Chapter 7
Introduction to Clearing and
Settlement System
Clearing Members handle the responsibility of clearing and settlement of
all deals
executed by Trading Members, who clear and settle such deals through
them. Clearing
Members perform the following important functions:
Clearing: Computing obligations of all his trading members i.e.,
determining positions to settle.
Settlement: Performing actual settlement.
Risk Management: Setting position limits based on upfront deposits /
margins for
each TM and monitoring positions on a continuous basis.
Clearing Member Eligibility Norms
• Net-worth of at least Rs.300 lakhs. The Net-worth requirement for a
Clearing Member who clears and
settles only deals executed by him is Rs. 100 lakhs.
• Deposit of Rs. 50 lakhs to clearing corporation which forms part of the
security deposit of the Clearing
Member.
• Additional incremental deposits of Rs.10 lakhs to clearing corporation for
each additional TM, in case
the Clearing Member undertakes to clear and settle deals for other TMs.
Clearing Mechanism
The first step in clearing process is calculating open positions and
obligations of clearing members.
The open position of a CM is arrived at by aggregating the open positions
of all the trading members
(TMs) and all custodial participants (CPs) clearing though him, in the
contracts which they have traded.
The open position of a TM is arrived at by adding up his proprietary open
position and clients’ open
positions, in the contracts which they have traded. While entering orders
on the trading system, TMs
identify orders as either proprietary (Pro) or client (Cli).
Proprietary positions are calculated on net basis (buy-sell) for each
contract and that of clients are arrived
at by summing together net positions of each individual client.
A TM’s open position is the sum of proprietary open position, client open
long position and client open
short position.
Settlement Mechanism - Settlement of Futures Contracts
In Futures contracts, both the parties to the contract have to deposit
margin money which is called as
initial margin. Futures contract have two types of settlements, the MTM
settlement which happens on a
continuous basis at the end of each day, and the final settlement which
happens on the last trading day of
the futures contract.
Mark to Market (MTM) Settlement Mark to Market is a process by which
margins are adjusted on the
basis of daily price changes in the markets for underlying assets. The
profits/ losses are computed as the
difference between:
1. The trade price & the day's settlement price for contracts executed
during the day but not squared up.
2. The previous day's settlement price & current day's settlement price for
brought forward contracts.
3. The buy price and the sell price for contracts executed during the day
and squared up.
Settlement price for daily MTM: The daily settlement price for futures
contracts is based on the last 30
minutes volume weighted average price of such contract across
exchanges. In case of futures contracts
which are not traded during the last half an hour on a day, a theoretical
daily settlement price is computed
as: F = S * ert, where: F = theoretical futures price, S = value of the
underlying index/individual security,
r = rate of interest (may be the relevant MIBOR rate or such other rate as
may be specified) and t =
time to expiration.
Final Settlement - On expiration day of the futures contracts, after the
close of trading hours, clearing
corporation marks all positions of a clearing member to the final
settlement price.
All long positions are automatically assigned to short positions with the
same series, on a random basis,
for either cash settlement or for delivery settlement, whichever is
applicable.
Settlement of Options Contracts - 1) Daily premium settlement, 2) Final
settlement
Daily Premium Settlement - The buyer of an option pays the premium,
while the seller receives the
same. The amount payable and receivable as premium are netted to
compute the net premium payable or
receivable amount for each client for each option contract.
The clearing members who have a premium payable position are required
to pay the premium amount to
the clearing corporation and in turn this amount is passed on to the
members who have a premium
receivable position. This is known as daily premium settlement. The
premium payable amount and
premium receivable amount are directly credited/ debited to the clearing
member’s clearing bank
account on T+1 day, where T is the trade date
Final Exercise Settlement - All the in-the-money (ITM) stock options
contracts are automatically
exercised on the expiry day. ITM contracts are those that have some
intrinsic value on the expiry day.
Net settlement of cash segment and futures and options (F&O) segment
on expiry
A mechanism of net settlement of cash and F&O segments on expiry of
stock derivatives has been introduced to ensure better alignment of cash
and derivatives segment, reduce the price risk and allow netting
efficiencies to market participants. Under the net settlement mechanism,
on expiry of F&O
