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Introduction of Dertivatives
swarg
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Introduction
Derivatives is useful for farmers to protectthemselves against fluctuation in the priceof their crop.
A farmer who showed his crop in Junefacer uncertainty over the rice he wouldreceive for his harvest in September. With
the help of derivative he can sell hisharvest.
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Derivatives Defined
A derivative is a product whose value isderived from the value of one or moreunderlying variables or assets in a
contractual manner. The underlying assetcan be equity, forex, commodity or anyother asset.
The Forwards contracts (Regulations)Act, 1952, regulates the forward/futurescontracts in commodities all over India.
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Definitions of Derivative
A security derived from a debt instrument,share, loan whether secured orunsecured, risk instrument or contract for
differences or any other form of security.
A contract which derives its value from theprices, or index of prices, of underlying
securities.
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Product, Participants and functions
The most common are forwards, futures,options and swaps.
Participants are hedgers, speculators, andarbitragers.
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Participants in the derivativesmarkets
Hedgers- Facerisk associatedwith the price of
an asset
Speculators- Bet onthe future
movements in theprice of an asset
Arbitrageurs -Take advantageof a discrepancybetween prices in
two differentmarkets
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Derivatives Markets
Derivative markets can classified ascommodity market and financialderivatives markets.
Financial Market- trade in equity, interestrates and exchange rates as theunderlying.
Commodity Market- trade in agriculturalcommodity, Metal (gold, silver).
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Spot Versus Forward Transaction
Every transaction has three components-trading, clearing and settlement.
Trading- A buyer and seller come together,
negotiate and arrive at a price.Clearing- Involve finding out the net outstanding
that is exactly how much of goods and moneythe two should exchange.
Settlement- is the actual process of exchangingmoney and goods.
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Spot Transaction
In sport the trading, clearing andsettlement happen immediately.
Example-On 1st Jan. 09 Sunil want to buysome gold and goldsmith quotes Rs.14000 per 10 grams. They agree uponthis price and Sunil buy 10 grams. Gold.
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Forward Transaction
A contract by which two parties agree tosettle a trade at a future date, for a statedprice and quantity. The exchange of
money and the underlying goods onlyhappens at the future date as specified inthe contract.
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Exchange traded vs. OTCderivatives
ExchangeTraded
OTC in nature
Customized contractterms
Hence less liquid
No margin payment
Settlement happensat end of the period
OTC Trade on an
organized exchange
Standardizedcontract terms
Hence more liquid
Requires margin
payments Follow daily cash
settlement
ExchangeTraded
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Some Commonly used derivatives
Forwards-A forward contract is anagreement between two entitles to buy orsell the underlying asset in the future at
today's pre-agreed price.
Futures- A future contract is an agreementbetween two parties to buy or sell the
underlying asset at a future date at today'sfuture rice.
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Options- there are two types of optionCall and Put.
Call Option- Give the right to buyer tobuy the asset but not the obligation.
Put option- Give the right to buyer tosell the asset but not the obligation.
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Chepter-2 Commodity Derivatives
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Difference between Commodity andFinancial Derivatives
In Financial derivative these contract arecash settled. In case of physicalsettlement, financial assets are not bulky
and do not need special facility forstorage.
In Commodity Derivatives these are bulky
nature so it need special facility forstorage. In this quality of the underlying isimportant.
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Physical Settlement
It involves the physical delivery of theunderlying commodities.
The seller intending to make deliverywould have to take the commodities to thedesigned warehouse.
The buyer intending to take delivery wouldhave to go to the designed warehouse andpick up the commodity.
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Delivery Notice Period
A seller of commodity futures has theoption to give notice of delivery.
This option is given during the delivery
notice period.A buyer of commodity futures has the
option to give notice of requirement of
delivery in delivery notice period. If both are not give the delivery notice
than their position will be cash settled.
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Delivery notice is required to be supportedby a warehouse receipt.
The warehouse receipt is the proof for thequantity and quality of commodities beingdelivered.
