Regulations of Futures Market – SEBI Rules

1. Introduction

The Derivatives market involves high risk and leverage. Without strict regulation, it could lead to market manipulation and investor losses. In India, the Securities and Exchange Board of India (SEBI) is the supreme regulator of the derivatives market.

2. Regulatory Framework Development

A. L.C. Gupta Committee (1998)

• Role: This committee laid the foundation for derivatives in India.
• Key Recommendation: It suggested that derivatives should be introduced in a phased manner, starting with Index Futures, to ensure safety.

B. Securities Contracts (Regulation) Act, 1956 (SCRA)

• Significance: The definition of "Securities" was amended to include "Derivatives". This gave legal validity to futures and options contracts.

3. Key SEBI Regulations for Broker & Exchange

1. Net Worth Requirements: Brokers and Clearing Members must maintain minimum capital (Net Worth) to ensure they don't go bankrupt.
2. Margin Collection: SEBI mandates that margins (Initial + Exposure) must be collected from the client upfront before the trade is executed.
3. Client Registration (KYC): No one can trade without completing 'Know Your Customer' norms and signing a 'Risk Disclosure Document'.
4. Position Limits: To prevent market manipulation, SEBI limits how many contracts a single person or entity can hold (e.g., "Market Wide Position Limit").

4. Diagram: Regulatory Hierarchy

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5. Exam Notes: Writing the Answer

Question: "Discuss the regulatory framework of Derivatives in India." (10 Marks)

Answering Structure:

1. Regulator: Start by naming SEBI.
2. Committee: Mention the L.C. Gupta Committee (Examiners look for this specific name).
3. Legal Status: Mention the amendment to SCRA, 1956.
4. Key Rules: List 3-4 rules like Upfront Margin, KYC, and Position Limits.

6. Quiz Time! 🎯

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