call for linking of each entity’s market risk capital charge to the riskiness of its assets as measured by the chosen VaR model. Accuracy of measurement would prove critical as regulation would not specify ‘a’ single model for measurement of risk; - the choice of model would be left to market participants who would also be required to furnish details of back-testing for the chosen VaR model. While a conservative estimate of risk would lead to very large capital holdings, a liberal estimate would result in inadequate coverage of loss and excessive number of model failures

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historically, which would in turn attract penalties from the regulator. It would therefore be in the interest of market participants to develop models that accurately measure the riskiness of their portfolios and furnish estimates of capital charge that would provide adequate cover. An important consideration in this context is that setting up of risk measurement systems by each individual participant for estimating portfolio risk under alternative models and scenarios would involve significant costs.

In line with its endeavour to develop market infrastructure, NSE has taken initiative in developing a VaR system for measuring the market risk inherent in Government of India (GoI) securities. The NSE-VaR system builds on the NSE database of daily yield curves - the NSE-ZCYC is now well accepted in terms of its conceptual soundness and empirical performance, and is increasingly being used by market participants as a basis for valuation of fixed income instruments. The NSE-VaR system provides measures of VaR using 5 alternative methods - variance-covariance (normal) and historical simulation methods, together with weighted normal, weighted historical simulation and the recently developed extreme value method [a technical paper explaining these methods is available on the NSE website]. While the first set of methods are easier to implement and therefore more popular, they may not provide accurate assessment of risk in volatile market conditions. To this end, we provide estimates based on the latter set of methods that are specifically suited for this purpose. Together, the 5 methods would provide a range of options for market participants to choose from.

NSE Government Securities Index

The increased activity in the government securities market in India and simultaneous emergence of mutual (gilt) funds has given rise to the need for a well-defined Bond Index to measure returns in the bond market. The NSE-Government Securities Index prices components off the NSE Benchmark ZCYC, so that movements reflect returns to an investor on account of change in interest rates only, and not those arising on account of the impact of idiosyncratic factors. The index is available from January 1, 1997 to the present. The index would provide a benchmark for portfolio management by various investment managers and gilt funds. It could also form the basis for designing index funds and for derivative products such as options and futures.

Salient features of the Index:

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The base date for the index is 1st January 1997 and the base date index value is 100

The index is calculated on a daily basis from 1st January 1997 onwards; weekends and holidays are ignored.

The index uses all Government of India bonds issued after April 1992. These were issued on the basis of an auction mechanism that imparted some amount of market-relatedness to their pricing. Bonds issued prior to 1992 were on the basis of administered interest rates.

Each day, the prices for all these bonds are estimated off the NSE Benchmark-ZCYC for the day.

The constituents are weighted by their market capitalisation. Computations are based on arithmetic and not geometric calculations. The index uses a chain-link methodology i.e. today's values are based on the

previous value times the change since the previous calculations. This gives the index the ability to add new issues and also remove old issues when redeemed.

Coupons and redemption payments are assumed to be re-invested back into the index in proportion to the constituent weights.

Both the Total Returns Index and the Principal Returns Index are computed. The indices provided are: Composite, 1-3, 3-8, 8+ years, TB index, GS

index NSE G-Sec Index for the day As on 06-September-2010

Index

Total Returns

Index

Principal

Returns

index

Avg. Coupon

Avg. Resid

ual Maturity

Portfolio

YTM

Portfolio

Duration

Portfolio

Modified

Duration

Portfolio

Convexity

ALL

296.13

119.82

7.817 9.748 8.385 5.877 5.641 61.102

1-3 251.5 88.1 8.440 2.178 8.062 1.985 1.908 4.519

3-8 300.35

109.18

7.709 5.541 8.160 4.477 4.302 23.879

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8+ 347.04

130.12

7.681 15.376

8.482 8.481 8.136 106.237

TB 275.71

275.71

0.000 0.278 6.366 0.275 0.266 0.125

GS 298.98

108.86

7.817 10.324

8.390 6.216 5.966 64.781

Time Series: - Composite index - Sub maturity 1-3 years - Sub maturity 3-8 years - Sub maturity 8+ years- Dated Government securities index - Treasury Bill index

CHAPTER-5 Initial Public Offerings (IPO)

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Initial Public Offerings (IPO)

A corporate may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company.

What is Book Building?SEBI guidelines defines Book Building as "a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built-up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document".

Book Building is basically a process used in Initial Public Offer (IPO) for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.

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As per SEBI guidelines, an issuer company can issue securities to the public though prospectus in the following manner:

1. 100% of the net offer to the public through book building process 2. 75% of the net offer to the public through book building process and 25% at

the price determined through book building. The Fixed Price portion is conducted like a normal public issue after the Book Built portion, during which the issue price is determined.

The concept of Book Building is relatively new in India. However it is a common practice in most developed countries.

Difference between Book Building Issue and Fixed Price IssueIn Book Building securities are offered at prices above or equal to the floor prices, whereas securities are offered at a fixed price in case of a public issue. In case of Book Building, the demand can be known everyday as the book is built. But in case of the public issue the demand is known at the close of the issue.

Issuers

An Issuer Company can issue capital through book building in following two ways:

75% Book Building processThe option of 75% Book Building is available to all body corporates that are otherwise eligible to make an issue of capital to the public. The securities issued through the book building process are indicated as 'placement portion category' and securities available to public are identified as 'net offer to public'. In this option, underwriting is mandatory to the extent of the net offer to the public. The issue price for the placement portion and offers to public are required to be same.

100% of the net offer to the public through Book Building processIn the 100% of the net offer to the public, entire issue is made through Book Building process. However, there can be a reservation or firm allotment to a

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maximum of 5% of the issue size for the permanent employees, shareholders of the company or group companies, persons who, on the date of filing of the draft offer document with the Board, have business association, as depositors, bondholders and subscribers to services, with the issuer making an initial public offering.

The number of bidding centres, in case of 75% book building process should not be less than the number of mandatory collection centres specified by SEBI. In case of 100% book building process, the bidding centres should be at all the places where the recognised stock exchanges are situated.

For additional details, issuers are requested to refer to SEBI guidelines.

Reverse Book Building at NSEDelisting of shares under SEBI (delisting of Securities) guidelines 2003

Securities and Exchange Board of India has issued the SEBI (Delisting of Securities) Guidelines 2003’ for delisting of shares from stock exchanges. The guidelines inter alia provide the overall framework for voluntary delisting by a promoter. In accordance with the guidelines for the first time in India by any Exchange, National Stock Exchange now provides online reverse book building for promoter/acquirer through its trading network which spans various cities and towns across India. NSE operates a fully automated screen based bidding system that enables trading members to enter offers directly from their offices through a sophisticated telecommunication network.

What is Reverse Book Building (Delisting of shares)?

The Reverse Book Building is a mechanism provided for capturing the sell orders on online basis from the share holders through respective Book Running Lead Managers (BRLMs) which can be used by companies intending to delist its shares through buy back process. In the Reverse Book Building scenario, the

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Acquirer/Company offers to buy back shares from the share holders. The Reverse Book Building is basically a process used for efficient price discovery. It is a mechanism where, during the period for which the Reverse Book Building is open, offers are collected from the share holders at various prices, which are above or equal to the floor price. The buy back price is determined after the offer closing date

Business process for delisting through book building is as follows:

The acquirer shall appoint designated Book Running Lead Manager (BRLM) for accepting offers from the share holders.