Delivery Notice Period
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Assignment
The clearing house of the exchangeidentifies the buyer to whom this notice maybe assigned.
Any seller/buyer who has given intention to
delivery/been assigned a delivery has anoption to square off positions till market closeof the day of delivery notice.
The clearing house decides the daily deliveryorder rate at which delivery will be settled.
The discount/ premium for quality and freightcosts is published by the clearing house
before introduction of the contract.
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DeliveryAfter assignment process, clearing
house/exchange issues a delivery orderto the buyer.
Exchange also inform respective
warehouse about the identity of thebuyer.
Buyer is required to deposit a certainpercentage of the contract amount withthe clearing house as margin againstthe warehouse receipt.
The period of physical delivery is
decided by Exchange.
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Warehousing
In commodity derivatives there is apossibility of physical settlement.
The seller handover the delivery towarehouse and buyer has to take
delivery from warehouse.All international commodity exchanges
used certified warehouses.
All CWH are required to provide storagefacilities for participants in thecommodities markets and to certify thequantity and quality of the underlyingcommodity.
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Quality of Underlying Assets
Derivatives contract is written on a givenunderlying so variance in quality isacceptable.
Exchange stipulate the grade or grades ofthe commodities that are acceptable.
In India BIS (bureau of Indian Standardsand EGMARK) is doing this work.
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Chapter 3
The NCDEX Platform
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The NCDEX Platform
NCDEX is a technology driven commodityexchange.
It is a public limited company registered
under the companies Act, 1956 with theregistrar of companies, Maharashtra inMumbai on April 23, 2003.
NCDEX is regulated by Forward MarketsCommission in respect of futures trading incommodities.
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NCDEX Provide trading Facility in
Gold Silver Soy-beans refined soy bean oil
Rapeseed mustard seed Expeller rapeseedMustards seed oilRBD polyolefin
Crude palm oil cottonMedium and long staple varieties.
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Promoters
NCDEX is promoted by ICICI Bank Ltd.,
Life Insurance Corporation of India,
National Bank for Agricultural and RuralDevelopment (NABARD) and
National Stock Exchange of India Limited.
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Governance
NCDEX is run by an independent Borard ofDirectors.
Promoters do not participate in the day to ay
activities of exchange. The board is responsible for managing and
regulating all the operations of the exchangeand commodities transaction.
Board appoints an executive committee andother committees for the purpose of managingactivities of the exchange.
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Exchange Membership
Membership of NCDEX is open to anyperson, association of persons,partnership, co-operative societies,
companies etc.
The members of NCDEX fall into twocategories
Trading Cum Clearing Members (TCM)
Professional Clearing Members (PCM)
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Trading Cum Clearing Members (TCMs)
The TCM membership entitles themembers to trade and clear, both forthemselves and on behalf of their clients.
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Professional Clearing Members (PCMs)
The PCM membership entitles themembers to clear trades executed throughtrading cum clearing members, both for
themselves and or on behalf of theirclients.
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Fee/Deposit and net worth requirementTCM (in Lakhs)
Interest free cash security deposit 15lakh
Collateral Security Deposit 15lakh
Annual subscription charges .50lakh
Advance minimum transaction Ch. .50lakh
Net worth requirement 50lakh
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Fee/Deposit and net worth requirementPCM (in Lakhs)
Interest free cash security deposit 25lakh
Collateral Security Deposit 25lakh
Annual subscription charges 1lakh
Advance minimum transaction Ch. 1lakh
Net worth requirement 5000lakh
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The NCDEX System
Trading
Clearing
Settlement
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Trading
The trading system on the NCDEX provides a fully automatedscreen-based trading for futures on commodities on a nationwidebasis a well as an online monitoring and surveillance mechanism.
The trade Timings of the NCDEX are 10 a.m. to 5 P.m. The NCDEX system supports an order driven market.
Order matching is essentially on the basis of commodity, its price,time and quantity. The exchange specifies the unit of trading and the delivery unit for
futures contracts on various commodities. The futures contracts are one month, two month and three month
expiry cycles and expire on the 20th of every month.
