Appendix B: Amounts outstanding of over the counter Foreign exchange derivatives ( By instrument and counter-party). By risk category and instrument (In billions of US dollars) Notional Amount Outstanding Gross Market Values Instrument / counterparty Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08
Appendix C: Amounts outstanding of over the counter foreign exchange derivatives ( By currency) By currency In billions of US dollars Notional Amount Outstanding Gross Market Values Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 All currencies 38,127 40,271 48,645 56,238 62,983 1,136 1,266 1,345 1,807 2,262 Australian dollar 1,683 1,502 2,030 2,227 2,396 37 52 81 76 105 Canadian dollar 1,674 1,768 2,239 2,404 2,226 75 68 106 134 93 Danish krone 155 148 167 241 224 4 3 3 5 6 Euro 15,344 16,037 18,280 21,806 25,963 472 509 455 790 1,010 Hong Kong dollar 641 631 902 988 857 3 3 6 5 13 Japanese yen 9,536 9,490 10,602 12,857 13,616 243 325 389 371 433 New Zealand dollar 41 48 56 60 58 1 2 2 2 1 Norwegian krone 185 281 384 420 478 3 6 9 10 14 Pound sterling 5,217 6,135 7,770 7,979 8,377 148 197 174 260 280 Swedish krona 1,172 1,220 1,390 1,525 1,589 31 33 23 29 30 Swiss franc 2,096 2,311 3,056 3,662 3,964 50 49 54 91 119 Thai baht 5 6 5 3 6 0 0 0 0 0 US dollar 31,791 33,755 40,513 46,947 52,152 969 1,069 1,112 1,471 1,838 Other 6,715 7,210 9,896 11,358 14,060 235 215 276 370 582
(Source: Bank for International Settlements)
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Appendix D : Amounts outstanding of over the counter Foreign exchange derivatives ( By instrument and maturity) By instrument and maturity in billions of US dollars All Counterparties Reporting Dealers Instrument / maturity Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08
Total contracts 38,127 40,271 48,645 56,238 62,983 15,306 15,532 19,173 21,334 24,845 Maturity of one year or less 29,579 30,270 36,950 40,316 43,639 12,003 11,632 14,586 16,096 18,014 Maturity between 1 and 5 yrs 5,851 6,702 8,090 8,553 10,701 2,305 2,697 3,182 3,597 4,787 Maturity over 5 years 2,697 3,299 3,606 7,370 8,643 998 1,204 1,405 1,641 2,044 Forwards and swaps 29,103 30,674 36,842 43,490 48,273 11,072 11,035 13,709 15,386 17,496 Maturity of one year or less 22,122 22,696 27,706 31,172 33,558 8,461 8,061 10,206 11,543 12,549 Maturity between 1 and 5 yrs 4,448 4,899 5,823 6,176 7,623 1,685 1,873 2,237 2,431 3,177 Maturity over 5 years 2,533 3,079 3,312 6,142 7,093 925 1,100 1,266 1,412 1,770 Options 9,024 9,597 11,804 12,748 14,710 4,234 4,498 5,464 5,948 7,349 Maturity of one year or less 7,456 7,573 9,244 9,144 10,081 3,541 3,571 4,380 4,553 5,466 Maturity between 1 and 5 yrs 1,403 1,803 2,267 2,377 3,078 620 823 945 1,166 1,610 Maturity over 5 years 165 221 293 1,227 1,550 73 104 139 229 274
(Source: Bank for International Settlements)
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Appendix E: Amounts outstanding of over the counter single currency interest- rate derivatives.( By instrument and counter-party)
By instrument and counter-party In billions of US dollars Notional Amount Outstanding Gross Market Values Instrument / counterparty Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08
Appendix F: Amounts outstanding of over the counter single currency interest- rate derivatives.( By currency).
