clearing and settlement derivatives

Financial Derivatives

CLEARING AND SETTLEMENT

Group -5Taru Walia - 25

Rahul Hedau - 73 Sunny Dwivedi - 114

Swapnil Wani - 157Ritika Vijayvargiya -

202 Saloni Goyal - 246

National Securities Clearing Corporation Limited (NSCCL) is the clearing and settlement agency for all deals executed on the Derivatives (Futures & Options) segment.

NSCCL acts as legal counter-party to all deals on NSE's F&O segment and guarantees settlement.

A Clearing Member (CM) of NSCCL has the responsibility of clearing and settlement of all deals executed by Trading Members(TM) on NSE, who clear and settle such deals through them.

Clearing Member performs following functions:-1. Clearing2. Settlement3. Risk Management

CLEARING AND SETTLEMENT

CLEARING ENTITIES

Clearing and settlement activities in the Currency Derivatives segment are undertaken by a Clearing Corporation with the help of the following entities:

1. Clearing members2. Clearing banks

CLEARING ENTITIES

Primarily, the CM performs the following functions: Clearing - Computing obligations of all his TM's i.e.

determining positions to settle.

Settlement - Performing actual settlement. Only funds settlement is allowed at present in Index as well as Stock futures and options contracts

Risk Management - Setting position limits based on upfront deposits / margins for each TM and monitoring positions on a continuous basis.

CLEARING MEMBERS

Self-clearing Members: Trading-cum-clearing member, clear and settle their own trades as well as trades of other trading members (TMs).

Trading cum Clearing Members: Professional clearing members (PCM)- clear and settle trades executed by TMs.

Professional Clearing Members (PCM): The members clearing their own trades and trades of others, and the PCMs -bring in additional security deposits in respect of every TM whose trades they undertake to clear and settle.

TYPES OF CLEARING MEMBERS

Net worth of at least Rs. 300 lakhs.

Deposit of Rs. 50 lakhs to NSCCL which forms part of the security deposit of the CM

Additional incremental deposits of Rs.10 lakhs to NSCCL for each additional TM in case the CM undertakes to clear and settle deals for other TMs.

ELIGIBILITY OF CLEARING MEMBER

Funds settlement - clearing banks.

For settlement - All clearing members are required to open a separate bank account with the Clearing Corporation designated clearing bank for F &O segment.

The clearing members keep a margin amount in these bank accounts.

CLEARING BANKS

CLEARING MECHANISM

DefineClearing 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.

CLEARING MECHANISM

A clearing member’s open position calculation is arrived by aggregating the open position of all the members(TM) and all custodial participants clearing through him. TM's 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 gross of 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 buy trade.

CLEARING MECHANISM

EXAMPLE OF CLEARING MECHANISM

• For a CM - XYZ, with TMs clearing through him - ABC and PQR

SETTLEMENT MECHANISM

Under settlement mechanism function a clearing member Performs actual settlement. 

Only funds settlement is allowed at present in Index as well as Stock, futures and options contracts

SETTLEMENT MECHANISM

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 day’s settlement price and current settlement price

3. 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.

FUTURES CONTRACTS ON INDEX OR INDIVIDUAL SECURITIES

Final Settlement1. On the expiry of the futures contracts, NSCCL

marks all positions of a CM to the final settlement price and the resulting profit / losses settled in cash.

2. The final settlement profit / loss are computed as the difference between trade price or the previous day’s settlement price and final settlement price

3. Final settlement loss/ profit amount is debited/ credited to the relevant CMs clearing bank account on T+1 day (T= expiry day).

4. Open positions in futures contracts cease to exist after their expiration day.

FUTURES CONTRACTS ON INDEX OR INDIVIDUAL 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.

OPTIONS CONTRACTS ON INDEX OR INDIVIDUAL SECURITIES

Interim exercise settlement for Option contracts on Individual Securities is aff ected for valid exercised option positions at in-the-money strike prices, at the close of the trading hours, on the day of exercise.

The interim exercise settlement value is the diff erence between the strike price and the settlement price of the relevant option contract. Exercise settlement value is debited/ credited to the relevant CMs clearing bank account on T+1 day (T= exercise date).

INTERIM EXERCISE SETTLEMENT FOR OPTIONS ON INDIVIDUAL SECURITIES

Final Exercise settlement is eff ected for option positions at in-the-money strike prices existing at the close of trading hours, on the expiration day of an option contract.

Final Exercise is Automatic on expiry of the option contracts. Option contracts, which have been exercised, shall be assigned and allocated to Clearing Members at the client level.

Exercise settlement is cash settled by debiting/ crediting of the clearing accounts of the relevant Clearing Members with the respective Clearing Bank. Final settlement loss/ profi t amount for option contracts on Indexes debited/ credited to the relevant CMs clearing bank account on T+1day (T = expiry day).

FINAL EXERCISE SETTLEMENT

CORPORATE ACTION ADJUSTMENT

The basis for any adjustment for corporate actions is such that the value of the position of the market participants, on the cum and ex-dates for the corporate action, continues to remain the same as far as possible.

This facilitates in retaining the relative status of positions, 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 classifi ed under stock benefi ts and cash benefi ts.

The cash benefi t declared by the issuer of capital is cash dividend.

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 and 9. secured premium notes (SPNs).

Any adjustment for corporate actions is carried out on the last day on which a security is traded on a cum basis in the underlying equities market, after the close of trading hours.

CORPORATE ACTION ADJUSTMENT

Adjustments may entail modifications to positions and/or contract specifications as listed below:1. Strike price2. Position3. Market lot/multiplier

The adjustments are carried out on any or all of the above, based on the nature of the corporate action.

The adjustments for corporate actions are carried out on all open, exercised as well as assigned positions.

CORPORATE ACTION ADJUSTMENT

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