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Clearing
NSCCL undertakes clearing of trades executedon the NCDEX.
The settlement guarantee fund is maintainedand managed by NCDEX.
After trading hours on the expiry date, based onthe available information, the matching fordeliveries taken place firstly, on the basis of
location and then randomly, keeping in view thefactors such as available capacity of thewarehouse, commodities already deposited anddematerialized and offered for delivery.
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Settlement
Futures contracts have two type of settlements,
The MTM settlement which happens on acontinuous basis at the end of each day and
The final settlement which happens on thelast trading of the futures contracts.
The final settlement price is the spot price on theexpiry day.
The seller intending to make delivery taken thecommodities to the designed warehouse.
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Chapter 5
Forward Contracts
Future contract
TerminologyOptions
Salient features:
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Salient features:
Bilateral contracts andhence exposed tocounter-party risk
Contract price notavailable in publicdomain
On expiry, settlementis by delivery
If the party wants toreverse the contract, it
has to o to the same
Buyer Seller
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Limitations:
Lack of centralization
Illiquidity
Counter party risk.
Futures
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FuturesA future contract is an agreement between
two parties to buy or sell an asset, at a
certain time in the future at certain price.
Future contracts are standardized andexchange traded.
Future terminology
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Future terminologySpot price: The price at
which an asset traded inspot market.
Future price: The priceat which the futurescontract trades in thefutures market.
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Future terminology
Contract cycle: The future contracts on theNCDEX have one-month, two-months ,andthree-months expiry cycles, these expire on the20th for specified month.
Expiry date: It is the date specified in the futurecontract. This is last day on which the contractwill be traded.
Contract size: The amount of asset that has tobe delivered under one contract. Famouslyknown as lot size
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Future terminology
Basis: Basis can be defined as the future price minus the spot price.
Cost of carry: It is the cost incurred over the storage, finance and interestpaid for the asset. This is the relationship between the spot and futureprices.
Initial margin: The amount that must be deposited in the margin account atthe time a future contract is first entered into.
Marking-to-market: At the end of each trading day, the margin account isadjusted to reflect the investors gain or loss depending upon the futureclosing price.
Maintenance margin: This is set to ensure that the balance in the marginaccount never becomes negative. If the balance in the margin account fallsbelow the maintenance margin, the investor receives a margin call.
Options
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Options
Options are derivative instruments where oneparty has a right to buy/sell the underlying whilethe other party has an obligation to buy/sell
Types of options
Based on the right:- Call option
- Put option
Based on the exercise:- American ( Individual Securities)
- European (S&P CNX Nifty)
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Option Terminology
Index options: This option have the index as the underlying.
Stock options: Stock Options are options on individual stocks.
Buyer of an option: The Buyer of an option is the one who by paying theoption premium buys the right.
Writer of an option: The writer is seller of the option who receivespremium.
Option price: Option price is the price which the option buyer pays tooption seller. Famously known as premium.
Expiration date: The date specified in the option contract is known asmaturity date.
Strike price: The price specified in the option contract is known as strikeprice.
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Option Terminology
In-the-money option: An in-the-money option is an option that would leadto a positive cash flow to the holder if it is exercised immediately.
For a call : spot price > strike price. For a put: spot price < strike price.
At-the-money options: An at-the-money option is an option that wouldlead to zero cash flow if it were exercised immediately.
For both call and put: spot price = strike price.
Out-of-the-money options: An out-of-the-money option is an option thatwould lead to a negative cash flow if it were exercised immediately.
For a call: spot price < strike price For a put: spot price > strike price
Option terminology
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Option terminology
Intrinsic value of an options: The option premium can be broken downinto two components- Intrinsic value Time value.
For call intrinsic value is as follows:
The intrinsic value of a call is the amount the option is In-the-money. If call is out-of the money then intrinsic value is zero.
For put intrinsic value is as follows: The intrinsic value of a put is the amount the option is In-of- the-money. If put is out-of the money then intrinsic value is zero.
Time value of an option: The time value of money is the differencebetween its premium and its intrinsic value.