The company/acquirer intending to delist its shares through Book Building process is identified by way of a symbol assigned to it by BRLM.

Orders for the offer shall be placed by the share holders only through the designated trading members, duly approved by the Exchange.

The designated trading members shall ensure that the security / share holders deposit the securities offered with the trading members prior to placement of an order.

The offer shall be open for 'n' number of days. The BRLM shall intimate the final acceptance price and provide the valid

accepted order file to the National Securities Clearing Corporation Limited (A wholly owned subsidiary of NSE carrying out clearing and responsible for settlement operations.)

SEBI guidelines shall be applicable to delisting of securities of companies and specifically apply to:

Voluntary delisting being sought by the promoters of a company. Any acquisition of shares of the company (either by a promoter or by any

other person) or scheme or arrangement, by whatever name referred to, consequent to which the public shareholding falls below the minimum limit specified in the listing conditions or listing agreement that may result in delisting of securities.

Promoters of the companies who voluntarily seek to delist their securities from all or some of the stock exchanges.

Cases where a person in control of the management is seeking to consolidate his holding in a company, in a manner which would result in the public shareholding or in the listing agreement that may have the effect of company being delisted.

Companies which may be compulsorily delisted by the stock exchanges.

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NSE Reverse Book Building System

NSE uses the reverse book building system; a fully automated screen based bidding system that allows offers to run in several issues concurrently. The system has the facility of defining a hierarchy amongst the users of the system. The Book Running Lead Manager can define who will be the Syndicate member and who will be the other members participating in the issue. The Syndicate Member and other Members also have a facility of defining a hierarchy among the users of the system as Corporate Manager, Branch Manager and Dealer.

Trading Members

The Book Running Lead Manager will give the list of trading members who are eligible to participate in the Book Building process to the Exchange. Members have to submit a one-time undertaking to the Exchange. Eligible trading members have to give in the prescribed format details of the user IDs that they would like to use.

List of Approved Trading Members:

ICICI Brokerage Services Limited. Karvy Stock Broking Limited Master Capital Services Limited.

Subscribers

Subscribers can approach any of the approved trading members for submitting offers in the NEAT IPO system. On line transaction registration slip are generated automatically after entering the offers in to the system, which acts as proof of the registration of each offer.

Reverse Book Building through the NSE system offers several advantages:

The NSE system offers a nation wide bidding facility in securities. It provides a fair, efficient & transparent method for collecting offers using

latest electronic trading systems.

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CHAPTER-6 INDICES

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Indices

An Index is used to give information about the price movements of products in the financial, commodities or any other markets. Financial indexes are constructed to measure price movements of stocks, bonds, T-bills and other forms of investments. Stock market indexes are meant to capture the overall behaviour of equity markets. A stock market index is created by selecting a group of stocks that are representative of the whole market or a specified sector or segment of the market. An Index is calculated with reference to a base period and a base index value.

Stock market indexes are useful for a variety of reasons. Some of them are :

They provide a historical comparison of returns on money invested in the stock market against other forms of investments such as gold or debt.

They can be used as a standard against which to compare the performance of an equity fund.

It is a lead indicator of the performance of the overall economy or a sector of the economy

Stock indexes reflect highly up to date information

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Modern financial applications such as Index Funds, Index Futures, Index Options play an important role in financial investments and risk management

Products & Services

IISL offers a wide range of products and services which are key support tools for the equity markets. We provide reliable, accurate and valuable data on indices and index related services to cater to the needs of various segments of users. Our speciality is indices based on Indian equity markets, which may be used for benchmarking, trading or research. Use of IISL data or name or indices requires a license or subscription.

Financial products on IISL Indices

IISL maintains, develops, compiles and disseminates entire gamut of equity indices. Licensing is mandatory for tracking the performance of an IISL Index. Licensing is also required for use of the name of IISL or S&P CNX or CNX or any IISL Index. Fees for licensing would vary according to the type of the product and the period.

CNX ensures common branding of indices, to reflect the identities of both the promoters,

i.e. NSE and CRISIL. Thus, 'C' stands for CRISIL, 'N' stands for NSE . The S&P prefix belongs to the US-based Standard & Poor's Financial Information Services.

CNX indices are useful for fund managers, corporates, brokers and all such enterprises connected with investments in the equity markets. These indices can be used for tracking the markets, understanding the performance of a company vis-a-vis the market, determining how an investors portfolio is performing as compared to the market, trading derivative products and most importantly for development of index based funds by mutual funds.

Data subscription

IISL provides index data on a daily, weekly or ad-hoc basis through preferred method. Data includes Index values, index constituents, historical growth trends etc. This is a paid service and the subscription charges vary depending upon the type of data sought and the period.

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Customized Indices

IISL undertakes development & maintenance of customized indices for clients for tracking the performance of the client portfolio of stocks vis-à-vis objectively defined benchmarks, or for benchmarking NAV performance to customized indices. The customized indices can be sub-sets of existing indices or a completely new index viz. Sector Indices, Individual Business Group Indices, Industry Indices etc. Charges for this service vary depending on the activity performed by IISL.

Consulting

IISL provides consulting services in areas of Index Funds, Exchange-traded-fund, derivatives, Index options, alerting for rebalancing for index funds etc. This is a paid service.

Market Updates

IISL provides to specialized clients facts and figures, reports and equity market updates on regular intervals. This is a paid service.

Research

IISL undertakes research activities for its clients on matters concerning equity and derivative markets.

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CHAPTER-7 Index Funds

Index Funds

Index Funds today are a source of investment for investors looking at a long term, less risky form of investment. The success of index funds depends on their low volatility and therefore the choice of the index.

IISL’s indices are used by a number of well known mutual funds in India for promoting Index Funds. Details of some of these funds are as follows:

A. Index Funds :

1. Principal Index Fund launched by Principal PNB AMC Pvt. Ltd. in July 1999.

2. UTI Nifty Index Fund launched by UTI AMC Pvt. Ltd. in March 2000.

3. Franklin India Index Fund launched by Franklin Templeton AMC (India) Pvt.Ltd. in June 2000.

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4. Franklin India Tax Fund launched by Franklin Templeton AMC (India) Pvt.Ltd. in February 2001.

5. SBI Magnum Index Fund launched by SBI Funds Management Ltd. in December 2001.

6. ICICI Prudential Index Fund launched ICICI Prudential AMC Ltd. in February 2002.

7. HDFC Index Fund – Nifty Plan launched by HDFC AMC Ltd. in July 2002.

8. Birla Index Fund launched by Birla Sun Life AMC Ltd. in September 2002.

9. LICMF Index Fund – Nifty Plan launched by LIC Mutual Fund AMC Ltd. in November 2002.

10.Tata Index Fund-Nifty Plan launched by Tata AMC Pvt. Ltd. in February 2003.

11.ING Vysya Nifty Plus Fund launched by ING Investment Management (I) Ltd. in January 2004.

12.Canara Robeco Nifty Index Fund launched by Canara Robeco AMC Ltd. in September 2004.

