INTRODUCTION TO DERIVATIVES

On June 9, 2000, the Bombay Stock Exchange (BSE) introduced India's first
derivative instrument - the BSE-30(Sensex) index futures. It was introduced
with three month trading cycle - the near month (one), the next month (two)
and the far month (three). The National Stock Exchange (NSE) followed a
few days later, by launching the S&P CNX Nifty index futures on June 12,
2000.

The plan to introduce derivatives in India was initially mooted by the

National Stock Exchange (NSE) in 1995. The main purpose of this plan was
to encourage greater participation of foreign institutional investors (FIIs) in
the Indian stock exchanges.

The introduction of derivatives was delayed for some more time as the
infrastructure for it had to be set up. Derivatives trading required a
computer-based trading system, a depository and a clearing house facility. In
addition, problems such as low market capitalization of the Indian stock
markets, the small number of institutional players and the absence of a
regulatory framework caused further delays. Derivatives trading eventually
started in June 2000.

The introduction of derivatives was well received by stock market players.

Trading in derivatives gained substantial popularity, and soon the turnover of
the NSE and BSE derivatives markets exceeded the turnover of the NSE and
BSE cash markets.

The Securities Contract Regulation Act (SCRA) was amended in 1999 to

include derivatives within the scope of securities, and a regulatory
framework for administering derivatives trading was laid out. The act
granted legality to exchange-traded derivatives, but not OTC (over the
counter) derivatives.

It allowed derivatives trading either on a separate and independent

derivatives exchange or on a separate segment of an existing stock
exchange. The derivatives exchange had to function as a self-regulatory
organization (SRO) and SEBI acted as its regulator. The responsibility of
clearing and settlement of all trades on the exchange was given to the
clearing house which was to be governed independently.
Derivatives were introduced in a phased manner. Initially, trading was
restricted to index futures contracts based on the S&P CNX Nifty Index and
BSE-30 (Sensex) Index. Later, trading was extended to index options (based
on the same indices) in June 2001, and options on individual securities in
July 2001. SEBI also permitted the launch of futures contracts on individual
stocks in November 2001.

BASICS OF DERIVATIVES

DEFINITION:

The term "Derivative" indicates that it has no independent value, i.e. its
value is entirely "derived" from the value of the underlying asset. The
underlying asset can be securities, commodities, bullion, currency, live stock
or anything else.

Derivatives are financial instruments whose values depend on the values of

other, more basic underlying assets.

Basic properties of derivatives:-

• They do not have value on their own.

• They derive their values from another asset or multiple of assets.

A Derivative includes: -

• A security derived from a debt instrument, share, loan, whether secured

or unsecured, risk instrument or contract for differences or any other
form of security;
• A contract which derives its value from the prices, or index of prices, of
underlying securities.
Motivation to use derivatives

The real motivation to use derivatives is that they are useful in reallocating
risk either across time or across individuals with different risk bearing
preferences.

Types of Derivatives

Derivatives are basically classified into two based upon the mechanism that
is used to trade on them. They are Over the Counter derivatives and
Exchange traded derivatives.

Over-the-counter (OTC) derivatives are contracts that are traded directly

between two parties, without going through an exchange or other
intermediary. Products such as swaps, forward rate agreements, and exotic
options are almost always traded in this way. The OTC derivatives market is
huge. According to the Bank for International Settlements, the total
outstanding notional amount is USD 298 trillion (as of 2005).
Exchange-traded derivatives are those derivatives products that are traded
via Derivatives exchanges. A derivatives exchange acts as an intermediary to
all transactions, and takes Initial margin from both sides of the trade to act as
a guarantee. The world's largest derivatives exchanges (by number of
transactions) are the Korea Exchange (which lists KOSPI Index Futures &
Options), Eurex (which lists a wide range of European products such as
interest rate & index products.

TYPES OF DERIVATIVES:

Forward contracts

Forward contracts are obligations entered into at a point in time for sale or
purchase of a specific type of security at a future point in time. For example,
a bank may enter into a forward contract to purchase $2 million in 6 percent,
30-year Ginnie Mae securities for delivery 30, 60 or 90 days out. The price
is set at the time the forward contract is committed to by the bank. The
counter-party to the forward contract is the broker-dealer who takes the
order from the bank.
 Futures Contract

Futures Contract means a legally binding agreement to buy or sell the

underlying security on a future date. Future contracts are the
organized/standardized contracts in terms of quantity, quality (in case of
commodities), delivery time and place for settlement on any date in future.
The contract expires on a pre-specified date which is called the expiry date
of the contract. On expiry, futures can be settled by delivery of the
underlying asset or cash. Cash settlement enables the settlement of
obligations arising out of the future/option contract in cash.