Difference between futures and
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Future Exchange traded
Exchange defines theproduct
Prize is zero, strikeprice moves
Prize is zero
Linear payoff Both long and short at
risk
Option Same as future
Same as future
Strike price is
fixed, pricemoves
Prize is always
positiveNonlinear payoff
Only short at risk
Difference between futures andoption
Future
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Diagram Presentation from book
Page 30 onwards.
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Chapter 6
Pricing Commodity futures
Investment Assets versus Consumptionasset
The cost of Carry Model
Pricing Futures contracts on InvestmentCommodities
Pricing Futures contracts on ConsumptionCommodities
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Pricing Commodity futures
Commodity futures began trading on theNCDEX from the 14th December 2003.
The process of arriving at a figure at which
a person buys and another sells a futurescontract for a specific expiration date iscalled price discovery.
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The cost of Carry Model
Cost-of-carry method is used to derive fair value of futurecontract.
If observed, price deviates from the fair value, arbitragewould enter into trades to capture the arbitrage profit.This will push the future price back to its fair value.
Formula for cost of carry model:
F= SerTR= Interest RateT= TimeE = 2.71828 (Practical Questions)
P i i F C i
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Pricing Futures contracts on ConsumptionCommodities
In investment asset storage costs is notthere but in consumption commoditiesstorage cost is there that is represented by
U so the formula is-
F= (S+U)erT
R= Interest RateT= Time
E = 2.71828 (Practical Questions)
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The Futures Basis
The cost of carry model explicitly definesthe relationship between the future priceand the related spot price
The difference of Sport price and theFuture price is called the basis.
When a futures contract nears expiration,
the basis reduced to Zero.
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Chapter 7
Hedging
Speculation
Arbitrage
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Hedging
Many participants in the commodityfutures market are hedging. They usefutures market to reduce a particular risk
that they face. The risk might be related toprice of wheat or oil or any othercommodity that the person deals in. Typeof hedge-
Short HedgeLong Hedge
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Short Hedge
A short hedge that requires a shortposition in futures contracts. A shot hedgeis appropriate when the hedger already
owns the assets, or is likely to own theasset and expects to sell it at some time inthe future.
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Long Hedge
Hedges that involve taking a long positionin a futures contract are known as longhedgers. A long hedge is appropriate
when company knows it will have topurchase a certain asset in the futures arewants to lock in a price now.
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Example
Suppose that it is now June 15, A firminvolved in industrial fabrication that it willrequire 300 kgs. Of silver on July 15 to
met a certain contract. The spot price ofsilver is Rs. 22000 per kg. and the Julysilver futures price is Rs. 23000. A unit oftrading is 5 kgs. The fabricator can hedge
his position by taking a long position inSixty (300/5) units of futures on theNCDEX.
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Hedging Ratio
Hedge ratio is the ratio of the size ofposition taken in the futures contracts tothe size of the exposure in the underlying
asset.
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H=pQs/Qf
s= Change in sport price
f=Change in futures price
Qs=Standard deviation of s
Qf= Standard deviation of f
P= Coefficient of correlation between s
and fH= Hedge ratio (Practical
Questions)
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Speculation
A Speculator who thinks the shares or thecommodities price of a given company willrise, it is easy to buy the shares or
commodities and hold them for whateverduration he wants to. Speculation can betwo types
Bullish commodity buy futuresBearish commodity sell futures
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Arbitrage
Arbitrager can buy and sell the same assetin different market when price variations isthere. The arbitrager buying cheap and
selling expensive continues till prices inthe two markets reach equilibrium.
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Overpriced commodity futures
Buy spot and sell futures- If the goldtraders for Rs. 600 per gram in the spotmarket three month gold futures on the
NCDEX trade at Rs. 625. In that situationbuy spot and sell future.
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Under priced commodity futures
Buy futures, sell spot- Gold traders for Rs.600 per gram in the spot market. Threemonth gold futures on the NCDEX trade at
Rs. 605 and seem under priced.
