India
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.
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Settlement Mechanism - Futures Contracts on Index or Individual Securities
Daily Mark-to-Market Settlement
The positions in the futures contracts for each member is marked-to-market to the daily settlement price of the futures contracts at the end of each trade day.
The profits/ losses are computed as the difference between the trade price or the previous day’s settlement price, as the case may be, and the current day’s settlement price. The CMs who have suffered a loss are required to pay the mark-to-market loss amount to NSCCL which is in turn passed on to the members who have made a profit. This is known as daily mark-to-market settlement.
Theoretical daily settlement price for unexpired futures contracts, which are not traded during the last half an hour on a day, is currently the price computed as per the formula detailed below:
F = S * e rt
where :
F = theoretical futures price
S = value of the undelrying index
r = rate of interest (MIBOR)
t = time to expiration
Rate of interest may be the relevant MIBOR rate or such other rate as may be specified.
After daily settlement, all the open positions are reset to the daily settlement price.
CMs are responsible to collect and settle the daily mark to market profits / losses incurred by the TMs and their clients clearing and settling through them. The pay-in and pay-out of the mark-to-market settlement is on T+1 days ( T = Trade day). The mark to market losses or profits are directly debited or credited to the CMs clearing bank account.
Final Settlement
On the expiry of the futures contracts, NSCCL marks all positions of a CM to the final settlement price and the resulting profit / loss is settled in cash.
The final settlement of the futures contracts is similar to the daily settlement process except for the method of computation of final settlement price. The final settlement profit / loss is computed as the difference between trade price or the previous day’s settlement price, as the case may be, and the final settlement price of the relevant futures contract.
Final settlement loss/ profit amount is debited/ credited to the relevant CMs clearing bank account on T+1 day (T= expiry day).
Open positions in futures contracts cease to exist after their expiration day
Interest Rate Derivatives -
Clearing and Settlement
1. Settlement Procedure & Settlement Price
Daily Mark to Market Settlement and Final settlement for Interest Rate Futures Contract
* Daily Mark to Market settlement and Final Mark to Market settlement in respect of admitted deals in Interest Rate Futures Contracts shall be cash settled by debiting/ crediting of the clearing accounts of Clearing Members with the respective Clearing Bank.
* All positions (brought forward, created during the day, closed out during the day) of a F&O Clearing Member in Futures Contracts, at the close of trading hours on a day, shall be marked to market at the Daily Settlement Price (for Daily Mark to Market Settlement) and settled.
* All positions (brought forward, created during the day, closed out during the day) of a F&O Clearing Member in Futures Contracts, at the close of trading hours on the last trading day, shall be marked to market at Final Settlement Price (for Final Settlement) and settled.
* Daily Settlement Price shall be the closing price of the relevant Futures contract for the Trading day.
* Final settlement price for an Interest rate Futures Contract shall be based on the value of the notional bond determined using the zero coupon yield curve computed by National Stock Exchange or by any other agency as may be nominated in this regard.
* Open positions in a Futures contract shall cease to exist after its expiration day.
Daily Settlement Price
Daily settlement price for an Interest Rate Futures Contract shall be the closing price of such Interest Rate Futures Contract on the trading day. The closing price for an interest rate futures contract shall be calculated on the basis of the last half an hour weighted average price of such interest rate futures contract. In absence of trading in the last half an hour, the theoretical price would be taken or such other price as may be decided by the relevant authority from time to time.
Theoretical daily settlement price for unexpired futures contracts, shall be the futures prices computed using the (price of the notional bond) spot prices arrived at from the applicable ZCYC Curve. The ZCYC shall be computed by the Exchange or by any other agency as may be nominated in this regard from the prices of Government securities traded on the Exchange or reported on the Negotiated Dealing System of RBI or both taking trades of same day settlement(i.e. t = 0).
In respect of zero coupon notional bond, the price of the bond shall be the present value of the principal payment discounted using discrete discounting for the specified period at the respective zero coupon yield. In respect of the notional T-bill, the settlement price shall be 100 minus the annualized yield for the specified period computed using the zero coupon yield curve. In respect of coupon bearing notional bond, the present value shall be obtained as the sum of present value of the principal payment discounted at the relevant zero coupon yield and the present values of the coupons obtained by discounting each notional coupon payment at the relevant zero coupon yield for that maturity. For this purpose the notional coupon payment date shall be half yearly and commencing from the date of expiry of the relevant futures contract.
For computation of futures prices from the price of the notional bond (spot prices) thus arrived, the rate of interest may be the relevant MIBOR rate or such other rate as may be specified from time to time.
