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SEBI's Varma panel moots measures to make index futures safe

The J R Varma Committee, set up by the Securities and Exchange Board of India to recommend risk containment measures in the Indian stock index futures market, submitted its report today.

The Varma report provides the methodology for fixing of initial margin on index futures contracts, prescribes liquid networth requirements for clearing members, transparency and disclosure norms for the clearing corporation and trading member position limits.

The committee said the SEBI should recommend the use of risk estimation methodology, but should not mandate a specific minimum margin level. The derivatives exchange and clearing corporation would be authorised to fix the quantum of margin for index futures using this methodology.

An exponential moving average method would be used to determine the volatility estimate every day. The volatility at the end of a particular day is estimated using the previous day's volatility estimate and the returns observed in the futures market during the current day.

However, for the first six months of trading (until futures market stablises with a reasonable level of trading), the initial margin shall not be less that five per cent.

The clearing member's liquid networth must satisfy two conditions: it should not be less than Rs 5 million; the mark-to-market value of gross open positions (of all trades cleared through the clearing member) should not exceed 33-1/3 times the members' liquid networth.

The committee also recommended that there should be a position limit at the trading member level of 15 per cent of the open interest or Rs 1 billion, whichever is higher.

UNI

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