13.Benchmark S&P CNX 500 Fund launched by Benchmark AMC Pvt. Ltd. in November 2008

14.JM Nifty Plus Fund launched by JM Financial AMC Pvt. Ltd. in June 2009.

15.IDFC Nifty Fund launched by IDFC AMC Ltd. in May 2010.

B. Exchange Traded Fund :

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1. NIFTY BeES an Exchange Traded Fund launched by Benchmark AMC Pvt. Ltd in January 2002.

2. Junior BeES an Exchange Traded Fund on CNX Nifty Junior, launched by Benchmark AMC Pvt. Ltd in February 2003.

3. SUNDER an Exchange Traded Fund launched by UTI in July 2003.

4. Bank BeES an Exchange Traded Fund (ETF) launched by Benchmark AMC Pvt. Ltd. in May 2004.

5. Lyxor ETF India launched by Lyxor International Asset Management in September 2007.

6. db X-trackers S&P CNX Nifty ETF launched by Deutsche Bank AG in July 2007.

7. PSU Bank Exchange Traded Scheme launched by Benchmark AMC Pvt. Ltd. in October 2007.

8. KOTAK PSU BANK Exchange Traded Scheme launched by Kotak Mahindra AMC Ltd in October 2007.

9. Reliance Banking ETF launched by Reliance Capital AMC Ltd. in August 2008.

10.Quantum Index Fund-Exchange Traded Fund launched by Quantum AMC Pvt Ltd. in May 2008.

11.Shariah Benchmark Exchange Traded Scheme (Shariah BeES) launched by Benchmark AMC Pvt. Ltd. in January 2009. 

12.Kotak Nifty ETF launched by Kotak Mahindra AMC Ltd. in January 2010.

Index Concepts

Impact Cost

Introduction

Liquidity in the context of stock markets means a market where large orders can be

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executed without incurring a high transaction cost. The transaction cost referred here is not the fixed costs typically incurred like brokerage, transaction charges, depository charges etc. but is the cost attributable to lack of market liquidity as explained subsequently. Liquidity comes from the buyers and sellers in the market, who are constantly on the look out for buying and selling opportunities. Lack of liquidity translates into a high cost for buyers and sellers.

The electronic limit order book (ELOB) as available on NSE is an ideal provider of market liquidity. This style of market dispenses with market makers, and allows anyone in the market to execute orders against the best available counter orders. The market may thus be thought of as possessing liquidity in terms of outstanding orders lying on the buy and sell side of the order book, which represent the intention to buy or sell.

When a buyer or seller approaches the market with an intention to buy a particular stock, he can execute his buy order in the stock against such sell orders, which are already lying in the order book, and vice versa.

An example of an order book for a stock at a point in time is detailed below:

Buy Sell

Sr.No. Quantity Price Quantity Price Sr. No.

1 1000 3.50 2000 4.00 5

2 1000 3.40 1000 4.05 6

3 2000 3.40 500 4.20 7

4 1000 3.30 100 4.25 8

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C. There are four buy and four sell orders lying in the order book. The difference between the best buy and the best sell orders (in this case, Rs.0.50) is the bid-ask spread. If a person places an order to buy 100 shares, it would be matched against the best available sell order at Rs. 4 i.e. he would buy 100 shares for Rs. 4. If he places a sell order for 100 shares, it would be matched against the best available buy order at Rs. 3.50 i.e. the shares would be sold at Rs.3.5.

Hence if a person buys 100 shares and sells them immediately, he is poorer by the bid-ask spread. This spread may be regarded as the transaction cost which the market charges for the privilege of trading (for a transaction size of 100 shares).

Progressing further, it may be observed that the bid-ask spread as specified above is valid for an order size of 100 shares upto 1000 shares. However for a larger order size the transaction cost would be quite different from the bid-ask spread.

Suppose a person wants to buy and then sell 3000 shares. The sell order will hit the following buy orders:

Sr. Quantity Price

1 1000 3.50

2 1000 3.40

3 1000 3.40

D. while the buy order will hit the following sell orders :

Quantity Price Sr.

2000 4.00 5

1000 4.05 6

E. This implies an increased transaction cost for an order size of 3000 shares in comparison to the impact cost for order for 100 shares. The "bid-ask spread" therefore conveys transaction cost for a small trade.

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This brings us to the concept of impact cost. We start by defining the ideal price as the average of the best bid and offer price, in the above example it is (3.5+4)/2, i.e. 3.75. In an infinitely liquid market, it would be possible to execute large transactions on both buy and sell at prices which are very close to the ideal price of Rs.3.75. In reality, more than Rs.3.75 per share may be paid while buying and less than Rs.3.75 per share may be received while selling. Such percentage degradation that is experienced vis-à-vis the ideal price, when shares are bought or sold, is called impact cost. Impact cost varies with transaction size.

For example, in the above order book, a sell order for 4000 shares will be executed as follows:

Sr. Quantity Price Value

1 1000 3.50 3500

2 1000 3.40 3400

3 2000 3.40 6800

Total value 13700

Wt. average price 3.43

F. The sale price for 4000 shares is Rs.3.43, which is 8.53% worse than the ideal price of Rs.3.75. Hence we say "The impact cost faced in buying 4000 shares is 8.53%".

Definition

Impact cost represents the cost of executing a transaction in a given stock, for a specific predefined order size, at any given point of time.

Impact cost is a practical and realistic measure of market liquidity; it is closer to the true cost of execution faced by a trader in comparison to the bid-ask spread.

It should however be emphasised that :

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(a) impact cost is separately computed for buy and sell(b) impact cost may vary for different transaction sizes (c) impact cost is dynamic and depends on the outstanding orders(d) where a stock is not sufficiently liquid, a penal impact cost is applied

In mathematical terms it is the percentage mark up observed while buying / selling the desired quantity of a stock with reference to its ideal price (best buy + best sell) / 2.

Example A :

ORDER BOOK SNAPSHOT

Buy Quantity Buy Price Sell Quantity Sell Price

1000 98 1000 99

2000 97 1500 100

1000 96 1000 101

TO BUY 1500 SHARES

Beta

Risk is an important consideration in holding any portfolio. The risk in holding securities is generally associated with the possibility that realised returns will be less than the returns expected.

Risks can be classified as Systematic risks and Unsystematic risks.

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Unsystematic risks:These are risks that are unique to a firm or industry. Factors such as management capability, consumer preferences, labour, etc. contribute to unsystematic risks. Unsystematic risks are controllable by nature and can be considerably reduced by sufficiently diversifying one's portfolio.

Systematic risks:These are risks associated with the economic, political, sociological and other macro-level changes. They affect the entire market as a whole and cannot be controlled or eliminated merely by diversifying one's portfolio.

What is Beta?

The degree to which different portfolios are affected by these systematic risks as compared to the effect on the market as a whole, is different and is measured by Beta. To put it differently, the systematic risks of various securities differ due to their relationships with the market. The Beta factor describes the movement in a stock's or a portfolio's returns in relation to that of the market returns. For all practical purposes, the market returns are measured by the returns on the index (Nifty, Mid-cap etc.), since the index is a good reflector of the market.Methodology / Formula

Beta is calculated as :

where,Y is the returns on your portfolio or stock - DEPENDENT VARIABLEX is the market returns or index - INDEPENDENT VARIABLEVariance is the square of standard deviation.Covariance is a statistic that measures how two variables co-vary, and is given by:

Where, N denotes the total number of observations, and and respectively

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represent the arithmetic averages of x and y.