The future contract is similar to a forward contract conceptually but differs

in the mechanism the contract is executed. The attributes in which the
futures contracts differ from forwards are:

Attributes Forwards Futures

Contract type Privately Exchange

traded traded

Contract term Customized Standard

Price Poor Good

transparency

Price discovery Poor Good

Liquidity Poor Good

Credit Risk High Low

Purpose of Futures Markets

Traditionally futures markets are recognized to meet the following needs:

Price discovery: The futures market helps in revealing information about the
future cash market prices thereby serving a social purpose by helping people
make better estimates of future prices so that they can make their investment
decisions more wisely.

Hedging: Futures are traded as a substitute for a cash market transaction,

thereby reducing the risk of the investor for his positions in the cash market.

Pricing of Futures

Future pricing is linked to the spot price of the underlying commodity. There
is a strong correlation between futures and spot prices of the underlying
asset. The difference is due to the cost-of-carrying it till the specified expiry
date, the demand-supply gaps, various market and economic forces. Futures
prices immediately incorporate and absorb any information related to the
underlying asset.

Futures price can be written as:

Future Price = Cash price + Cost-of-carry.

Cost of carry measures the storage cost plus the interest that is paid to
finance the asset less the income earned on the asset.
 Option contract

Options Contract is a type of Derivatives Contract which gives the

buyer/holder of the contract the right (but not the obligation) to buy/sell the
underlying asset at a predetermined price within or at end of a specified
period. The buyer / holder of the option purchase the right from the
seller/writer for a consideration which is called the premium. The
seller/writer of an option is obligated to settle the option as per the terms of
the contract when the buyer/holder exercises his right. The underlying asset
could include securities, an index of prices of securities etc.

Option Feature

In other contracts, the focus is on underlying asset and each counterpart has
right and obligation to perform. For example, in futures contract, the buyer
has the right and obligation to buy; and seller, the right and obligation to sell.

Option contract differs from others in two respects. The primary focus is on
right & obligation, not on underlying asset. Second, the right & obligation
are separated, with buyer taking the right without obligationand seller taking
the obligation without right. Thus, the distinguishing feature of option is the
right-without-obligation for the buyer.

In option contract, what the buyer buys is the right, not the underlying asset;
and what the seller sells is the right, not the underlying asset.
 Option v/s Other Contracts

• R & O – Right and obligation

• R w/o O – Right without obligation
• w/o R – Obligation without right
• U/A – Underlying asset

The privilege of right without obligation has a price, called the option price
(or premium) and is paid by the buyer to the seller upfront. In return for
receiving the option price from buyer, the option seller grants the privilege
of right without obligation. It should be noted that option price is totally
different from the price of underlying asset.
Option Type

Option type defines the nature of buyer’s right, which can be

• Right to buy the underlying asset, which is called the call option; or
• Right to sell the underlying asset, which is called the put option.

The buyer will exercise his right only if it is favorable to him. If it is not, he
will not exercise his right because he has no obligation. Thus, the underlying
asset moves from to another only when the option is exercised. When it
moves from one counterpart to another, its price (in cash) must move in the
opposite direction. The amount of price in cash is fixed at the time of
contract and is called the strike price (K) or exercise price.

Option price is the price of the privilege of right & obligation whereas strike
price is the price of underlying asset. Further, option price is paid by the
buyer to seller with certainty whereas the strike price paid only if the option
is exercised at the discretion of the buyer.

Flows between Option Buyer and Seller

We can see from the exhibit above that option seller is actually buying the
asset if the option exercised is put option. We may say that the option seller
is actually underwriting the risk on the underlying asset, and he may be
seller or buyer of the underlying asset. For this reason, the option seller is
called option writer.

The buyer’s privilege of r w/o o has a limited life, called the expiration date
(T), after which the option expires.

Option Style

Option style defines when the buyer can exercise his right on the underlying
asset. If he can exercise only on the expiration date of the option, it is
European style; if he can exercise anytime during option life, it is American-
style.