By currency In billions of US dollars Notional Amount Outstanding Gross Market Values Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 All currencies 262,526 291,582 347,312 393,138 458,304 5,445 4,826 6,063 7,177 9,263 Australian dollar 983 1,042 1,538 1,701 2,549 9 9 21 35 58 Canadian dollar 2,047 2,125 2,828 3,014 3,286 38 31 43 37 60 Danish krone 233 224 234 313 343 6 6 7 8 10 Euro 103,461 111,791 127,648 146,082 171,877 2,299 2,300 2,846 2,688 3,910 Hong Kong dollar 318 453 516 553 682 4 4 4 7 9 Japanese yen 32,581 38,113 48,035 53,099 58,056 463 297 364 401 380 New Zealand dollar 20 26 61 79 97 0 0 1 1 1 Norwegian krone 562 1,183 1,969 2,381 2,792 5 6 11 10 20 Pound sterling 19,071 22,238 27,676 28,390 38,619 291 311 627 430 684 Swedish krona 3,452 3,594 5,155 5,176 6,454 38 32 48 43 73 Swiss franc 3,647 3,543 3,921 4,101 5,253 46 34 52 42 71 US dollar 88,115 97,430 114,371 129,756 149,813 2,120 1,661 1,851 3,219 3,601 Other 8,036 9,818 13,360 18,493 18,484 126 136 189 257 386
(Source: Bank for International Settlements)
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Appendix G: Amounts outstanding of over the counter single currency interest- rate derivatives.( By instrument and maturity) By instrument and maturity In billions of US dollars All Counterparties Reporting Dealers Instrument / maturity Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08
Total contracts 262,526 291,582 347,312 393,138 458,304 114,826 127,432 148,555 157,245 188,982 Maturity of one year or less 90,755 104,098 132,402 127,601 153,181 43,775 49,538 60,108 60,805 79,955 Maturity between 1 and 5 yrs 101,909 110,314 125,700 134,713 150,096 43,533 47,231 53,469 56,783 63,969 Maturity over 5 years 69,861 77,170 89,210 130,824 155,028 27,518 30,663 34,979 39,658 45,058 Forwards and swaps 225,705 248,361 295,024 336,187 396,142 97,325 106,302 122,078 131,541 159,692 Maturity of one year or less 80,387 90,709 116,496 113,626 138,215 39,668 44,389 53,829 54,880 72,793 Maturity between 1 and 5 yrs 86,254 92,678 103,900 114,109 128,741 35,819 38,313 41,781 46,349 52,223 Maturity over 5 years 59,064 64,974 74,628 108,451 129,186 21,837 23,600 26,468 30,313 34,675 Options 36,821 43,221 52,288 56,951 62,162 17,501 21,130 26,477 25,704 29,291 Maturity of one year or less 10,368 13,389 15,906 13,975 14,966 4,107 5,149 6,279 5,926 7,162 Maturity between 1 and 5 yrs 15,655 17,636 21,800 20,604 21,355 7,713 8,918 11,687 10,434 11,746 Maturity over 5 years 10,797 12,196 14,582 22,373 25,841 5,681 7,063 8,511 9,344 10,383
(Source: Bank for International Settlements)
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Appendix H : Amounts outstanding of over the counter equity linked and commodity derivatives.( By instrument & counter-party)
Appendix L: Derivatives financial instruments traded on organized exchanges. (By instrument and location )
By instrument and location Number of contracts in millions Contracts outstanding Turnover Instrument / Location Dec-06 Dec-07 Jun-08 Sept-08 2006 2007 Q4-07 Q1-08 Q2-08 Q3-08
Appendix N: Markets for Derivatives Instruments from 1986 to 1996
Appendix O: Markets for IRS and Currency for members of ISDA. From 1987 to 1996
(Source: The American Economic Review:1998)
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Appendix P: Contracts Specifications (Proposed) of Currency Futures in MCX SE: Underlying USD – INR Lot Size 1000 USD Maturity Period 12 monthly contracts
Exchange Timings 9.00 am to 5.00 pm
Quote price INR per USD
Initial Margin
As decided by the exchange from time to time based on the Var margining system. Minimum margin shall be at the rate of 1.75% on the first day of trading and at the rate of 1% there after.
Position Limits
At Client Level – Gross open positions of the client across all the contracts shall not exceed 6% of the total open interest or $5 million whichever is higher. At Trading Member Level – Gross open positions of the trading member across all the contracts shall not exceed 15% of the total open interest or $25 million whichever is higher.
Final Settlement
Final settlement would be in INR based on RBI reference rate. The contract would expire on the last working day (excluding Saturdays) of the month.
Appendix Q: Records Achieved in F & O Segment at NSE
(Source: www.nseindia.com)
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Appendix R: Comparative Analysis of World Exchanges
Appendix S: The Top 20 Equity Index: - A listing of the most actively traded futures and options contracts worldwide ranked by number of contracts traded
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Appendix T: Analysis of Forex Questionnaire-survey: Forex analysis:
1. Out of 55 firms surveyed, 31 firms use derivatives while 24 firms don’t use derivatives. Thus 56% of the firms use derivatives while 44% firms don’t use derivatives.