In order to calculate the beta of a portfolio, multiply the weightage of each stock in the portfolio with its beta value to arrive at the weighted average beta of the portfolio

Standard Deviation

Standard Deviation is a statistical tool, which measures the variability of returns from the expected value, or volatility. It is denoted by sigma(s) . It is calculated using the formula mentioned below:

Where, is the sample mean, xi’s are the observations (returns), and N is the total number of observations or the sample size.

Total Returns Index

Introduction

Nifty is a price index and hence reflects the returns one would earn if investment is made in the index portfolio. However, a price index does not consider the returns arising from dividend receipts. Only capital gains arising due to price movements of constituent stocks are indicated in a price index. Therefore, to get a true picture of returns, the dividends received from the constituent stocks also need to be factored in the index values. Such an index, which includes the dividends received, is called the Total Returns Index.

Total Returns Index reflects the returns on the index arising from (a) constituent stock price movements and (b) dividend receipts from constituent index stocks.

Methodology for Total Returns Index (TR) is as follows:

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The following information is a prerequisite for calculation of TR Index:

1. Price Index close2. Price Index returns3. Dividend payouts in Rupees4. Index Base capitalisation on ex-dividend date

Dividend payouts as they occur are indexed on ex-date.

Indexed dividends are then reinvested in the index to give TR Index.

Total Return Index = [Prev. TR Index + (Prev. TR Index * Index returns)] +                                  [Indexed dividends + (Indexed dividends * Index returns)]

Base for both the Price index close and TR index close will be the same.

An investor in index stocks should benchmark his investments against the Total Returns index instead of the price index to determine the actual returns vis-à-vis the index.

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CHAPTER-8 EXCHANGE TRADE FUNDS

Exchange Traded Funds

ETFs are just what their name implies: baskets of securities that are traded, like individual stocks, on an exchange. Unlike regular open-end mutual funds, ETFs can be bought and sold throughout the trading day like any stock.

Most ETFs charge lower annual expenses than index mutual funds. However, as with stocks, one must pay a brokerage to buy and sell ETF units, which can be a significant drawback for those who trade frequently or invest regular sums of money.

They first came into existence in the USA in 1993. It took several years for them to attract public interest. But once they did, the volumes took off with a vengeance. Over the last few years more than $120 billion (as on June 2002) is invested in about 230 ETFs. About 60% of trading volumes on the American Stock Exchange

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are from ETFs. The most popular ETFs are QQQs (Cubes) based on the Nasdaq-100 Index, SPDRs (Spiders) based on the S&P 500 Index, iSHARES based on MSCI Indices and TRAHK (Tracks) based on the Hang Seng Index. The average daily trading volume in QQQ is around 89 million shares.

Their passive nature is a necessity: the funds rely on an arbitrage mechanism to keep the prices at which they trade roughly in line with the net asset values of their underlying portfolios. For the mechanism to work, potential arbitragers need to have full, timely knowledge of a fund's holdings.

Creations & Redemptions

ETFs are different from Mutual funds in the sense that ETF units are not sold to the public for cash. Instead, the Asset Management Company that sponsors the ETF (Fund) takes the shares of companies comprising the index from various categories of investors like authorized participants, large investors and institutions. In turn, it issues them a large block of ETF units. Since dividend may have accumulated for the stocks at any point in time, a cash component to that extent is also taken from such investors. In other words, a large block of ETF units called a "Creation Unit" is exchanged for a "Portfolio Deposit" of stocks and "Cash Component".

The number of outstanding ETF units is not limited, as with traditional mutual funds. It may increase if investors deposit shares to create ETF units; or it may reduce on a day if some ETF holders redeem their ETF units for the underlying shares. These transactions are conducted by sending creation / redemption instructions to the Fund. The Portfolio Deposit closely approximates the proportion of the stocks in the index together with a specified amount of Cash Component. This “in-kind” creation / redemption facility ensures that ETFs trade close to their fair value at any given time.

Some investors may prefer to hold the creation units in their portfolios. While others may break-up the creation units and sell on the exchanges, where individual investors may purchase them just like any other shares.

ETF units are continuously created and redeemed based on investor demand. Investors may use ETFs for investment, trading or arbitrage. The price of the ETF tracks the value of the underlying index. This provides an opportunity to investors to compare the value of underlying index against the price of the ETF units prevailing on the Exchange. If the value of the underlying index is higher than the

97

price of the ETF, the investors may redeem the units to the Sponsor in exchange for the higher priced securities. Conversely, if the price of the underlying securities is lower than the ETF, the investors may create ETF units by depositing the lower-priced securities. This arbitrage mechanism eliminates the problem associated with closed-end mutual funds viz. the premium or discount to the NAV.

ETFs Launched on NSE

World Indiceso Hang Seng BeES™

Equityo Nifty BeESo Junior Nifty BeESo Bank BeESo PSUBNKBEESo SHARIABEESo S&P CNX Nifty UTI Notional Depository Reciepts Scheme

(SUNDER)o KOTAKPSUBKo RELBANKo QNIFTYo KOTAK NIFTYo M50

Liquido Liquid Benchmark Exchange Traded Scheme (Liquid BeES)

  Gold

o GOLDBEESo GOLDSHAREo KOTAKGOLD o RELGOLDo QUANTUMGOLDo SBIGETSo RELIGAREGOLDo HDFCMFGETF | HDFC GOLD Informationo ICICI Prudential Gold ETF | IPGETF

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Liquid Benchmark Exchange Traded Scheme (Liquid BeES)

Liquid BeES (Liquid Benchmark Exchange Traded Scheme) is the first money market ETF (Exchange Traded Fund) in the world. The investment objective of the Scheme is to provide money market returns. Liquid BeES will invest in a basket of call money, short-term government securities and money market instruments of short and medium maturities. It is listed and traded on the NSE – Capital Market Segment and is settled on a T+2 Rolling basis.

The Fund will endeavor to provide daily returns o the investors, which will accrue in the form of daily dividend, which will be compulsorily reinvested in the Fund daily. The units arising out of dividend reinvestment will be allotted and credited to the Demat account of the investors at the end of every month. Such units of Liquid BeES will be allotted and credited daily, up to 3 decimal places.

NSDL and CDSL have waived all the charges (including Custodian charges) relating to transactions in Liquid BeES in the NSDL and CDSL depository systems respectively.

ISIN code INF732E01037

NSE symbol LIQUIDBEES

Series EQ

Face value Rs. 100

Entry/ Exit load NIL

Depository charges NIL

How can an investor invest/ redeem Liquid BeES units ?

An investor can invest / redeem Liquid BeES in two ways:

1. Buy/ Sell directly on NSE, Minimum 1 unit of Rs. 1000

2. Directly from the Fund, with a Minimum Subscription of Rs.25 lacs and

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minimum redemption of 2500 units on T+1 settlement subject to clearance of funds/ transfer of units.