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Chapter 8
Trading
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Future Trading System
The trading system on the NCDEXprovides a fully automated screen-basedtrading for future of commodities.
It supports an order driven market.
The trade timings on the NCDEX are10.00 a.m. to 5 p.m.
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Entities in the Trading System
Trading Cum Clearing Member (TCMs)
Professional Clearing Member
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Guidelines for allotment of client code
All clients trading through a member are tobe registered clients at the members back
office.
A unique client code is to be allotted foreach client
The same client should not be allotted
multiple codes.
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Commodity futures Trading cycle
In NCDEX trades commodity futures contractshaving one month, two month and three monthexpiry cycle.
All contracts expire on 20th of the expiry month.
If 20th of the expiry month is a trading holiday thecontracts shall expire on the previous tradingday.
New contract will be introduced on the tradingday following the expiry of the near monthcontract.
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Order types and trading parameters
Time Condition (Good till day order, Goodtill cancelled, Good till date, immediate orcancel order, All or none order, Fill or Kill
order)Price Condition (Limit order, Stop Loss)
Other Condition (Market Price, Market on
open, Market on close, Trigger Price, Limitorder, One cancels the other order)
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Quantity Freeze
All orders placed by members have to bewithin the quantity specified by theexchange any order exceeding this
specified quantity will not be executed bywill lie pending with the exchange as aquantity freeze.
The member is required to confirm to theexchange about quantity freeze order.
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Base Price
On introduction of new contracts the baseprice is the previous days closing price ofthe underlying commodity in the prevailing
spot market.
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Price ranges of contracts
In orders to prevent erroneous order entryby trading members, operating priceranges on the NCDEX are kept at +/-10%
from the base price.
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Margins for trading in futures
Margin is the deposit money that needs tobe paid to buy or sell each contract. Themargin range from 2% to 15% of the value
of the contract.
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Types of Margin
Initial Margin
Maintenance Margin
Additional Margin
Mark-to-Market Margin
Just as a trader is required to maintain a margin
account with a broker, clearing house member isrequired to maintain a margin account with theclearing house this is knows as clearing margin.
C
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Charges
The transaction charges are payable @ 6Rs. Per one lakhs trade done.
The due date is 7th day from the date of
the bill every month in respect of the tradedone in the previous month.
NCDEX engaged BJPL ( Bill junctionpayments Limited) collect the transactioncharges through Electronic ClearingSystem.
Ch
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Charges
In terms of the regulations, members arerequired to remit Rs. 50000 as advancetransaction charges or registration.
If the transaction charges are not paid orbefore the due date, a penal interest islevied as specified by the exchange.
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Chapter 9
Clearing and Settlement
Cl i
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Clearing
The main task of the clearing house is to keep track of allthe transactions that take place during a day so that thenet position of each of its members can be calculated.Typically it is responsible for the following-
Effecting timely settlement
Trade registration and follow up.
Control of the evolution of open interest
Financial clearing of the payment flow.
Physical settlement of financial settlement of contract.
Administration of financial guarantees demanded by theparticipants.
Cl i h i
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Clearing mechanism
PCM are entitled to clear and settlecontracts through the clearing house.
TCM open position is arrived at by the
summation of his clients open position inthe contracts in which they have traded.Client positions are netted at the level ofindividual client and grossed across all
clients, at the member level without anyset off between clients.
Cl i B k
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Clearing Banks
ICICI Bank Limited
Canara Bank
UTI Bank Limited
HDFC Bank Limited.
D it P ti i t
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Depository Participants
Every clearing member is required tomaintain a CM Pool account exclusivelyfor clearing operations (for effecting and
receiving deliveries from NCDEX).
S ttl t
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Settlement
There are two type of settlements, MTMsettlement which happens on a continuousbasis at the end of each day and the final
settlement which happens on the lasttrading day of the futures contracts bothare cash settled by debiting/crediting the
clearing accounts of CMs with therespective clearing banks.
D il M k t M k t S ttl t
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Daily Mark to Market Settlement
Daily mark to market settlement is done tillthe date of the contract expiry this is doneto take care of daily price fluctuations for
all trades. All the open positions of themembers are marked to market at the endof the day and the profit/loss isdetermined.
