Clearing and Settlement PPT: Financial Derivatives

CLEARING AND Financial
Derivatives
SETTLEMENT PPT
CLEARING AND SETTLEMENT
 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. Clearing
2. Settlement
3. Risk Management
CLEARING ENTITIES
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 members
2. Clearing banks
CLEARING MEMBERS
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.
TYPES OF 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.
ELIGIBILITY OF CLEARING MEMBER
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.
CLEARING BANKS
 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 MECHANISM
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.
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 position
The 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.
EXAMPLE OF CLEARING MECHANISM
• For a CM - XYZ, with TMs clearing through him - ABC and PQR
SETTLEMENT MECHANISM
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
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 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
Final Settlement
1. 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.
OPTIONS CONTRACTS ON INDEX OR
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.
INTERIM EXERCISE SETTLEMENT FOR
OPTIONS ON INDIVIDUAL SECURITIES
 Interim exercise settlement for Option contracts on Individual

Securities is affected 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 difference 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).
FINAL EXERCISE SETTLEMENT
 Final Exercise settlement is effected 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/ profit amount
for option contracts on Indexes debited/ credited to the relevant
CMs clearing bank account on T+1day (T = expiry day).
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 classified under stock benefits

and cash benefits.
 The cash benefit declared by the issuer of capital is cash dividend.

 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.
 Adjustments may entail modifications to positions and/or

contract specifications as listed below:
1. Strike price
2. Position
3. 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.
THANK YOU

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CLEARING AND Financial

 National Securities Clearing Corporation Limited (NSCCL) is the

 NSCCL acts as legal counter-party to all deals on NSE's F&O

Clearing Member performs following functions:-

Clearing and settlement activities in the Currency

Primarily, the CM performs the following functions:

 Settlement - Performing actual settlement. Only funds

 Risk Management - Setting position limits based on upfront

Self-clearing Members: Trading-cum-clearing member, clear

Trading cum Clearing Members: Professional clearing

Professional Clearing Members (PCM): The members

Net worth of at least Rs. 300 lakhs.

Deposit of Rs. 50 lakhs to NSCCL which forms part of the

Additional incremental deposits of Rs.10 lakhs to NSCCL for

 Funds settlement - clearing banks.

 For settlement - All clearing members are required to open a

 The clearing members keep a margin amount in these bank

A clearing member’s open position calculation is

 Under settlement mechanism function a clearing member

 Interim exercise settlement for Option contracts on Individual

 The interim exercise settlement value is the difference between

 Final Exercise settlement is effected for option positions at in-

 Final Exercise is Automatic on expiry of the option contracts.

 Exercise settlement is cash settled by debiting/ crediting of the

 This facilitates in retaining the relative status of positions, namely

 This also addresses issues related to exercise and assignments.

 Corporate actions can be broadly classified under stock benefits

 The cash benefit declared by the issuer of capital is cash dividend.

 Stock Benefits declared by the issuer of capital include:

 Any adjustment for corporate actions is carried out on the last

 Adjustments may entail modifications to positions and/or

 The adjustments for corporate actions are carried out on all

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