For further information please visit the site www.benchmarkfunds.com or click on the following link -

http://www.benchmarkfunds.com/static/staticinfo.cgi/query?filename=liqdownloads.htm

For daily dividend and NAV information please click on the following link:

http://www.benchmarkfunds.com/historicalprices/index.cgi

Advantages of Liquid BeES

For Investors

Earn returns on idle funds Set off trades from equity to cash and from cash to equity Ability to earn higher returns than a savings account, with the same liquidity

as cash Ability to earn returns for less than 7 days Can be used for paying margins to brokers

For Brokers

Lesser working capital and efficient cash management Can be used for paying margins to the Stock Exchange - SEBI vide its

circular no. SEBI/SMD/SE/Cir-22/2003 dated June 11, 2003 has directed the stock exchanges to include Liquid Mutual Fund units in the list of securities eligible as “Cash or Cash Equivalent” for the Cash Component portion of the Additional Capital and Margins.

An Example of how Liquid BeES can be used by investors

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Currently, if an investor sells shares on NSE, he adopts the following procedure:

1. Sell shares worth Rs. 1,00,000 on Monday (Day T)2. The payout will normally take place on Wednesday (Day T+2).3. The broker will issue a cheque for this amount to the investor after the

payout i.e. on Thursday (Day T+3).4. The investor deposits this amount in his/ her bank on the next day (T+4).5. The money will be available in the investor’s bank account only on next

Monday (T+7).

The investor does not earn any returns from the day he/ she sold to the day he/ she receives payout i.e. 7 Days.

Let us say that instead, the investor adopts the following procedure using Liquid BeES:

1. Sells shares worth Rs. 1,00,000 on Monday (Day T)2. Simultaneously buys Liquid BeES worth Rs. 1,00,000 on Monday (Day T)3. On payout day, Wednesday (Day T+2), the payout from sale of shares will

be netted off against the payin for purchase of Liquid BeES.4. The broker will not receive pay-out of funds for sale of shares.5. Instead, the investor directly gets 100 units of Liquid BeES in his/ her demat

account on Wednesday (Day T+2).6. He starts earning interest immediately from Day T+2

In short, the investor gets money market returns on Liquid BeES from the day he/ she receives the units in his demat account i.e. T+2, instead of the earlier scenario when he got funds in his bank account on T+7. Liquid BeES gives returns just like cash for him.

Similarly, if the same investor buys shares worth Rs. 1,00,000 on NSE on Monday (Day T), he adopts the following procedure:

1. He/ she has to transfer funds into his broker’s account latest by Tuesday (Day T+1).

2. He has to write a cheque to the broker by Monday (Day T) itself.

The investor loses interest on funds for at least 1 day, because he needs to transfer the funds to the broker at least 1 day before the payout.

Instead, if the investor adopts the following procedure using liquid BeES, he will get returns for one extra day:

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1. Buy shares worth Rs. 1,00,000 on the next Monday,2. Simultaneously sell Liquid BeES (he needs to own the units before selling)

worth Rs. 1,00,000 on Monday (Day T).3. On payout day, Wednesday (Day T+2), the payout from the sale of Liquid

BeES will be netted off against the pay-in for the purchase of shares.4. The investor need not pay-in separate funds for purchase of shares but will

receive the shares5. The investor will receive interest on the units of Liquid BeES till the day the

units of Liquid BeES remain in his/ her demat account i.e. Wednesday (Day T+2).

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CHAPTER -9 MUTUAL FUNDS

Mutual Funds

Now the buying and selling of mutual fund have become easier for investors.

An investor who wishes to subscribe or redeem units of a mutual fund scheme can now use Mutual Fund Service System (MFSS) provided by NSE.

This service has been launched on November 30, 2009 at the hands of Mr C B Bhave, Chairman, Securities Exchange Board of India (SEBI), on November 30, 2009.

Mutual Fund Service System

Mutual Fund Service System (MFSS) is an online order collection system provided by NSE to its eligible members for placing subscription or redemption orders on

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the MFSS based on orders received from the investors.

Orders Placing

The MFSS will be available for Participants between 9 a.m. to 3 p.m.

The NSE MFSS shall facilitate entry of both buy and sell orders. In order to subscribe units, member will be required to place buy orders. A member who wishes to redeem units of mutual fund scheme will be required to place sell orders in the system. Participants can choose between Physical mode and depository mode while putting their subscription / redemption requests on the MFSS. All orders shall be settled on order to order basis, on T+1 (working days).

Individuals, HUF and Body Corporate can participate in MFSS subject to completing the KYC procedure. In case of a minor the guardian would have to be KYC compliant.

Confirmation of order

The system will generate an order confirmation slip for each order which includes time stamp of the order being put on the system, on behalf of the investor. The order confirmation slip which is generated by the system shall be given to the investor by the member and is the conclusive evidence of the transaction.

Eligibility criteria for Members

Trading Members of NSE who have obtained AMFI Registration Number (ARN) from Association of Mutual Funds of India (AMFI) are eligible to participate in MFSS. Further, eligible members would have to register as distributor with the Mutual Fund Company. Hence, eligible members would be able to place orders only in respect of Mutual Fund Companies where they have registered as distributor.

AMC Schemes AMC Contact Details

  List of Eligible scheme for MFSS (Refer latest NSE Circular for updated list)

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AIG Global Asset Management Company (India) Private Limited

Benchmark Asset Management Company Private Limited

Birla Sun Life Asset Management Company Limited

DSP Blackrock Investment Managers Private Limited

FIL Fund Management Pvt. Ltd.

Franklin Templeton Asset Management India Pvt Ltd

HDFC Asset Management Company Ltd

ICICI Prudential Asset Management Company

IDFC Asset Management Company Limited

JP Morgan Asset Management India Private Limited

Kotak Mahindra Asset Management Company Ltd.

Morgan Stanley Investment Management Private Limited

Principal PNB Asset Management Company Pvt. Ltd.

Quantum Asset Management Company Pvt. Ltd.

Reliance Capital Asset Management Ltd.

Religare Asset Management Company Ltd.

SBI Funds Management Pvt. Ltd.

Sundaram BNP Paribas Asset Management Company Limited

Tata Asset Management Ltd.

UTI Asset Management Company Private Limited

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CHAPTER-10 Members

Members

We appreciate your interest in membership of National Stock Exchange. This section of our website provides you with all information required to obtain membership of our Exchange as well as other information required by members on a continuous basis.

In case of any queries or clarifications, please feel free to contact Ms. Ketki Khedkar / Ms. Jinal Shal / Ms. Kalyani PLS on 022-26598249.

New Membership

NSE offers multi-asset class products and services and operates trading platforms and the Clearing and Settlement platform is operated by NSCCL, a wholly owned

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subsidiary of NSE. Participation on the Exchange in each of the products is through the Member of the Exchange who is registered for the product.

Membership of the Exchange/NSCCL is open to corporate entities, individuals and partnership firms who fulfill the eligibility criteria laid down by SEBI and NSE.

Categories of Membership

Members are admitted in the following categories:

Only Capital Market – This category of membership entitles a member to execute trades and to clear and settle the trades executed on his own account as well as on account of his clients in the Capital Market Segment.

Capital Market and Futures & Options Trading – A membership in this category entitles a member to

o execute trades and to clear and settle the trades executed on his own account as well as on account of his clients in the Capital Market Segment and Execute trades on his own account as well as on account of his clients in the Futures & Options segment, but, clearing and settlement of trades executed through the Trading Member would have to be done through a Trading-cum Clearing Member or Professional Clearing Member of the Exchange.