A CM buy one month future contract ofgold at 6435 the MTM is as follows
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Date Settlement
Price
MTM
Dec. 15 6320 -115
Dec. 16 6250 -70
Dec. 17 6312 62
Dec.18 6310 -2
Fi l S ttl t
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Final Settlement
On the date of expiry the final settlement price isthe spot price on the expiry day.
The responsibility of settlement is on a trading
cum clearing member for all trades done on hisown account and his clients trades.
A professional clearing member is responsiblefor settling all the participants trades which he
has confirmed to the exchange.
Methods of Settlement
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Methods of Settlement
Closing out open positions
Physical delivery
Cash settlement
NSCCL undertakes clearing of tradesexecuted on the NCDEX.
Ph sical Deli er of the nderl ing Asset
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Physical Delivery of the underlying Asset
For open positions on the expiry day of thecontract, the buyer and the seller can announceintentions for delivery.
Deliveries take place in the electronic form
All other positions are settled cash.
A contract comes to settlement, the exchangeprovides alternatives like delivery place, month
and quality specifications, trading period,delivery date.
Physical Delivery of the underlying Asset
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After the trading hours on the expiry date, basedon the available information, the matching fordeliveries is done, firstly on the basis of locationsAnd then available capacity of the warehouse.
Any buyer intending to take physical has to put arequest to his depository participant.
The seller intending to make delivery has to take
the commodities to the designated warehouse.
Physical Delivery of the underlying Asset
Physical Delivery of the underlying Asset
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If the commodities meet the specifications,the warehouse accepts them.Warehouses then ensure that the receipts
get updated in the depository systemgiving a credit in the depositors electronicaccount.
The seller then gives the invoice to his
clearing member, who would courier thesame to the buyers clearing member.
Physical Delivery of the underlying Asset
Closing out by offsetting Positions
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Closing out by offsetting Positions
In this the opposite transaction is effectedto close out the original futures position.
A buy contract is closed out by a sale
and a sale contract is closed out by a buy.
Cash Settlement
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Cash Settlement
Contracts held till the last day of trading can becash settled.
When a contract is settled in cash it is marked tothe marked to the market at the end of the last
trading day and all positions are declaredclosed.
The settlement price on the last trading day isset equal to the closing spot price of the
underlying asset ensuring the convergence offuture prices and the spot prices.
Entities involved in physical settlement
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Entities involved in physical settlement
Accredited warehouse
Approved registrar and transfer agents
Approved assayer
Accredited warehouse
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Accredited warehouse
NCDEX specifies accredited warehousesthrough which delivery of a specific commoditycan be effected and which will facilitate forstorage of commodities
Warehouses charge a fee that constitutesstorage and other charges such as insurance,assaying and handling charges or any otherincidental charges.
Warehouses store commodities in line with theirgrade specifications and validity period andfacilitate maintenance of identity.
Approved Registrar and Transfer Agents
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Approved Registrar and Transfer Agents The exchange specifies approved R&T agents
through whom commodities can bedematerialized and who facilitate fordematerialization/re-materialization ofcommodities in the manner prescribed by the
exchange from time to time. Establishes connectivity with approved
warehouse and supports them.
Verifies the information regarding the
commodities accepted by the accreditedwarehouse and assigns the identificationnumber allotted by the depository in line with thegrade/validity period.
Approved Assayer
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Approved Assayer
The exchange specifies approved assayersthrough whom grading of commodities can beavailed by the constituents of clearing members.The functions are-
Inspect the warehouses identified by theexchange.
Make available grading facilities.Grading certificate so issued by the assayer
specifies the grade as well as the validity periodup to which the commodities would retain theoriginal grade, and time up to which thecommodities are fit for trading.
Risk Management
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Risk Management
NCDEX had developed a comprehensive riskcontainment mechanism that is-
The requirements for membership in terms of capitaladequacy.
NCDEX charges an upfront initial margin for all the openpositions of a member.
