Sebi puts in place risk management measures for derivatives segment

Markets regulator Sebi today put in place additional risk management measures, pertaining to margin collection requirement and computation of liquid net worth, for equity derivatives segment.

The decision has been taken after taking into account feedback from the clearing corporations and the recommendations of Sebi's risk management review committee, the regulator said in a circular.

Sebi has issued additional risk management measures, pertaining to margin collection requirement and computation of liquid net worth, that needs to be complied with and implemented by the stock exchanges or clearing corporations for derivatives segment.

For the client's margin collection requirement in the equity derivatives segment, Sebi (Securities and Exchange Board of India) said that clearing or trading members need to include initial margin, exposure margin or extreme loss margin, calendar spread margin and mark to market settlements.

The client margins are required to be compulsorily collected and reported to the exchange or clearing corporation.

Sebi said that liquid net worth will be arrived at by deducting initial margin and the exposure margin or extreme loss margin from the liquid assets of the clearing members.

The provisions of this circular will come into effect from June 1, the regulator noted.

Derivatives in financial markets typically refers to a forward, future, option or any other hybrid contract of pre- determined fixed duration, linked for the purpose of contract fulfilment to the value of a specified real or financial asset or to an index of securities.

Broadly, there are two types of derivative contracts -- futures and options. A futures contract means a legally binding agreement to buy or sell the underlying security on a future date, while options contract gives the buyer or holder of the contract the right (but not the obligation) to buy or sell the underlying asset at a predetermined price within or at end of a specified period.

Securities and Exchange Board of India ( SEBI )