Capital Market and Futures & Options Trading & Self Clearing – A membership in this category entitles a member to

o execute trades and to clear and settle the trades executed on his own account as well as on account of his clients in the Capital Market Segment and

o execute trades on his own account as well as on account of his clients and to clear and settle trades executed only on his own account as well as on account of his clients in Futures & Options segment.

Capital Market and Futures & Options Trading and Clearing – A membership in this category entitles a member to

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o execute trades and to clear and settle the trades executed on his own account as well as on account of his clients in the Capital Market Segment and

o execute trades on his own account as well as on account of his clients and to clear and settle trades executed by themselves as well as by other trading members who choose to use clearing services of the member in Futures & Options segment.

Only WDM – A membership in this category acquires a right to execute trades and to clear and settle the trades executed by the members in the WDM Segment. This membership can be also taken in combination with any of the 4 categories as stated above.

Professional Clearing Members – A membership in this category entitles a member to clear and settle trades of such members of the Exchange who choose to clear and settle their trades through this member.

Further to Circular No: 648 with Download No: NSE/MEMB/11148 dated August 19, 2008, the different categories of membership in the Currency Derivatives segment is as follows:

Only trading membership in Currency Derivatives – A membership in this category entitles a member to execute trades on his own account as well as on account of his clients in the Currency Derivatives segment, but, clearing and settlement of trades executed through the Trading Member would have to be done through a Trading-cum Clearing Member or Professional Clearing Member of the Exchange.

Trading and Clearing membership in Currency Derivatives - A membership in this category entitles a member to execute trades on his own account as well as on account of his clients and to clear and settle trades executed by themselves as well as by other trading members who choose to use clearing services of the member in Currency Derivatives Segment.

Professional Clearing Members – A membership in this category entitles a member to clear and settle trades of such members of the Exchange who choose to clear and settle their trades through this member.

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Eligibility Criteria

The following are eligible to apply for membership subject to the regulatory norms and provisions of SEBI and as provided in the Rules, Regulations, Byelaws and Circulars of the Exchange -

1. Individuals 2. Partnership Firms registered under the Indian Partnership Act, 1932; 3. Corporations, Companies or Institutions or subsidiaries of such

Corporations, Companies or Institutions set up for providing financial service 

4. Banks for Currency Derivative Segments5. Such other person as may be permitted under the Securities Contracts

(Regulation) Rules 19

1. Individuals (Sole Proprietor)

CRITERIA

Age Minimum age : 21 years

Status Indian Citizen

Education At least HSC or equivalent qualification

Experience Applicant should have an experience for not less than two years as a partner with, or an authorised assistant or authorised clerk or remisier or apprentice to, a member.

2. Partnership Firms

Where the applicant is a partnership firm, the applicant shall identify a Dominant Promoter Group as per the norms of the Exchange at the time of making the application. Any change in the shareholding of the partnership firm including that of the said Dominant Promoter

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Group or their sharing interest shall be effected only with the prior permission of NSEIL/SEBI. 

CRITERIA

Age Minimum age of partner(s) : 21 years

Status Registered Partnership firm under Indian Partnership Act, 1932

Education Partners should be at least HSC or equivalent qualification

Designated Partners

Identify at least two partners as designated partners who would be taking care of the day to day management of the partnership firm

Designated Partners Experience

Should have a minimum of 2 years experience in an activity related to dealing in securities or as portfolio manager or as investment consultant or as a merchant banker or in financial services or treasury, broker, sub broker, authorised agent or authorised clerk or authorised representative or remisier or apprentice to a member of a recognised stock exchange, dealer, jobber, market maker, or in any other manner in dealing in securities or clearing and settlement thereof.

Dominant Promoter Norms

Identify partner’s sharing interest as per Exchange DPG norms 

2. Corporations, Companies or Institutions

A Company as defined in the Companies Act, 1956 (1 of 1956), shall be eligible to be admitted as a member of a Stock Exchange provided:

i. such company is formed in compliance with the provisions of Section 12 of the said Act;

ii. it undertakes to comply with such other financial requirements and norms as may be specified by the Securities and Exchange Board of India for the registration of such company under sub-section (1) of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

iii. the directors of such company are not disqualified for being members of a stock exchange under clause (1) of rule 8 [except sub-clauses (b) and (f) thereof] or clause (3) of rule 8 [except sub-clauses (a) and (f) thereof] of the Securities Contracts (Regulation) Rules, 1957 and the

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directors of the company had not held the offices of the directors in any company which had been a member of the stock exchange and had been declared defaulter or expelled by the stock exchange

CRITERIA

Age Minimum age of director(s) : 21 years

Status Corporate registered under The Companies Act, 1956 (Indian)

Minimum Paid up Equity Capital

Rs.30 lakhs

Designated Directors

Identification of at least two directors as designated directors who would be managing the day to day trading operations

Education Each of the Designated Directors should be at least HSC or equivalent qualification

Designated Directors Experience

Should have a minimum of 2 years experience in an activity related to dealing in securities or as portfolio manager or as investment consultant or as a merchant banker or in financial services or treasury, broker, sub broker, authorised agent or authorised clerk or authorised representative or remisier or apprentice to a member of a recognised stock exchange, dealer, jobber, market maker, or in any other manner in dealing in securities or clearing and settlement thereof.

Dominant Promoter Norms

Identify dominant group as per Exchange DPG norms

3. Professional Clearing Member (PCM)

The following persons are eligible to become PCMs of NSCCL for Futures & Options and/or Capital Market Segment provided they fulfill the prescribed criteria:

1. SEBI Registered Custodians; or2. Banks recognised by NSEIL/NSCCL for issuance of bank guarantees

4. Banks

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Further to Circular No: 648 with Download No: NSE/MEMB/11148 dated August 19, 2008, the eligibility membership criteria for banks in the Currency Derivatives segment is as follows:

Banks authorized by the Reserve Bank of India under section 10 of the Foreign Exchange Management Act, 1999 as ‘AD Category - I bank’ are permitted to become trading and clearing members of the currency futures market of the recognized stock exchanges, on their own account and on behalf of their clients, subject to fulfilling the following minimum prudential requirements:

Minimum net worth of Rs. 500 crores.

Minimum CRAR of 10 per cent.

Net NPA should not exceed 3 per cent.

Made net profit for last 3 years.

The AD Category - I banks which fulfill the prudential requirements are required to lay down detailed guidelines with the approval of their Boards for trading and clearing of currency futures contracts and management of risks.

AD Category - I banks which do not meet the above minimum prudential requirements and AD Category - I banks which are Urban Co-operative banks or State Co-operative banks can participate in the currency futures market only as clients, subject to approval therefore from the respective regulatory Departments of the Reserve Bank.

The requirement of approved users of being certified as per the certification as applicable in the F&O segment is waived off for banks for a period of one year from the date of the issuance of SEBI circular SEBI/DNPD/Cir- 38 /2008 dated August 06, 2008. 