2. (%) of firms with operating revenues in foreign currency ( firms which don’t use derivatives)
Total 24 100.0 100.0 Question wise analysis for firms using forex derivatives is shown below: Use of benchmark:
Use of benchmark Frequency Percent Cumulative Percent
Does not use Benchmark 7 22.6 22.6 Forward rates available at the beginning of period
13 41.9 64.5
Spot rate available at the beginning of period
5 16.1 80.6
Baseline percent hedged strategy
3 9.7 90.3
Other benchmark 3 9.7 100.0 Total 31 100.0
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The risk management tools used for short term risk management: Short term forward cover
Frequency PercentYes 23 74.2No 8 25.8
Total 31 100.0 Short term Cross currency option
Frequency Percent Yes 6 19.4No 25 80.6
Total 31 100.0 Forward Rate Agreement
Frequency Percent Yes 4 12.9No 27 87.1
Total 31 100.0 Other short term hedging instrument
Frequency Percent Yes 2 6.5No 29 93.5
Total 31 100.0 Long term risk management tools used Long Term Currency Swap
Frequency Percent Yes 4 12.9No 27 87.1
Total 31 100.0
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Long Term Currency Swap
87.1%
12.9%
No
Yes
Long Term Currency Option
67.7%
32.3%
No
Yes
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Firms hedging contractual commitments:
Hedge contractual commitments
Hedge contractual commitments
FrequentlySometimesNeverNot Applicable
Per
cent
60
50
40
30
20
10
0
Hedging contacts over one year:
Hedge transactions over one year
Hedge transactions over one year
FrequentlySometimesNeverNot Applicable
Per
cent
50
40
30
20
10
0
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Hedging Economic exposure:
Hedging Economic Exposure
3.2%
3.2%
93.5%
75 - 100 %
25 - 50 %
< 25 %
Altering the timing of hedge to cope up the fluctuations in exchange rates: Alter the timing of hedge for volatility
FrequentlySometimesNever
Perc
ent
60
50
40
30
20
10
0
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Altering the size of hedge to cope up the fluctuations in exchange rates: Alter the size of hedge for volatility
FrequentlySometimesNever
Perc
ent
70
60
50
40
30
20
10
0
After the size of hedge for volatility
Frequency of valuing Derivative portfolio
Frequency of valuing Derivative portfolio
As Needed / No set SAnnually
QuarterlyWeekly
Daily
Per
cent
60
50
40
30
20
10
0
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Appendix U: Key Recommendations of J.R.Varma and L.C.Gupta Committee
Prof. J.R. Varma Committee Report for risk containment for derivative trading The J.R. Varma Committee, set up by the SEBI, to recommend risk containment measures in the Indian Stock Index Futures Market submitted its Report to SEBI. The Committee focused on ways of making operational the broad recommendations of the committee on derivatives to fix the initial margin to cover at 99 per cent Value at Risk.
Recommendations of Varma Committee Report on Derivatives
The Report provides the methodology for fixing of initial margin on Index Futures contracts, prescribes liquid net worth requirements for clearing members, transparency and disclosure norms for the clearing corporation, trading member position limits etc.
1. SEBI should recommend only the use of a particular Value at 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 obtain 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 the futures market stabilises with a reasonable level of trading), the initial margin shall not be less than 5%.
2. The margin on calendar spreads to be levied at a flat rate of 0.5% per month of spread on the far month contract of the spread subject to a minimum margin of 1% and a maximum margin of 3% on the far side of the spread for spreads with legs upto 1 year apart.
3. The clearing member’s liquid net worth must satisfy the following 2 conditions on a real time basis:
a. Condition 1: Liquid Net Worth shall not be less than Rs 50 lakh at any point of time.
b. Condition 2: The mark to market value of gross open positions at any point of time of all trades cleared through the clearing member shall not exceed 331/3
times the members’ liquid networth.
4. There shall be a position limit at the trading member level of 15% of the open interest or Rs 100 crore whichever is higher.
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Dr. L.C.Gupta Committee Recommendation: (executive summary) The Committee strongly favours the introduction of financial derivatives in order to provide the facility for hedging in the most cost-efficient way against market risk. This is an important economic purpose. At the same time, it recognises that in order to make hedging possible, the market should also have speculators who are prepared to be counter-parties to hedgers. A derivatives market wholly or mostly consisting of speculators is unlikely to be a sound economic institution. A soundly based derivatives market requires the presence of both hedgers and speculators.