Option Style

The option contract can now be formalized. It specifies the following:

 Underlying asset
 Nature of buyer’s right without obligation (ie, option type)
 Price of Right without obligation (ie, option price)
 Exercise time (ie, option style)
 Price of underlying asset in exercise (ie, strike price)
 Expiration date of option
Option Status

Option status defines the benefit to buyer from exercising the option. The
status could be as follows.

1. Profit from exercise: the status is called in-the-money (itm).

2. Loss from exercise: the status is called out-of-the-money (otm).
3. No Profit, No Loss: when the status is called at-the-money (atm)

Given his right without obligation, the buyer will exercise only those options
that yield profit and let all others expire. In other words, only itm options are
exercised; and otm and atm options expire unexercised.

Option Exposures

In cash and futures market, we have only two exposures: buy asset (long) or
sell asset (short). Since there are two option types, and each can be bought
or written, we have a total of four exposures as follows.

Exposure Meaning Implication Exposure on

Exercise

Long Call Buying Right to buy underling asset Long underlying

(lc) call asset

Short Call Writing Obligation to sell Short underlying

(sc) call underlying asset asset

Long Put Buying Right to sell underlying Short underlying

(lp) put asset asset

Short Put Writing Obligation to buy Long underlying

(sp) put underlying asset asset
Thus, "long" option means having the right, and "short" option means
having the obligation. Further, sc and lp result in the same exposure in the
underlying asset, namely long, when the option is exercised. Similarly, long
call and short put result in long underlying asset when exercised. There is a
crucial difference, however. When you are long on option, you control the
exercise. When you are short on the option, you cannot control the exercise.

Option Payoff

Given that "long" means buying option and that the buyer has r w/o o, the
long option has "limited loss and unlimited profit." If the market moves
unfavorably, the buyer will not exercise his option, and his loss will be
limited to the option price paid. If the market moves favorably, the buyer
will exercise his option and the profit will be proportional to extent of price
move.

Similarly, for short option (i.e., for option writer), the payoff is "limited
profit, unlimited loss": profit is limited to the option price received and the
loss is proportional to the extent of price move.
 Index Futures and Index Option Contracts

Futures contract based on an index i.e. the underlying asset is the index, are
known as Index Futures Contracts. For example, futures contract on NIFTY
Index and BSE-30 Index. These contracts derive their value from the value
of the underlying index.

Similarly, the options contracts, which are based on some index, are known
as Index options contract. However, unlike Index Futures, the buyer of Index
Option Contracts has only the right but not the obligation to buy / sell the
underlying index on expiry. Index Option Contracts are generally European
Style options i.e. they can be exercised / assigned only on the expiry date.

An index, in turn derives its value from the prices of securities that
constitute the index and is created to represent the sentiments of the market
as a whole or of a particular sector of the economy. Indices that represent the
whole market are broad based indices and those that represent a particular
sector are sectoral indices.

In the beginning futures and options were permitted only on S&P Nifty and
BSE Sensex. Subsequently, sectoral indices were also permitted for
derivatives trading subject to fulfilling the eligibility criteria. Derivative
contracts may be permitted on an index if 80% of the index constituents are
individually eligible for derivatives trading. However, no single ineligible
stock in the index shall have a weightage of more than 5% in the index. The
index is required to fulfill the eligibility criteria even after derivatives
trading on the index have begun. If the index does not fulfill the criteria for 3
consecutive months, then derivative contracts on such index would be
discontinued.

By its very nature, index cannot be delivered on maturity of the Index

futures or Index option contracts therefore, these contracts are essentially
cash settled on Expiry.
 Swap

In finance a swap is a derivative, where two counterparties exchange one

stream of cash flows against another stream. These streams are called the
legs of the swap. The cash flows are calculated over a notional principal
amount. Swaps are often used to hedge certain risks, for instance interest
rate risk. Another use is speculation.

An illustration of a standard fixed/float interest rate swap

Interest Rate Swap

Interest Rate swaps are the most common type of swap, also known as a
'plain vanilla' swap. They typically exchange fixed rate payments against
floating rate payments. The principals are not exchanged, and are known as
the notional principal. Exceptions exist, such as floating-to-floating swaps
(known as basis swaps).

Total return swap

A total return swap is a swap, where party A pays the total return of an asset,
and party B makes periodic interest payments. The total return is the capital
gain or loss, plus any interest or dividend payments. Note that if the total
return is negative, then party A receives this amount from party B. The
parties have exposure to the return of the underlying stock or index, without
having to hold the underlying assets. The profit or loss of party B is the same
for him as actually owning the underlying asset.