Final Settlement Price for mark to market settlement of interest rate futures contracts
Final settlement price for an Interest rate Futures Contract on zero coupon notional bond and coupon bearing bond shall be based on the price of the notional bond determined using the zero coupon yield curve computed as explained above. In respect of notional T-bill it shall be 100 minus the annualized yield for the specified period computed using the zero coupon yield curve.
Settlement value in respect of notional T-bill
Since the T-bills are priced at 100 minus the relevant annualized yield, the settlement value shall be arrived at using the relevant multiplier factor. Currently it shall be 91/365
2 .Settlement Schedule
Product Settlement Schedule
Interest Rate Futures Contracts Daily Mark-to-Market Settlement Pay-in : T+1 working day on or after 11.30 a.m.
Payout : T+1 working day on or after 12.00 p.m.
(T is trading day)
Interest Rate Futures Contracts Final Settlement Pay-in : T+1 working day on or after 11.30 a.m.
Payout : T+1 working day on or after 12.00 p.m.
(T is expiration day)
Settlement Mechanism -
Options Contracts on Index or Individual Securities
Daily Premium Settlement
Premium settlement is cash settled and settlement style is premium style. The premium payable position and premium receivable positions are netted across all option contracts for each CM at the client level to determine the net premium payable or receivable amount, at the end of each day.
The CMs who have a premium payable position are required to pay the premium amount to NSCCL which is in turn passed on to the members who have a premium receivable position. This is known as daily premium settlement.
CMs are responsible to collect and settle for the premium amounts from the TMs and their clients clearing and settling through them.
The pay-in and pay-out of the premium settlement is on T+1 days ( T = Trade day). The premium payable amount and premium receivable amount are directly debited or credited to the CMs clearing bank account.
Interim Exercise Settlement for Options on Individual Securities
Interim exercise settlement for Option contracts on Individual Securities is effected for valid exercised option positions at in-the-money strike prices, at the close of the trading hours, on the day of exercise. Valid exercised option contracts are assigned to short positions in option contracts with the same series, on a random basis. 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. Long positions at in-the money strike prices are automatically assigned to short positions in option contracts with the same series, on a random basis.
For index options contracts, exercise style is European style, while for options contracts on individual securities, exercise style is American style. 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 Index is debited/ credited to the relevant CMs clearing bank account on T+1 day (T = expiry day).
Final settlement loss/ profit amount for option contracts on Individual Securities is debited/ credited to the relevant CMs clearing bank account on T+1 day (T = expiry day).
Open positions, in option contracts, cease to exist after their expiration day.
The pay-in / pay-out of funds for a CM on a day is the net amount across settlements and all TMs/ clients, in F&O Segment.
Settlement Mechanism -
Settlement of Custodial Participant (CP) Deals
NSCCL provides a facility to entities like institutions to execute trades through any TM, which may be cleared and settled by their own CM. Such entities are called Custodial Participants (CP).
To avail of this facility, a CP is required to register with NSCCL through his CM, which allots them a unique CP code. The CP and the CM are required to enter into an agreement as per specified format.
Thereafter, all trades executed by such CP through any TM are required to have the CP code in the relevant field on the F&O trading system at the time of order entry. Such trades executed on behalf of a CP are required to be confirmed by their CM (and not the CM of the TM through whom the trade was executed), within the time specified by NSE, using the confirmation facility provided by NSCCL to the CMs in the F&O segment.
Till such time the trade is confirmed by the CM of the CP, the same is considered as a trade of the TM and the responsibility of settlement of such trade vests with the CM of the TM. Once the trades have been confirmed by the CM of the CP, they form part of the obligations of the CM of the CP and they shall be responsible for all obligations arising out of such trades including the payment of margins and settlement of obligations.
Scheme for FIIs and MFs trading in Exchange traded derivatives
Position Limits
The position limits for FII, Mutual Funds , FII sub-accounts & MF schemes shall be as under:
At the level of the FII and MF
i. FII & MF Position limits in Index options contracts:
FII & MF position limit in all index options contracts on a particular underlying index shall be Rs.250 Crores or 15 % of the total open interest of the market in index options, whichever is higher.
This limit would be applicable on open positions in all options contracts on a particular underlying index.
ii. FII & MF Position limits in Index futures contracts:
FII & MF position limit in all index futures contracts on a particular underlying index shall be Rs.250 crores or 15 % of the total open interest of the market in index futures, whichever is higher.
This limit would be applicable on open positions in all futures contracts on a particular underlying index.
In addition to the above, FIIs & MF’s shall take exposure in equity index derivatives subject to the following limits:
a. Short positions in index derivatives (short futures, short calls and long puts) not exceeding (in notional value) the FII’s / MF’s holding of stocks.
b. Long positions in index derivatives (long futures, long calls and short puts) not exceeding (in notional value) the FII’s / MF’s holding of cash, government securities, T-Bills and similar instruments.
