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19 August 2017

Trading Settlement

The Trading Member, like in Stock Market segment, is required to enter all the orders in the trading system. The Trading Member is required to disclose to the Exchange at the time of order entry that the order is on his own account or on behalf of clients.

The Trading Member provides the client with a copy of the trade confirmation slip as generated on the Trading System, forthwith on execution of the trade and with a contract note for the trade executed.

Orders entered into the Trading System by Trading Members shall be subject to various validation requirements as specified by the F&O Segment of the Exchange from time to time including trading parameters, turnover limits, exposure limits and/or other restrictions placed on traded derivatives contracts. The Trading System shall not accept orders that do not meet the validation checks. Orders in the Normal market shall be matched on price-time priority basis. The best buy order shall match with the best sell order. For trading on price, the best buy order would be the one with the highest price and the best sell order would be the one with the lowest price.

Trades generated on the system are irrevocable and 'locked in'. The Trading Member shall make available to his client the system generated trade number through Trade Confirmation Slip. The Trading Member shall issue a contract note to his constituents for trades executed on his behalf. The contract note shall be signed by a Trading Member or his Authorised signatory or constituted Attorney and shall be time stamped with the time of receipt of order and the time of execution of order. The Brokerage charged to the client shall be indicated separately from the price, in the contract note.

Margin Requirements :

Every Trading Member is required to deposit margins with the Exchange/Clearing Corporation/Clearing Member on the outstanding position.

There are two types of margin levied on Derivatives Contracts. One is Initial Margin using the concept of Value at Risk and shall cover one-day loss that can be encountered on the position on 99% of the days and the other is Mark-to-Market Margin. Initial Margin is collected upfront and Mark-to-Market Margin on T+1 basis.

Mark to Market Margin :

Mark-to Market Margins are settled daily which means that any profit arising on the outstanding position at the futures closing price shall be paid out on T+1 day. Similarly any loss arising on the open position at the futures closing price will have to be paid to Exchange on T+1 day.

It is therefore mandatory for the Trading Members to collect from its clients the Margin Deposit, which the member has to provide under these Trading Regulations in respect of the business done by the Members for such clients.

Initial Margin :

Initial Margins are collected upfront which means that the Trading Members will buy and/or sell derivatives contracts on behalf of the clients only on the receipt of margin of minimum such percentage as the relevant authority may decide from time to time, on the price of the derivatives contracts proposed to be purchased, unless the client already has an equivalent credit with the Trading Member.

At the time of calculating the initial margin, the outstanding position of a client is segregated into two - Spread Position and Non Spread Position.

Spread is a form of Speculative trading that involves the simultaneous purchase and sale of related contract. At present we have only Calender spread, which is defined as having equal offsetting positions in 2 different expiry month contracts on the same underlying. For instance, long 200 index futures in July contract and short 200 index futures in August contract. Long Spread means long in the far month contract and Short spread means short in the far month contract. In the example quoted above it is short spread as it has short position in August contract and long position in July contract.

Since there is not much risk involved in spread positions, the initial margin on such positions are quite low.

Non-Payment of Margin :

In case of non-payment of daily settlement by the clients within the next trading day, the Trading Member shall be at liberty to close out transactions by selling or buying the derivatives contracts, as the case may be, unless the constituent already has an equivalent credit with the Trading Member. The loss incurred in this regard, if any, shall be met from the margin money of the client.

Settlement :

At any point of time there will be available near three-month contracts. For instance, In June, June Contract, July Contract and August Contract shall be available for trading.

While entering the contract one has to specify the expiry month of the contract, which will clearly indicate the contract life cycle. The last Thursday of the Expiry month shall be the day of Final Settlement of the current month contract. After the Final Settlement that contract shall get invalidated and a new contract gets introduced automatically.

Daily Settlement takes place at the end of the trading session. The outstanding positions are marked to market at the Daily Settlement Price to calculate the Mark to Market Value and the Profit or Loss, which is nothing but the difference between the Net Traded Value and Mark to Market Value for each contract. The net profit or loss of all the contracts are credited or debited, as the case may be on the T+1 day. Daily Settlement Price is the futures closing price, which is calculated by taking the half an hour, weighted closing futures price. The outstanding positions are brought forward to the next working day at Daily Settlement Price.

The Final Settlement takes place on the last trading day of the contract. Every last Thursday of the Contract Month is the last trading day of that contract. For final settlement the outstanding positions are closed out at the Final Settlement Price, which is the closing spot index and the closing futures index. The net difference is credited or debited, as the case may be, on the T+1 day. With this the whole settlement of that contract takes place.
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