Equity Swap

An equity swap is a special type of total return swap, where the underlying
asset is a stock, a basket of stocks, or a stock index. Compared to actually
owning the stock, in this case you do not have to pay anything up front, but
you do not have any voting or other rights that stock holders do have.
 Structure of Derivative Markets in India

Derivative trading in India takes can place either on a separate and

independent Derivative Exchange or on a separate segment of an existing
Stock Exchange. Derivative Exchange/Segment function as a Self-
Regulatory Organization (SRO) and SEBI acts as the oversight regulator.
The clearing & settlement of all trades on the Derivative Exchange/Segment
would have to be through a Clearing Corporation/House, which is
independent in governance and membership from the Derivative
Exchange/Segment.

Regulatory framework of Derivatives markets in India

With the amendment in the definition of 'securities' under SC(R)A (to

include derivative contracts in the definition of securities), derivatives
trading takes place under the provisions of the Securities Contracts
(Regulation) Act, 1956 and the Securities and Exchange Board of India Act,
1992.

Dr. L.C Gupta Committee constituted by SEBI had laid down the regulatory
framework for derivative trading in India. SEBI has also framed suggestive
bye-law for Derivative Exchanges/Segments and their Clearing
Corporation/House which lay's down the provisions for trading and
settlement of derivative contracts. The Rules, Bye-laws & Regulations of the
Derivative Segment of the Exchanges and their Clearing Corporation/House
have to be framed in line with the suggestive Bye-laws. SEBI has also laid
the eligibility conditions for Derivative Exchange/Segment and its Clearing
Corporation/House.

The eligibility conditions have been framed to ensure that Derivative

Exchange/Segment & Clearing Corporation/House provide a transparent
trading environment, safety & integrity and provide facilities for redressal of
investor grievances.
Some of the important eligibility conditions are:-

 Derivative trading to take place through an on-line screen based Trading

System.
 The Derivatives Exchange/Segment shall have on-line surveillance
capability to monitor positions, prices, and volumes on a real time basis
so as to deter market manipulation.
 The Derivatives Exchange/ Segment should have arrangements for
dissemination of information about trades, quantities and quotes on a real
time basis through at least two information vending networks, which are
easily accessible to investors across the country.
 The Derivatives Exchange/Segment should have arbitration and investor
grievances redressal mechanism operative from all the four areas /
regions of the country.
 The Derivatives Exchange/Segment should have satisfactory system of
monitoring investor complaints and preventing irregularities in trading.
 The Derivative Segment of the Exchange would have a separate Investor
Protection Fund.
 The Clearing Corporation/House shall perform full novation, i.e., the
Clearing Corporation/House shall interpose itself between both legs of
every trade, becoming the legal counterparty to both or alternatively
should provide an unconditional guarantee for settlement of all trades.
 The Clearing Corporation/House shall have the capacity to monitor the
overall position of Members across both derivatives market and the
underlying securities market for those Members who are participating in
both.
 The level of initial margin on Index Futures Contracts shall be related to
the risk of loss on the position. The concept of value-at-risk shall be used
in calculating required level of initial margins. The initial margins should
be large enough to cover the one-day loss that can be encountered on the
position on 99% of the days.
 The Clearing Corporation/House shall establish facilities for electronic
funds transfer (EFT) for swift movement of margin payments.
 In the event of a Member defaulting in meeting its liabilities, the Clearing
Corporation/House shall transfer client positions and assets to another
solvent Member or close-out all open positions.
 The Clearing Corporation/House should have capabilities to segregate
initial margins deposited by Clearing Members for trades on their own
account and on account of his client. The Clearing Corporation/House
shall hold the clients’ margin money in trust for the client purposes only
and should not allow its diversion for any other purpose.
 The Clearing Corporation/House shall have a separate Trade Guarantee
Fund for the trades executed on Derivative Exchange / Segment.

Presently, SEBI has permitted Derivative Trading on the Derivative Segment

of BSE and the F&O Segment of NSE.
 Margin

Although the value of a contract at time of trading should be zero, its price
constantly fluctuates. This renders the owner liable to adverse changes in
value, and creates a credit risk to the exchange, who always acts as
counterparty. To minimize this risk, the exchange demands that contract
owners post a form of collateral, in the US formally called performance
bond, but commonly known as margin.