The open position of the members are marked to marketbased on contract settlement price for each contract
The difference is settled in cash on T+1 basis.
A separate settlement guarantee fund for this has beencreated out of the capital of members.
Margining At NCDEX
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Margining At NCDEX
SPAN- is to identify overall risk in aportfolio of all futures contracts for eachmember on 99% VAR methodology.
Implementation aspects of margining and
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risk management
Mode of payment of initial margin-cash,collateral security deposits, bank guarantees,fixed deposits receipts and approvedgovernment of India securities.
Effect of failure to pay initial margin- Theexchange can withdraw any or all of themembership rights of a member including thewithdrawal of trading facilities of the membersclearing through such clearing members, without
any notice. Intra-day Price limit- that is +/-10%of the
previous days settlement price prescribed foreach commodity.
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Regulatory Framework
Chapter 10
Rules governing commodity derivatives
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exchanges
The trading of commodity derivatives on theNCDEX is regulated by Forward MarketsCommission (FMC) under Forward Contracts(Regulation) Act, 1952.
All the exchanges, which deal with forwardcontracts, are required to obtain certificate ofregistration from the FMC.
Forward Market commission provides regulatory
oversight in order to ensure financial integrity,market integrity and to protect and promoteinterest of customers, non-members.
Trading
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Trading
NCDEX provides an automated trading facility inall the commodities admitted for dealings on thespot market and derivative market.
Trading on the exchange is allowed only through
approved workstation located at locations for theoffice of a trading member as approved by theexchange.
Each trading member is required to have a
unique identification number which is providedby the exchange.
Trading members and users
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Trading members and users
Trading members have to pass a certificationprogram, which has been prescribed by theexchange
In case of trading members, other than
individuals or sole proprietorships, suchcertification program has to be passed by atleast one of their directors/ employees/ partners/members of governing body.
Each approved user is given a uniqueidentification number through which he will haveaccess to the trading system.
Trading Parameters
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Trading Parameters
Every trading member is required tospecify the buy or sell orders as either anopen order or a close order for derivativescontracts.
The exchange also prescribes differentorder books that shall be maintained onthe trading system and also specifies
various conditions on the order that willmake it eligible to place it in those books.
Trade Operations
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Trade Operations
They have to keep relevant records ordocuments concerning the order the tradingsystem order number and copies of the orderconfirmation slip/modification slip must be madeavailable to the constituents.
When a trade cancellation is permitted andtrading member wishes to cancel a trade, it can
be done only with the approval of the exchange. The exchange also prescribes categories of
securities that would be eligible for a margindeposit.
Margin Requirements
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Margin Requirements
The exchange prescribes from time to timethe commodities/derivative contracts, thesettlement periods and trade types forwhich margin would be attracted.
Initial margin on derivatives contractsusing the concepts of VAR concept.
The margin has to be deposited with the
exchange within the time notified by theexchange.
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Clearing
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Clearing
NSCCL undertakes clearing of tradesexecuted on the NCDEX.
All deals executed on the exchange are
cleared and settled by the tradingmembers on the settlement date by thetrading members themselves as clearingmembers or through other professional
clearing member in accordance with theseregulations.
Procedure for payment of Sales Tax/Vat
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Procedure for payment of Sales Tax/Vat
The exchange prescribes procedure for paymentof sales tax/vat or any other state/local/centraltax/fee applicable to the deals culminating intosale with physical delivery of commodities.
Member have to maintain records/details ofsales tax registration of each of such constituentand furnish the same to the exchange as andwhen required.
The seller is responsible for payment of salestax/Vat, however the seller is entitled to recoverfrom the buyer.
Penalties for defaults
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Penalties for defaults
In the event of a default by the seller or thebuyer in delivery of commodities or payment ofthe price, the exchange closes out thederivatives contracts and imposes penalties on
the defaulting buyer or seller.
The settlement for the defaults in delivery is tobe done in cash within the period as prescribed
by the exchange at the highest price from thelast trading date till the final settlement date witha mark up.
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