The Hindu Business Line : FIIs in exchange-traded derivatives

FIIs have been permitted to trade in all exchange traded derivative contracts subject to compliance with position limits prescribed for them and their sub-accounts as well compliance with procedure for trading, settlement and reporting as prescribed by the derivative exchange / clearing house / clearing corporation from time to time.

Position Limits: The position limits for FII and their sub-accounts shall be as under:

At the level of the FII

In the case of index-related derivative products, there shall be a position limit of 15 per cent of open interest in all futures and options contracts on a particular underlying index on the Exchange, or Rs 100 crore, whichever is higher.

For securities in which the market-wide position limit is less than or equal to Rs 250 crore, the FII position limit in such stock shall be 20 per cent of the market-wide limit.

For securities in which the market-wide position limit is greater than Rs 250 crore, the FII position limit in such stock shall be Rs 50 crore.

At the level of the sub-account

A disclosure requirement for any person or persons acting in concert who together own 15 per cent or more of the open interest of all futures and options contracts on a particular underlying index on the Exchange. The gross open position across all futures and options contracts on a particular underlying security, of a sub-account of an FII, should not exceed the higher of:

1 per cent of the free float market capitalisation (in terms of number of shares) or 5 per cent of the open interest in the derivative contracts on a particular underlying stock (in terms of number of contracts). These position limits shall be applicable on the combined position in all futures and options contracts on an underlying security on the Exchange.

Procedures: The Clearing Corporation would monitor the FII position limits at the end of each trading day. For this purpose, the following procedure is prescribed:

FIIs intending to trade in the F&O segment of the Exchange shall be required to notify the following details of the Clearing Member/s, who shall clear and settle their trades in the F&O segment, to Clearing Corporation.

i) Name of FII ii) SEBI Registration Number iii) Name of sub-account/s of FII (if any) iv) Name of the Clearing Member/s.

A unique code will be allotted by Clearing Corporation to each such FII prior to commencement of trading by them. This will be utilised by Clearing Corporation for the purpose of monitoring position limits at the level of the FII. For e.g. If the name of FII is say XYZ and it has 2 sub accounts viz. scheme 1 and 2, the FII code allotted by NSCCL may be `XYZ' (comprising 12 characters).

Each FII/ sub-account of the FII, as the case may be, intending to trade in the F&O segment of the Exchange, shall further be required to obtain a unique Custodial Participant (CP) code allotted from the Clearing Corporation, through their Clearing Member. CP code normally comprises of 12 alphanumeric characters. Clearing Corporation will allot CP codes to each such FII/ sub-account of the FII. The Clearing Member/s of the FII/ sub-account of the FII, are required to furnish the following details to Clearing Corporation, to obtain CP codes: i) Name of FII ii) Unique code allotted to the FII by NSCCL (as detailed in 2 above) iii) Name of sub-account/s of FII iv) CP code/s allotted to the FII/ sub account/s of the FII, in the Capital Market segment of Clearing Corporation

Eg. In the example given in 2 above the CP codes allotted by NSCCL may be ABCDEFGH0001 and ABCDEFGH0002.

FIIs/ sub accounts of FIIs, which have been allotted a unique CP code by Clearing Corporation, shall only be permitted to trade on the Exchange.

The FII/ sub-account of FII shall ensure that all orders placed by them on the Exchange carry the relevant CP code allotted by Clearing Corporation as specified in point 3 above, in the relevant field in NEATFO.

Clearing Member/s of the FII shall 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 will monitor 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.

The cumulative FII position may be disclosed to the market on a T + 1 basis, before the commencement of trading on the next day.

In the event of an FII breaching the position limits on any underlying, Clearing Corporation will advise the Exchange to withdraw the facility granted to such FII to take any fresh positions in any derivative contracts. Such FII will be 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 may be reinstated upon due compliance of the position limits.

It shall also be 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 shall be required to reduce open position in such underlying, in accordance with the mechanism specified by Clearing Corporation. Only upon due compliance of the position limits, the sub-accounts may permitted to take further positions.

Computation of position limits: The position limits would be 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 position for all derivative contracts would be valued as the open interest multiplied with the closing price of the respective underlying in the cash market.

source: Web site of the National Stock Exchange Board of India (www.nseindia.com)

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