Margin requirements are waived or reduced in some cases for hedgers who
have physical ownership of the covered commodity or spread traders who
have offsetting contracts balancing the position.

Initial margin is paid by both buyer and seller. It represents the loss on that
contract, as determined by historical price changes that is not likely to be
exceeded on a usual day's trading.

Because a series of adverse price changes may exhaust the initial margin, a
further margin, usually called variation or maintenance margin, is required
by the exchange. This is calculated by the futures contract, i.e. agreeing a
price at the end of each day, called the "settlement" or mark-to-market price
of the contract.

Margin-equity ratio is a term used by speculators, representing the amount

of their trading capital that is being held as margin at any particular time.
Traders would rarely (and unadvisedly) hold 100% of their capital as
margin. The probability of losing their entire capital at some point would be
high. By contrast, if the margin-equity ratio is so low as to make the trader's
capital equal to the value of the futures contract itself, then they would not
profit from the inherent leverage implicit in futures trading. A conservative
trader might hold a margin-equity ratio of 15%, while a more aggressive
trader might hold 40%.

Return on margin (ROM) is often used to judge performance because it

represents the gain or loss compared to the exchange’s perceived risk as
reflected in required margin. ROM may be calculated (realized return) /
(initial margin).
 Settlement

Settlement is the act of consummating the contract, and can be done in one
of two ways, as specified per type of futures contract:

Physical delivery - the amount specified of the underlying asset of the

contract is delivered by the seller of the contract to the exchange, and by the
exchange to the buyers of the contract. Physical delivery is common with
commodities and bonds. In practice, it occurs only on a minority of
contracts. Most are cancelled out by purchasing a covering position - that is,
buying a contract to cancel out an earlier sale (covering a short), or selling a
contract to liquidate an earlier purchase (covering a long).

Cash settlement - a cash payment is made based on the underlying

reference rate, such as a short term interest rate index such as Euribor, or the
closing value of a stock market index

Expiry - is the time when the final prices of the future is determined. For
many equity index and interest rate futures contracts (as well as for most
equity options), this happens on the third Friday of certain trading month.
On this day the t+1 futures contract becomes the t forward contract. For
example, for most CME and CBOT contracts, at the expiry on December,
the March futures become the nearest contract. This is an exciting time for
arbitrage desks, as they will try to make rapid gains during the short period
(normally 30 minutes) where the final prices are averaged from. At this
moment the futures and the underlying assets are extremely liquid and any
mispricing between an index and an underlying asset is quickly traded by
arbitrageurs. At this moment also, the increase in volume is caused by
traders rolling over positions to the next contract or, in the case of equity
index futures, purchasing underlying components of those indexes to hedge
against current index positions. On the expiry date, a European equity
arbitrage trading desk in London or Frankfurt will see positions expire in as
many as eight major markets almost every half an hour.
 Membership categories in the derivatives market

Trading Member (TM) – A TM is a member of the derivatives exchange

and can trade on his own behalf and on behalf of his clients.

Clearing Member (CM) – These members are permitted to settle their own
trades as well as the trades of the other non-clearing members known as
Trading Members who have agreed to settle the trades through them.

Self-clearing Member (SCM) – A SCM are those clearing members who

can clear and settle their own trades only.

Requirements for a Member with regard to the conduct of his business

The derivatives member is required to adhere to the code of conduct

specified under the SEBI Broker Sub-Broker regulations. The following
conditions stipulations have been laid by SEBI on the regulation of sales
practices:

 Sales Personnel: The derivatives exchange recognizes the persons

recommended by the Trading Member and only such persons are
authorized to act as sales personnel of the TM. These persons who
represent the TM are known as Authorized Persons.
 Know-your-client: The member is required to get the Know-your-
client form filled by every one of client.
 Risk disclosure document: The derivatives member must educate his
client on the risks of derivatives by providing a copy of the Risk
disclosure document to the client.
 Member-client agreement: The Member is also required to enter into
the Member-client agreement with all his clients.
 Types of traders in the derivatives market

Hedgers: They are in the position where they face risk associated with the
price of an asset. They use derivatives to reduce or eliminate risk. For
example, a farmer may use futures or options to establish the price for his
crop long before he harvests it. Various factors affect the supply and demand
for that crop, causing prices to rise and fall over the growing season. The
farmer can watch the prices discovered in trading at the CBOT and, when
they reflect the price he wants, will sell futures contracts to assure him of a
fixed price for his crop.

