Clearing and settlement derivatives

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  • 1. CLEARING AND Financial Derivatives SETTLEMENTGroup -5Taru Walia- 25 Rahul Hedau- 73Sunny Dwivedi - 114 Swapnil Wani - 157Ritika Vijayvargiya - 202Saloni Goyal -246

2. CLEARING AND SETTLEMENT National Securities Clearing Corporation Limited (NSCCL) is theclearing and settlement agency for all deals executed on theDerivatives (Futures & Options) segment. NSCCL acts as legal counter-party to all deals on NSEs F&Osegment and guarantees settlement. A Clearing Member (CM) of NSCCL has the responsibility ofclearing and settlement of all deals executed by TradingMembers(TM) on NSE, who clear and settle such deals throughthem. Clearing Member performs following functions :-1. Clearing2. Settlement3. Risk Management 3. CLEARING ENTITIES 4. CLEARING ENTITIES Clearing and settlement activities in the CurrencyDerivatives segment are undertaken by a ClearingCorporation with the help of the following entities: 1. Clearing members 2. Clearing banks 5. CLEARING MEMBERSPrimarily, the CM performs the following functions: Clearing - Computing obligations of all his TMs i.e. determiningpositions to settle. Settlement - Performing actual settlement. Only funds settlementis allowed at present in Index as well as Stock futures andoptions contracts Risk Management - Setting position limits based on upfrontdeposits / margins for each TM and monitoring positions on acontinuous basis. 6. T YPES OF CLEARING MEMBERS Self-clearing Members: Trading-cum-clearing member, clearand settle their own trades as well as trades of othertrading members (TMs). Trading cum Clearing Members: Professional clearingmembers (PCM)- clear and settle trades executed by TMs. Professional Clearing Members (PCM): The membersclearing their own trades and trades of others, and thePCMs -bring in additional security deposits in respect ofevery TM whose trades they undertake to clear and settle. 7. ELIGIBILITY OF CLEARING MEMBER Net worth of at least Rs. 300 lakhs. Deposit of Rs. 50 lakhs to NSCCL which forms part of thesecurity deposit of the CM Additional incremental deposits of Rs.10 lakhs to NSCCL foreach additional TM in case the CM undertakes to clear andsettle deals for other TMs. 8. CLEARING BANKS Funds settlement - clearing banks. For settlement - All clearing members are required to open aseparate bank account with the Clearing Corporation designatedclearing bank for F &O segment. The clearing members keep a margin amount in these bankaccounts. 9. CLEARING MECHANISM 10. CLEARING MECHANISM Define Clearing can be defined as the procedure by which an organization acts as an intermediary and assumes the role of both buyer and seller for transactions in order to reconcile orders between transacting parties. 11. CLEARING MECHANISMA clearing members open position calculation isarrived by aggregating the open position of all themembers(TM) and all custodial participants clearingthrough him.TMs open position in turn includes Proprietary open position & Client open positionThe proprietary positions are calculated on net basis(buy - sell) and client positions are calculated on grossof net positions of each client i.e., a buy trade is off-set by a sell trade and a sell trade is off-set by a buytrade. 12. EXAMPLE OF CLEARING MECHANISM For a CM - XYZ, with TMs clearing through him - ABC and PQR 13. SETTLEMENT MECHANISM 14. SETTLEMENT MECHANISM Under settlement mechanism function a clearing memberPerforms actual settlement. Only funds settlement is allowed at present in Index as well asStock, futures and options contracts 15. FUTURES CONTRACTS ON INDEX OR INDIVIDUAL SECURITIES Daily Mark-to-Market Settlement:-1. The positions in the futures contracts for each member are marked -to- market to the price of the futures contracts at the end of each trade day.2. The profits/ losses are computed as the difference between the trade price or the previous days settlement price and current settlement price3. The CMs who have suffered a loss are required to pay the mark-to- market loss amount to NSCCL which is in turning passed on to the members who have made a profit.4. This is known as daily mark-to-market settlement.5. The pay-in and pay-out of the mark-to-market settlement is on T+1 days (T = Trade day).6. The mark to market losses or profits are directly debited or credited to the CMs clearing bank account. 16. FUTURES CONTRACTS ON INDEX ORINDIVIDUAL SECURITIES Final Settlement1. On the expiry of the futures contracts, NSCCL marks allpositions of a CM to the final settlement price and theresulting profit / losses settled in cash.2. The final settlement profit / loss are computed as thedifference between trade price or the previous dayssettlement price and final settlement price3. Final settlement loss/ profit amount is debited/ credited tothe relevant CMs clearing bank account on T+1 day (T=expiry day).4. Open positions in futures contracts cease to exist aftertheir expiration day. 17. OPTIONS CONTRACTS ON INDEX ORINDIVIDUAL SECURITIES Daily Premium Settlement:-1. Premium settlement is cash settled and settlement style is premium style.2. The premium payable position and premium receivable positions are netted across all option contracts for each at the client level to determine the net premium payable or receivable amount, at the end of each day.3. The CMs who have a premium payable position is required to pay the premium amount to NSCCL which is in turn passed on to the members who have a premium receivable position.4. This is known as daily premium settlement. 18. INTERIM EXERCISE SETTLEMENT FOROPTIONS ON INDIVIDUAL SECURITIES Interim exercise settlement for Option contracts on IndividualSecurities is affected for valid exercised option positions at in-the-money strike prices, at the close of the trading hours, on theday of exercise. The interim exercise settlement value is the dif ference betweenthe strike price and the settlement price of the relevant optioncontract. Exercise settlement value is debited/ credited to therelevant CMs clearing bank account on T+1 day (T= exercisedate). 19. FINAL EXERCISE SETTLEMENT Final Exercise settlement is ef fected for option positions at in -the-money strike prices existing at the close of trading hours, onthe expiration day of an option contract . Final Exercise is Automatic on expiry of the option contracts.Option contracts, which have been exercised, shall be assignedand allocated to Clearing Members at the client level . Exercise settlement is cash settled by debiting/ crediting of theclearing accounts of the relevant Clearing Members with therespective Clearing Bank. Final settlement loss/ profit amountfor option contracts on Indexes debited/ credited to the relevantCMs clearing bank account on T+1day (T = expiry day). 20. CORPORATE ACTION ADJUSTMENT 21. CORPORATE ACTION ADJUSTMENT The basis for any adjustment for corporate actions is such thatthe value of the position of the market participants, on the cumand ex-dates for the corporate action, continues to remain thesame as far as possible. This facilitates in retaining the relative status ofpositions, namely in-the-money, at-the-money and out-of-money. This also addresses issues related to exercise and assignments. Corporate actions can be broadly classified under stock benefitsand cash benefits. The cash benefit declared by the issuer of capital is cashdividend. 22. CORPORATE ACTION ADJUSTMENT Stock Benefits declared by the issuer of capital include:1. bonus,2. rights,3. merger/de-merger,4. amalgamation,5. splits,6. consolidations,7. hive-off,8. warrants and9. secured premium notes (SPNs). Any adjustment for corporate actions is carried out on the lastday on which a security is traded on a cum basis in theunderlying equities market, after the close of trading hours. 23. CORPORATE ACTION ADJUSTMENT Adjustments may entail modifications to positions and/orcontract specifications as listed below:1. Strike price2. Position3. Market lot/multiplier The adjustments are carried out on any or all of the above, basedon the nature of the corporate action. The adjustments for corporate actions are carried out on allopen, exercised as well as assigned positions. 24. THANK YOU