5. Other applicable eligibility criteria

1. At any point of time the applicant has to ensure that either the proprietor/one designated director/partner or the Compliance Officer

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of the applicant entity should be successfully certified either in Securities Market (Basic) Module or Compliance Officers (Brokers) Module or the relevant module pertaining to the segments wherein membership of the Exchange has been sought.i.e.

a. Capital Market (Dealers) Module b. Derivatives Market (Dealers) Modulec. National Institute of Securities Markets (NISM) Series I – Currency

Derivatives Certification Examination

The above norm would be a continued admittance norm for membership of the Exchange.

2. An applicant must be in a position to pay the membership and other fees, deposits etc, as applicable at the time of admission within three months of intimation to him of admission as a Trading Member or as per the time schedule specified by the Exchange.

3. The Exchange may specify such standards for investor service and infrastructure with regard to any category of applicants as it may deem necessary, from time to time.

Who cannot become a member?

Further to the capital and network requirements, No entity shall be admitted as a member/partner or director of the member if It has been adjudged bankrupt or a receiver order in bankruptcy has been made against him or he has been proved to be insolvent even though he has obtained his final discharge;

It has compounded with his creditors for less than full discharge of debts; It has been convicted of an offence involving a fraud or dishonesty; It is engaged as a principal or employee in any business other than that of

Securities, except as a broker or agent not involving any personal financial liability or for providing merchant banking, underwriting or corporate or investment advisory services, unless he undertakes to severe its connections with such business on admission, if admitted;

It has been at any time expelled or declared a defaulter by any other Stock Exchange or he has been debarred from trading in securities by an Regulatory Authorities like SEBI, RBI etc;

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It incurs such disqualification under the provisions of the Securities Contract (Regulations) Act, 1956 or Rules made there-under so as to disentitle such persons from seeking membership of a stock exchange;

It incurs such disqualification consequent to which NSE determines it to be not in public interest to admit him as a member on the Exchange, provided that in case of registered firms, body corporates and companies, the condition from (will apply to, all partners in case of partnership firms, all directors in case of companies; NSE may from time to time modify / expand the scope of activities that could be considered as relevant experience for the above purpose.

Disclaimer - The Exchange reserves the right to accept or reject any application or amend the terms & conditions without assigning any reasons whatsoever. The number of members to be admitted shall be at the sole discretion of the Exchange.

Deposit & Net worth Requirements (Corporates)

DEPOSIT STRUCTURE (Rs. IN LAKHS)

Segment Type of Membership Cash-NSEIL

Non-Cash NSEIL

Cash NSCCL

Non-Cash NSCCL

Total Net Worth

Capital Market TM & SCM 85 - 15 25 125 100

Wholesale Debt Market

TM & SCM 150 - - - 150 200

Futures & Options

TM 25 - - - 25 100

TM & SCM 25 - 25 25 75 100

TM & CM 25 - 25 25 75 300

PCM - - 25 25 50 300

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Currency Derivatives Segment

Existing Members

TM 2 8 - - 10 100

TM & CM

2 8 25 25 60 1000

NCDEX Members

TM 2 10.5 - - 12.5 100

TM & CM

2 13 25 25 65 1000

Other Members

TM 2 13 - - 15 100

TM & CM

2 18 25 25 70 1000

PCM - - 25 25 50 1000

* TM = Trading Membership.* TM & SCM = Trading and Self Clearing Membership.* TM & CM = Trading and Clearing Membership.* PCM = Professional Clearing Membership.

  Deposit & Networth Requirements(Individual / Partnership Firms)

DEPOSIT STRUCTURE (Rs. IN LAKHS)

Segment Type of Membership Cash-NSEIL

Non-Cash NSEIL

Cash NSCCL

Non-Cash NSCCL

Total Net Worth

Capital Market TM & SCM 26.5 - 6 17.5 50 75

Wholesale Debt Market

TM & SCM 150 - - - 150 200

Futures & Options

TM 25 - - - 25 75

TM & SCM 25 - 25 25 75 100

TM & CM 25 - 25 25 75 300

Currency Existing TM 2 8 - - 10 100

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Derivatives Segment

Members

TM & CM

2 8 25 25 60 1000

NCDEX Members

TM 2 10.5 - - 12.5 100

TM & CM

2 13 25 25 65 1000

Other Members

TM 2 13 - - 15 100

TM & CM

2 18 25 25 70 1000

* TM = Trading Membership.* TM & SCM = Trading and Self Clearing Membership.* TM & CM = Trading and Clearing Membership.* PCM = Professional Clearing Membership.

Fees and Charges :

Application Processing Fees : Rs. 10,000/- Plus applicable Service Tax. Admission Fees : Rs. 5,00,000/- Plus applicable Service Tax

Annual subscription charges (Captial Market Segment):

o For Corporates - Rs. 1,00,000 P.A.o For Individuals/Partnership Firms - Rs. 50,000 P.A.

Annual subscription charges (Wholesale Debt Market): Rs. 1,00,000 P.A. Advance minimum transaction charges (Futures & Options segment): Rs.

1,00,000 P.A.

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Set of Documents

For CorporateFor Partnership FirmsFor IndividualsFor Banks (only for Currency Derivatives Segment )

NSE Research Initiative

In order to improve market efficiency further and to set international benchmarks in the securities industry, NSE launched the NSE Research Initiative with a view to develop an information base and a better insight into the working of securities

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market in India.

The objective of this initiative is to foster research, which can support and facilitate:

(a) stock exchanges to better design market micro-structure,(b) participants to frame their strategies in the market place,(c) regulators to frame regulations,(d) policy makers to formulate policies and(e) expand the horizon of knowledge.

NSE supports research initiatives on issues that have a bearing on securities market in India.

Broad Areas of Research under NSE Research Initiative

Research proposals on issues that have a bearing on securities market in India are welcome. Proposals may be in any area including:

Market Micro-structure and Design Market Efficiency Derivatives Fixed Income and Government Securities Market Investor Protection Risk Measurement and Management

Currently, we are not accepting any research proposal under the NSE Research Initiative.

Completed working papers for 2010     

Researcher Topic

 July 2010

Dr. Sugato Chakravarty and Dr. Rina Ray Do Hetrogeneous beliefs affects trading volume and asset prices.

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 June 2010

Mr. Manna Majumder and Mr. MD Anwar Hussian

Forecasting of Indian Stock Market Index Using Artificial Neural Network

 May 2010

Dr. Manoj Subhash Kamat & Dr. Manasvi Manoj Kamat

Determinants and the Stability of Dividends in India

Publications

NSE-NEWS: NSE Newsletter Articles Published in NSE Newsletters Indian Securities Market, A Review | Archives NSE Factbook| Archives

NSE Newsletter           

The 'NSE NEWS' is a monthly publication of National Stock Exchange of India Ltd (NSE). NSE NEWS invites articles, of 2000-3000 words (along with abstract of 100 words) from professionals / academicians / researchers on issues that have a bearing on financial markets. The articles submitted should be non-technical in nature. If the article is accepted, the author would be awarded Rs.5,000/-. The articles can be emailed at [email protected] with complete personal and contact details.