Speculators: Speculators wish to bet on the future movement in the price of

an asset. They use derivatives to get extra leverage. A speculator will buy
and sell in anticipation of future price movements, but has no desire to
actually own the physical commodity.

Arbitrators: They are in the business to take advantage of a discrepancy

between prices in two different markets. If, for example, they see the future
prices of an asset getting out of line with the cash price, they will take
offsetting positions in the two markets to lock in a profit.

Derivative contracts that are permitted by SEBI

Derivative products have been introduced in a phased manner starting with

Index Futures Contracts in June 2000. Index Options and Stock Options
were introduced in June 2001 and July 2001 followed by Stock Futures in
November 2001. Sectoral indices were permitted for derivatives trading in
December 2002. Interest Rate Futures on a notional bond and T-bill priced
off ZCYC have been introduced in June 2003 and exchange traded interest
rate futures on a notional bond priced off a basket of Government Securities
were permitted for trading in January 2004.
 Eligibility criterion for stocks on which derivatives trading may be
permitted

A stock on which stock option and single stock future contracts are proposed
to be introduced is required to fulfill the following broad eligibility criteria:-

The stock shall be chosen from amongst the top 500 stock in terms of
average daily market capitalization and average daily traded value in the
previous six month on a rolling basis.

The stock’s median quarter-sigma order size over the last six months shall be
not less than Rs.1 Lakh. A stock’s quarter-sigma order size is the mean order
size (in value terms) required to cause a change in the stock price equal to
one-quarter of a standard deviation.

The market wide position limit in the stock shall not be less than Rs.50
crores.

A stock can be included for derivatives trading as soon as it becomes

eligible. However, if the stock does not fulfill the eligibility criteria for 3
consecutive months after being admitted to derivatives trading, then
derivative contracts on such a stock would be discontinued.

Minimum contract size

The Standing Committee on Finance, a Parliamentary Committee, at the

time of recommending amendment to Securities Contract (Regulation) Act,
1956 had recommended that the minimum contract size of derivative
contracts traded in the Indian Markets should be pegged not below Rs. 2
Lakhs. Based on this recommendation SEBI has specified that the value of a
derivative contract should not be less than Rs. 2 Lakh at the time of
introducing the contract in the market. In February 2004, the Exchanges
were advised to re-align the contracts sizes of existing derivative contracts to
Rs. 2 Lakhs. Subsequently, the Exchanges were authorized to align the
contracts sizes as and when required in line with the methodology prescribed
by SEBI.
Lot size of a contract

Lot size refers to number of underlying securities in one contract. The lot
size is determined keeping in mind the minimum contract size requirement
at the time of introduction of derivative contracts on a particular underlying.

For example, if shares of XYZ Ltd are quoted at Rs.1000 each and the
minimum contract size is Rs.2 Lakhs, then the lot size for that particular
scrips stands to be 200000/1000 = 200 shares i.e. one contract in XYZ Ltd.
covers 200 shares.
 Investor protection

Measures have been specified by SEBI to protect the rights of investor

in Derivatives Market:

 Investor's money has to be kept separate at all levels and is permitted

to be used only against the liability of the Investor and is not available
to the trading member or clearing member or even any other investor.
 The Trading Member is required to provide every investor with a risk
disclosure document which will disclose the risks associated with the
derivatives trading so that investors can take a conscious decision to
trade in derivatives.
 Investor would get the contract note duly time stamped for receipt of
the order and execution of the order. The order will be executed with
the identity of the client and without client ID order will not be
accepted by the system. The investor could also demand the trade
confirmation slip with his ID in support of the contract note. This will
protect him from the risk of price favor, if any, extended by the
Member.
 In the derivative markets all money paid by the Investor towards
margins on all open positions is kept in trust with the Clearing
House/Clearing Corporation and in the event of default of the Trading
or Clearing Member the amounts paid by the client towards margins
are segregated and not utilized towards the default of the member.
However, in the event of a default of a member, losses suffered by the
Investor, if any, on settled / closed out position are compensated from
the Investor Protection Fund, as per the rules, bye-laws and
regulations of the derivative segment of the exchanges.
 The Exchanges are required to set up arbitration and investor
grievances redressal mechanism operative from all the four areas /
regions of the country.