In this regard, if the open positions of an FII / MF exceeds the limits as stated in item no a or b, such surplus would be deemed to comprise of short and long positions in the same proportion of the total open positions individually. Such short and long positions in excess of the said limits shall be compared with the FII’s / MF’s holding in stocks, cash etc as stated above. (Circular No. NSCC/F&O/C&S/348)
iii. Stock Futures & Options:
a. For stocks having applicable market-wise position limit (MWPL) of Rs. 500 crores or more, the combined futures and options position limit shall be 20% of applicable MWPL or Rs. 300 crores, whichever is lower and within which stock futures position cannot exceed 10% of applicable MWPL or Rs. 150 crores, whichever is lower.
b. For stocks having applicable market-wise position limit (MWPL) less than Rs. 500 crores, the combined futures and options position limit would be 20% of applicable MWPL and futures position cannot exceed 20% of applicable MWPL or Rs. 50 crore which ever is lower.
At the level of the sub-account
Index Futures & Options:
A disclosure is requirement from any person or persons acting in concert who together own 15% or more of the open interest of all futures and options contracts on a particular underlying index on the Exchange. A failure to do so shall be treated as a violation and shall attract appropriate penal and disciplinary action in accordance with the Rules, Bye-Laws and Regulations of NSE/NSCCL.
Stock Futures & Options:
The gross open position across all futures and options contracts on a particular underlying security, of a sub-account of an FII, should not exceed the higher of :
* 1% of the free float market capitalization (in terms of number of shares)
or
* 5% of the open interest in the derivative contracts on a particular underlying stock (in terms of number of contracts). These position limits shall be applicable on the combined position in all futures and options contracts on an underlying security on the Exchange.
Procedures
The Clearing Corporation would monitor the FII position limits at the end of each trading day. For this purpose, the following procedure is prescribed:
FIIs intending to trade in the F&O segment of the Exchange shall be required to notify the following details of the Clearing Member/s, who shall clear and settle their trades in the F&O segment, to Clearing Corporation.
i. Name of FII
ii. SEBI Registration Number
iii. Name of sub-account/s of FII (if any)
iv. Name of the Clearing Member/s.
A unique code will be allotted by Clearing Corporation to each such FII prior to commencement of trading by them. This will be utilized by Clearing Corporation for the purpose of monitoring position limits at the level of the FII.
For e.g. If the name of FII is say XYZ and it has 2 sub accounts viz. scheme 1 and 2, the FII code allotted by NSCCL may be "XYZ" (comprising 12 characters).
Each FII/ sub-account of the FII, as the case may be, intending to trade in the F&O segment of the Exchange, shall further be required to obtain a unique Custodial Participant (CP) code allotted from the Clearing Corporation, through their Clearing Member. CP code normally comprises of 12 alphanumeric characters. Clearing Corporation will allot CP codes to each such FII/ sub-account of the FII.
The Clearing Member/s of the FII/ sub-account of the FII, are required to furnish the following details to Clearing Corporation, to obtain CP codes:
i. Name of FII
ii. Unique code allotted to the FII by NSCCL (as detailed in 2 above)
iii. Name of sub-account/s of FII
iv. CP code/s allotted to the FII/ sub account/s of the FII, in the Capital Market segment of Clearing Corporation
Eg. In the example given in 2 above the CP codes allotted by NSCCL may be ABCDEFGH0001 and ABCDEFGH0002.
FIIs/ sub accounts of FIIs which have been allotted a unique CP code by Clearing Corporation shall only be permitted to trade on the Exchange.
The FII/ sub-account of FII shall ensure that all orders placed by them on the Exchange carry the relevant CP code allotted by Clearing Corporation as specified in point 3 above, in the relevant field in NEATFO.
Clearing Member/s of the FII shall submit the details of all the trades confirmed by FII to Clearing Corporation, by the end of each trading day, as per the mechanism specified.
Clearing Corporation will monitor the open positions of the FII/ sub-account of the FII for each underlying security and index on which futures and option contracts are traded on the Exchange, against the position limits specified at the level of FII/ sub-accounts of FII respectively, at the end of each trading day.
The cumulative FII position may be disclosed to the market on a T + 1 basis, before the commencement of trading on the next day.
In the event of an FII breaching the position limits on any underlying, Clearing Corporation will advise the Exchange to withdraw the facility granted to such FII to take any fresh positions in any derivative contracts. Such FII will be required to reduce their open position in such underlying, in accordance with the mechanism provided by Clearing Corporation from time to time. The facility withdrawn may be reinstated upon due compliance of the position limits.
