SEBI Regulation and Guideline

SEBI is the statutory regulator for securities markets in India, and its mandate extends to currency derivatives that are listed on recognised stock exchanges. The regulator ensures market integrity, protects investor interests and promotes orderly growth of the derivatives segment.

Under the Securities Contracts (Regulation) Act, 1956 (SCRA) and the SEBI (Currency Derivatives) Regulations, 2015, all ETCD contracts must comply with prescribed eligibility, margin, position‑limit and reporting standards. These rules are periodically updated through circulars and guidelines, which become binding on brokers, clearing corporations and market participants.

For the NISM exam, you will often be asked to match a regulatory provision with its purpose (e.g., “Which SEBI rule limits the net open interest of a participant?”). Remember that SEBI’s focus is on risk containment and transparency, so most provisions revolve around exposure caps and disclosure.

• Key purpose – safeguard market stability
• Primary authority – SEBI, acting under SCRA

The cornerstone document is the SEBI (Currency Derivatives) Regulations, 2015. It outlines eligibility criteria for participants, the requirement for a dedicated clearing house, and the need for a robust risk‑management framework.

Subsequent circulars refine these rules. Notable ones include Circular No. 03/2015 (initial framework), Circular No. 04/2016 (margin methodology amendment), and Circular No. 10/2020 (enhanced position‑limit monitoring). Each circular adds specific numeric thresholds or procedural steps that candidates must memorise.

Exam questions frequently present a scenario and ask which circular introduced a particular change, such as the shift from a 15% to a 10% minimum margin for USD/INR futures. Knowing the year and circular number helps you answer quickly.

• Regulation 2015 – baseline rules
• Circular 2016 – margin revisions
• Circular 2020 – tighter position limits

SEBI imposes a strict cap on the net open interest (NOI) a single participant can hold in any currency‑derivative contract. The limit is expressed as a percentage of the total open interest (TOI) of that contract on the exchange.

The rationale is to prevent market manipulation and to ensure that no single entity can cause excessive price volatility. The current guideline (Circular 10/2020) sets the maximum net position at 5% of TOI for major currency pairs and 3% for exotic pairs.

When answering exam questions, calculate the permissible net position by applying the percentage to the reported TOI. If the resulting figure is exceeded, the participant must unwind positions or face penalties.

• Net Position Limit = (Allowed % × TOI) / 100
• Excess positions trigger mandatory liquidation and possible fines.

Margin is the collateral that participants must deposit to cover potential losses. SEBI mandates a minimum initial margin that varies by currency pair and volatility. For USD/INR, the minimum is typically 10% of the contract value, while for EUR/INR it may be 12%.

The margin methodology follows a tiered approach: higher volatility leads to a higher margin requirement. This is designed to align the margin with the risk profile of the underlying currency.

In the exam, you may be asked to compute the margin for a given contract size. Use the contract value (lot size × price) multiplied by the prescribed margin percentage. Ensure you convert percentages correctly and round off as per standard practice.

• Initial Margin = Contract Value × Margin %
• Maintenance Margin = Typically 75% of Initial Margin

All participants must submit daily position reports to the exchange and SEBI. The reports include net positions, margin posted, and any breaches of limits. Real‑time reporting is mandatory for positions that exceed 2% of TOI.

Additionally, brokers must disclose their risk‑management policies and internal controls to SEBI during periodic audits. Failure to file accurate reports can result in penalties, suspension of trading rights, or even criminal prosecution.

Exam questions often test the reporting frequency (daily vs. real‑time) and the threshold that triggers additional scrutiny. Remember: 2% of TOI triggers real‑time monitoring, while 5% triggers mandatory unwind.

• Daily Position Report – mandatory for all participants
• Real‑time monitoring – triggered at 2% of TOI

SEBI enforces compliance through inspections, audits and surveillance of trading activity. Penalties for violations range from monetary fines (up to 5% of the turnover) to suspension of the participant’s registration.

Specific offences include: exceeding net position limits, inadequate margin maintenance, delayed reporting, and failure to maintain proper KYC records for derivative accounts. Each breach is categorized as a ‘minor’ or ‘major’ violation, influencing the severity of the sanction.

For the exam, remember the hierarchy of penalties: minor breach – warning/fine; major breach – suspension or cancellation of registration. Questions may ask you to identify the appropriate penalty for a given violation.

• Minor breach – up to ₹5 lakh fine
• Major breach – suspension up to 6 months or cancellation