1. The Committee is of the opinion that there is need for equity derivatives, interest rate derivatives and currency derivatives. In the case of equity derivatives, while the Committee believes that the type of derivatives contracts to be introduced will be determined by market forces under the general oversight of SEBI and that both futures and options will be needed, the Committee suggests that a beginning may be made with stock index futures.
2. The Committee favours the introduction of equity derivatives in a phased manner so that the complex types are introduced after the market participants have acquired some degree of comfort and familiarity with the simpler types. This would be desirable from the regulatory angle too.
3. The Committee's recommendations on regulatory framework for derivatives trading envisage two-level regulation, i.e. exchange-level and SEBI-level. The Committee’s main emphasis is on exchange-level regulation by ensuring that the derivative exchanges operate as effective self-regulatory organisations under the overall supervision of SEBI.
4. Since the Committee has placed considerable emphasis on the self-regulatory competence of derivatives exchanges under the over-all supervision and guidance of SEBI, it is necessary that SEBI should review the working of the governance system of stock exchanges and strengthen it further. A much stricter governance system is needed for the derivative exchanges in order to ensure that a derivative exchange will be a totally disciplined market place.
5. The Committee is of the opinion that the entry requirements for brokers/dealers for derivatives market have to be more stringent than for the cash market. These include not only capital adequacy requirements but also knowledge requirements in the form of mandatory passing of a certification programme by the brokers/dealers and the sales persons. An important
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regulatory aspect of derivatives trading is the strict regulation of sales practices.
6. Many of the SEBI's important regulations relating to exchanges, brokers-dealers, prevention of fraud, investor protection, etc., are of general and over-riding nature and hence, these should be reviewed in detail in order to be applicable to derivatives exchanges and their members.
7. The Committee has recommended that the regulatory prohibition on the use of derivatives by mutual funds should go. At the same time, the Committee is of the opinion that the use of derivatives by mutual funds should be only for hedging and portfolio balancing and not for speculation. The responsibility for proper control in this regard should be cast on the trustees of mutual funds. The Committee does not favour framing of detailed SEBI regulations for this purpose in order to allow flexibility and development of ideas.
8. SEBI, as the overseeing authority, will have to ensure that the new futures market operates fairly, efficiently and on sound principles. The operation of the underlying cash markets, on which the derivatives market is based, needs improvement in many respects. The equity derivatives market and the equity cash market are parts of the equity market mechanism as a whole.
9. SEBI should create a Derivatives Cell, a Derivatives Advisory Committee, and Economic Research Wing. It would need to develop a competence among its personnel in order to be able to guide this new development along sound lines.
Appendix V: Copy of Equity Questionnaire Use of Derivatives 1.a Does your firm use derivatives (forwards, futures, options, swaps)?
(please circle the appropriate response) a. Yes b. No
Please complete this section if you answered no to question 1.a 1.b Please indicate three most important factors in your decision not to use
derivatives (please rank 1 most important 2- second most important 3-third most important)
a. Lack of knowledge: Rank: b. Insufficient exposure to financial or commodity prices.: Rank: c. Exposures are more effectively managed by other means.: Rank: d. Difficulty pricing & valuing derivatives.: Rank: e. Concerns about perceptions of derivative use by investors, regulators,
and the public.: Rank: f. Costs of establishing and maintaining a derivatives program exceed that
of expected benefits.: Rank: Others: Specify____________________________________________________.
2. How often does your firm use derivatives to/for
Frequently Seldom Never Don’t know a. Arbitraging the market b. Taking a view (speculation) c. Hedge the balance sheet d. Hedge anticipated transactions (<= 12 months)
e. Hedge anticipated transactions (>= 12 months)
3. What concerns you about using derivatives?
(please indicate degree of concern with each) No
concern Low Moderate High
a. Credit risk b. Transaction cost c. Market Risk d. Liquidity risk e. Lack of knowledge about derivatives within my firm.