It shall also be obligatory on FIIs to report any breach of position limits by them / their sub-account/s, to Clearing Corporation and ensure that such sub-account/s does not take any fresh positions in any derivative contracts in such underlying. The sub-account of FII shall be required to reduce open position in such underlying, in accordance with the mechanism specified by Clearing Corporation. Only upon due compliance of the position limits, the sub-accounts may permitted to take further positions.
Computation of Position Limits
The position limits would be computed on a gross basis at the level of a FII and on a net basis at the level of sub-accounts and proprietary positions.
The open position for all derivative contracts would be valued as the open interest multiplied with the closing price of the respective underlying in the cash market.
The following penalty points and penal charges are levied for failure to pay funds/ settlement obligations:
Penal Charges
A penal charge will be levied on the amount in default as per the byelaws relating to failure to meet obligations by any Clearing Member.
Type of Default Penalty Charge per day Chargeable to
Overnight settlement shortage of value more than Rs.5 lakhs 0.07% Clearing Member
Overnight settlement shortage of value less than Rs.5 lakhs 0.07% Clearing Member
Violations on account of MTM multiple shortage 0.07% Clearing Member
Violations on account of Initial Margin shortage 0.07% Clearing Member / Trading Member
Violations on account of Open Interest by TM Nil Trading Member
Shortage of Base Capital of the member 0.09% Clearing Members
Violations on account of Market wide position limit Nil Clearing Members
Client level / sub-account/NRI position limit violation Nil Clearing Member
Shortage of Capital cushion 0.07% Clearing Members
In addition to the above, a penal interest at the rate of 0.09% for each day of default will be levied on the members who fail to pay the penalty imposed on them.
Violations if any by the custodial participants shall be treated in line with those by the trading member and accordingly action shall be initiated against the concerned clearing member.
Short Reporting of Margins in Client Margin Reporting Files
Percentage of short reporting (in terms of value) Penalty per instance
< 1% No action
>> 1% but less than or equal to 20% Reprimand Letter
> 20% Rs.1000/- or 0.10% of the short margin reported which ever is higher subject to a maximum of Rs.1,00,000/-
Non reporting of margins in client margin reporting files will be considered similar to and as short reporting, penalty will be levied accordingly.
Depositories
National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd (CDSL) - act as depositories for Equity, Corporate Debt and some Government Securities. They are incorporated under the Companies Act, 1956 as public limited companies limited by shares and are for profit institutions. NSDL and CDSL facilitate clearing of trades thorugh depository participants, by enabling securities transfers across beneficial owners, inter-se and to/from clearing members, based on transfer instructions.
Investors are permitted to open accounts only through depository participants and not directly with the depository. However, the depositories maintain record of beneficial ownership details of all depository account holders. A depository participant can be a bank, financial institution, a custodian, a broker or any entity eligible as per SEBI (Depositories and Participants) Regulations, 1996.
Depositories maintain a three-way interface between the Stock Exchanges, the depository participants and the issuer companies / registrars and transfer agents (R&T). The depositories are electronically linked to each of these via a satellite link or through leased land lines.
Reserve Bank of India (RBI) - is the depositary for dated government securities and treasury bills. RBI was established under an act of parliament (The Reserve Bank of India Act, 1934). Investors (Constituents) can hold securities through members of RBI only. Members of RBI hold a securities account for this purpose tilted Subsidiary General Ledger (SGL) account and under this account, the members maintain securities holdings of their constituents i.e. clients. Such accounts are termed as Constituent Subsidiary General Ledger (CSGL) accounts.
Registration
Regulations do not permit registration of securities in the name of the Global Custodian or sub-custodian as well as omnibus holdings and nominee registrations. Securities are registered in the name of the beneficial owner (in the name registered with SEBI in case of FIIs). Clients can, opt to hold physical securities in street name, however, street name holdings result in increased risk as title is established on registration in clients’ name. Also, FIIs are restricted from transacting in securities in physical form. SEBI mandated dematerialized mode of settlement for institutional investors and currently 99.9% of settlement is effected in dematerialized form.
Book-Entry: For dematerialized securities, beneficial ownership is automatically deemed to be transferred to the beneficiary upon credit of shares to its depository account. All corporate benefits are accrued/notified directly to the beneficial owners.
Physical: Registration, as a separate process, is applicable only to secondary market transactions in physical securities. Registration (for physical securities) involves the buyer (or the buyer’s custodian) sending share certificates along with all the documents to the company or its share registrar who records the change in ownership and issues a new certificate or endorses the old certificate in the name of the beneficial owner. Legislation requires that the company complete the registration process within 30 days. Shares sent for registration cannot be traded under normal circumstances.
Buyers must pay stamp duty at 0.25% at the higher of the consideration (in case of equity shares), or the current market value, and this must be evidenced on the transfer deeds for registration to be effected.
Source: National Stock Exchange website.