   Articles Published in NSE Newsletters

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Author Topic

 July 2010

Venkateswaran R Shareholding Pattern in India

 June 2010

Geeta Das Mutual Funds : An Investment Option for Small Investors

Deepa Rekha Disciplining the Board Room - Role of Institutional Shareholders in Maintaining Corporate Democracy

 May 2010

Jayant Raghu Ram & Arjun Pall

Corporate Disclosures Related To Climate Change

Rasmeet Kohli Journey of equity derivatives market at NSE ?An analysis for the decade (2000-01 to 2009-10)

 April 2010

Prateek Bhattacharya Drawbacks of Derivative Actions: An Impediment to Corporate Governance in the Indian Legal Scenario?

Anand Wadadekar Dual Listing

 March 2010

Jainendra Shandilya Performance Presentation in Global Context

Monika Bhardwaj Class Action Lawsuit

 February 2010

Monika Bhardwaj and Anand Wadadekar

Carbon Credit For Environmental Management

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 January 2010

Anuradha Guru India's Financial Development: Measures and Analysis

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CHAPTER-11 HISTORICAL DATA

Historical Data

In order to help researchers as well as market participants to undertake research work in the Capital Market (Cash), Derivatives Market (F&O) and Debt Market, NSE comes out with the historical trades data (high frequency tick by tick data) on CDs/DVDs. NSE disseminates the historical data for its 3 segments i.e. CM, F&O and the WDM. The details provided in the CDs /DVDs are as given below:

Historical Data Tariff

A) Capital Market Segment Data

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The historical data CDs/DVDs for CM segment of the NSE contains high frequency intra-day data. It contains the following information; (a) Day wise bhavcopy for each trading day of the month [in yyyymmdd.gz format], (b) Circulars issued by NSE or NSCCL during the month, (c) Index information about main stock market indices viz. Nifty, CNX Midcap and Defty both end-of-day and intra-day Data, (d) Masters containing the database masters, listing out symbols, series, ISINs etc., (e) Snapshots of the limit order book at four time points in the day for a month [in yyyymmdd format] and (f) Trades Data containing details about every trade that took place.

B) Derivatives Segment Data

The historical data CDs/DVDs for Derivatives segment of the NSE contains high frequency intra-day data. It contains the following information; (a) day wise bhavcopy for each trading day of the month, (b) Circulars issued by NSE or NSCCL during the month, (c) Masters which contains all the contracts as on the month end including the contracts that expired on the last Thursday of the month, (d) Trades file which contains details about every trade that has taken place in NSE, (e) Snapshots of the limit order book at five time points in the day for the month.

C) Wholesale Debt Market Data

The historical data CDs/DVDs for the WDM segment contains high frequency intra day data, which has the following information; (a) Circulars issued during the month, (b) Masters containing the list of available securities as at the end of the month along with their details viz., Sectype, Security, Issue name, Issue Size as per WDM database, Issue date, Coupon frequency, Maturity date, Market capitalization etc., (c) Trades data with details such as the Trade number, Sectype, Security, Issue name, Trade type, Trade date, Time of trade, Settlement date, Trade quantity, Price, Yield, Coupon cycle, Issue date, Maturity date etc.

D) How to Purchase the historical data

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Researchers (Market Participants )/Person’s interested in procuring the historical data need to make the payment by way of Demand draft/local cheque in favour of "Dotex International Limited" payable at Mumbai.

Along with the demand draft, an undertaking signed on a stamp paper of Rs. 300/- (Rupees Three Hundred Only) which is to be notarized on a non-judicial stamp paper and a request letter with the person’s address, telephone details is required to be submitted.

Also kindly note that NSE has a standard format of data which is covered in the data CDs/DVDs (details already mentioned above) and we do not cater to specific tailor made requests.

Only on receipt of the demand draft and the signed undertaking (as per our format), the data would be sent. The demand draft/cheque and the undertaking letter shall be sent at the following address:

‘Visit to NSE’ Program

It has been the endeavor of NSE to spread knowledge about financial markets as widely as possible. As part of this endeavor, we have been organizing ‘Visit to NSE’ Program, under which groups of students visit NSE to attend a 2-hour session. The session includes lectures on ‘Overview of the Exchange’, ‘Capital Markets’, ‘Derivative Markets’ and ‘NSE's Certification in Financial Markets (NCFM)’. In this session, the students learn about stock exchange structure, its operations, products traded on it and so on. They also learn about NSE’s NCFM certification which not only expands their knowledge base, but also improves their career prospects.

This program is conducted in the Mumbai office as well as the regional offices located at Delhi, Kolkata and Chennai. On behalf of the schools, colleges and educational institutions desiring to participate in the program, a coordinator needs to contact the Mumbai office or a regional office depending on their respective location. Please note that the slots cannot be guaranteed and that the allocation of slots would be on first-come-first-served basis.

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CHAPTER-12 INVESTOR SERVICE CELL

INVESTOR SERVICES CELL (ISC)

Empowerment of investors through education and protection of interest of investors is one of the primary objectives of NSE.  To cater to the needs of investors, NSE has established its Investor Services Cell at Mumbai, Chennai, Kolkata and New Delhi.

The Investor Services Cell facilitates resolution of complaints of investors against the listed corporate entities and NSE members.   NSE has accorded high priority for resolution of investor complaints and therefore the activities of Investors Services Cell are supervised by a Board Sub-Committee exclusively constituted for the purpose.

The Investor Services Cell also renders administrative assistance to arbitration

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proceedings in respect of arbitration cases that are admitted for Arbitration under the Exchange's Arbitration Framework. 

Trade Verification Module

Trade Verification module is a very simple tool to verify trades executed in your account. The data on trades would be available on T+1 day. At any given point in time 10 trading days' data would be available for verification. Data for non-proprietary and non-institutional trades would only be available here.

Complaint / Arbitration StatusAs per SEBI circular MRD/DoP/SE/Cir- 10/2009 dated September 03, 2009

2010-11Trading Member Company

Report 1A - Complaints received from clients against trading members during the current financial year

Report 2A - Complaints received from investors against listed companies during the current financial year

Report 1C - Redressal of complaints lodged by clients against trading members during the current financial year

Report 2C - Redressal of complaints lodged by investors against listed companies during the current financial year

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Report 3B - Disposal of arbitration proceedings (where client is a party) during the current financial year

2009-10Trading Member Company

Report 1A - Complaints received from clients against trading members during the previous financial year

Report 2A - Complaints received from investors against listed companie s during the previous financial year

Report 1C - Redressal of complaints lodged by clients against trading members during the previous financial year

Report 2C - Redressal of complaints lodged by investors against listed companie s during the previous financial year

Report 3B - Disposal of arbitration proceedings (where client is a party) during the previous financial year

Report 4B - Penal actions against trading members during the previous financial year

2008-09Trading Member Company

Report 1B - Redressal of complaints lodged by clients against trading members

Report 2B - Redressal of complaints lodged by investors against listed companies

Report 3A - Disposal of arbitration proceedings (where client is a party)

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Report 4A - Penal actions against trading members

CONCLUSION:

After a voluminous study of the national stock exchange (NSE), it is hereby concluded that

a) The volume of business in NSE has grown tremendouslyb) Its volume of transaction has sur-passed the national stock

exchangec) New financial products has been floated such as the hang sang

indexd) The futures & options markets is the main fulcrum of this markete) Regulations are very stringent and any unruly price behavior of

stocks is completely ruled out.

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BIBLIOGRAPHY

www.nse.com

www.wikipedia.com

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