Equity Futures in India

Equity futures are of two types: stock index futures and futures on individual securities. Both the types of equity futures are available in India.

Stock Index Futures: The National Stock Exchange has introduced stock index futures. The National Stock Exchange has a stock index futures contract based on S&P CNX Nifty; the Bombay Exchange has a stock index future contract based on Sensex.

The features of the S&P, CNX, Nifty futures contracts are as follows:

1. S&P CNX Nifty futures contracts have a maximum of 3 month trading cycle – the near month (one) the next month (two) and the far month (three). A new contract will be introduced on the trading day following the expiry of the near month contract.
2. S&P CNX Nifty futures contracts expire on the last Thursday of the expiry month. If the last Thursday is a trading holiday, the contracts shall expire on the previous trading day.
3. The permitted lot size of S&P CNX NIFTY contracts is 200 and multiples thereof.

Futures on individual Securities:

Futures on individual securities were introduced in India in 2001. The list of securities in which futures contracts are permitted is specified by securities and Exchange Board of India. The National Stock Exchange and the Bombay Stock Exchange have introduced futures on individual securities.

The salient features of futures on individual securities on the National Stock Exchange are as follows:

1. The underlying of the futures on individual securities contracts shall be the underlying security available for trading in the capital market segment of the Exchange.
2. Futures contracts on individual securities will have a maximum of three month trading cycle. New contracts will be introduced on the trading day following the expiry of the near month contract.
3. Futures contracts on individual securities shall expire on the last Thursday of the expiry month. If the Thursday is a trading holiday, the contracts shall expire on the previous day
4. The permitted size of the futures contracts on individual securities shall be the same as the lot size of options contract for a given underlying security or such lot size as may be stipulated by the Exchange from time to time.
5. The price steps in respect of all futures contracts admitted to the dealings of the Exchange shall be Rs 0.05.
6. The base price of the futures contracts on introduction of new contracts shall be the previous day’s closing price of the underlying security. The base price of the contracts on subsequent trading days will be daily settlement price of the futures contracts.
7. Futures contracts on individual securities shall be initially cash settled and would be settled in the following manner: (a) daily mark-to-market settlement and (b) Final mark-to-market settlement on expiry of a futures contact.
8. The pay-in and pay-out of the mark-to-market settlement is on T+1 day (T= Trade day).

Trading Mechanism:

The futures and options trading system of NSE is called NEAT- F&O. It is nationwide fully automated screen based trading arrangement for Nifty futures and options and stock futures and options with an online monitoring and surveillance mechanism. Similar to the trading of equities in the cash market system, NEAT – F&O trading system is an anonymous and transparent order-driven market that operates on a strict price time priority basis. The NEAT–F&O trading system can be accessed by two types of users, the Trading Members (TMs) and the Clearing Members (CMs). Users have tremendous flexibility in terms of the kinds of orders that they can place on the system. They can impose various conditions like Good-till Day, Good till Cancelled Immediate or cancel, Limit/Market Price, Stop Loss, and so on.

Clearing and Settlement:

The NSCCL (the National Stock Exchange Clearing Corporation Limited) clears and settles all the deals executed on the NSE’s F&O segment. It acts as a legal counterparty to all deals on the F&O signet and guarantees settlement. It works out the open positions or obligation of members. A TMs open position is the sum of proprietary open position, client open long position, and client open short position. While F&O contracts on individual securities can be delivered as in the spot market, currently F&O contracts in India are cash settled.

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