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4.a What proportion of your total equity investment is in derivatives? (please circle the appropriate response) a. less than 25% b. less than 50% c. less than 75% d. more than 75%
4.b Please bifurcate your proportion invested in derivatives as given below:
Derivatives tool (%) Percentages 1. Futures in stock 2. Futures on index 3. Options in stock 4. Options on index 5. Interest rate derivatives Total 100
5. Do you have software for pricing the following derivatives?
Yes No Don’t know a. Swap b. Options c. Futures
6. Please indicate which of the following types of option contracts your firm has
used in the past months for the indicated exposure. Stock market exposure a. Standard European style b. Standard American style c. Basket options d. Barrier options e. Options with deferred or conditional premium
f. Option combinations (i.e. straddle, strip etc.) g. Others: ________________________
7. In the present phase of very high volatility of stock market, what would you like
to do from the following: (Please tick mark the applicable)
a. Trading in Cash market: _________________ b. Trading in Option market:________________ c. Trading in futures market:________________
d. Not to trade: _________________
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Appendix W: Copy of Forex Questionnaire 1. What percentages of your consolidated operating revenues are in foreign currency?
( Please circle the response that is closest.)
a. 0% b. 5% c. 10% d. 20% e. 30% f. 40% g. 50+ % 2. What percentages of your consolidated operating costs are in foreign currency?
(Please circle the response that is closest.)
a. 0% b. 5% c. 10% d. 20% e. 30% f. 40% g. 50+ % 3. What percentages of your capital expenditure are in foreign currency?
(Please circle the response that is closest.)
a. 0% b. 5% c. 10% d. 20% e. 30% f. 40% g. 50+ % 4. Which benchmark does your firm use for evaluating foreign currency risk management over
the budget planning period? (Please circle the response that is appropriate)
a. Our firm does not use a benchmark. b. Forward rates available at the beginning of the period. c. Spot rates available at the beginning of the period d. Baseline percent hedged strategy (eg. X% hedged)
e. Other benchmark [ If your firm does not use currency derivatives, please skip ahead to Section option contracts ] 5. Which of the following risk management products does your firm use?
SHORT TERM: a. Forward covers b. cross currency options c. forward rate agreements d. Others LONG TERM: a. Currency swap b. currency options
6. How often does your firm transact in the currency derivatives market to…
( Please circle the appropriate response for each exposure)
Hedge contractual commitments i. on- balance-sheet transactions ( accounts payables/receivables)
ii. off-balance-sheet transactions (pending contracts)
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Not
Applicable Never Sometimes Frequently
Hedge anticipated transactions one year or less
Hedge anticipated transactions over one year
Hedge economic/ competitive exposure
Hedge translation exposure Arbitrage borrowing rates across currencies (currency swap in association with foreign currency borrowings)
7. What percentage of the following categories of exposures do you generally hedge?
(Please indicate the appropriate percentage under each exposure category) Percentage of exposure
hedged
On-balance sheet
transactions
Off-balance sheet
transactions
Anticipated transactions 1 yr. or less
Anticipated transactions over 1 yr.
Economic/ Competitive
Exposure
Foreign repatriation
Translation exposure
< 25% 25 – 50% 50-75% 75-100
8. For each of the following exposures, which best describes your usual hedging horizon?
( Please tick the appropriate response for each column)
Hedging Horizon
Contractual Commitments
Anticipated transaction
Economic Exposure
Foreign repatriation
Translation Of foreign
Accounts Shorter than the maturity of exposure
Hedge the maturity of exposure
Longer than the maturity of exposure
Hedge to the end of fiscal year (budget period)
9. How often does your market view of exchange rates cause you to…
(Please tick the appropriate response for each column) Never Sometimes Frequently Alter the timing of hedges Alter the size of hedges Actively take positions in currency derivatives
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10. What percent of your total foreign currency derivatives have the following original maturities? Period Percentage < 90 days 91 to 180 days 181 days to one year One year to three years > 3 years
Option contracts: B1. Please indicate which of the following types of option contracts your firm has
used in the past months for the indicated exposure. ( Please circle the appropriate column, leave blank if options are not used)
a. Standard European style options b. Standard American style options c. Average price (rate) options d. Basket options e. Barrier option f. Option combinations (i.e. strip, strangle etc.) g. Other
B2. If your firm does not use options, then for what reason not? -----------------------------------------------------------------
B3. If you use options, what is the probability of earnings (profits) as a holder of
options? --------
Control and reporting procedure: C1. Does your firm have a documented policy with respect to the use of derivatives?
(Please circle the appropriate response) a. Yes b. No
C2. How frequently is derivatives actively reported to the Board of Directors?
(Please circle the appropriate response) a. Monthly b. Quarterly c. Annually d. As needed/ No set schedule e. Other
C3. How frequently do you value your derivatives portfolio?
(Please circle the appropriate response) a. Daily b. Weekly c. Monthly d. Quarterly e. Annually f. As needed/ No set schedule
