7.1 Clearing Members
7.2 Clearing Mechanism
7.3 Settlement Mechanism
7.4 Risk Management
7.5 Margining and mark to market under SPAN
7.1 Clearing Members :
There are three types of clearing members:
1. Self-Clearing Member: Clear and settle their trades.
2. Trading Member-Cum-Clearing Member: Clear its trades and clear the trades of other members.
3. Professional Clearing Member: Clears trades for the trading member.
Eligibility Norms:
- Net worth: Rs. 300 lakhs (Rs. 100 lakhs for self-clearing members).
- Deposit: Rs. 50 lakhs as a security deposit to the Clearing Corporation.
- Additional Deposits: Rs. 10 lakhs for each additional trading member.
Funds settlement is provided through designated clearing banks.
7.2 Clearing Mechanism
The clearing starts with the calculation of the open position and obligations of the clearing members, CM. The open position of a CM is the sum of positions held by all trading members, TMs and custodial participants, CPs clearing through it. In computing its open position, a TM computes its proprietary positions and clients' positions separately, of course. While proprietary positions are computed net (in terms of buy-sell), a sum aggregate computation is done for client positions.
7.3 Settlement Mechanism
The stock exchanges in India can introduce phased-in flexible settlement options for stock derivatives, namely cash or physical settlement. Post-introduction of physical settlement, it shall be completed within six months. Finally, there are MTM and final settlements in the case of futures and options. MTM adjustments are made daily about market prices, but settlement is done at expiry, where cash profits or losses are realized. Options have daily premium settlement and final exercise settlement at expiry, whereby the options are exercised automatically if they are in the money at expiry. All settlements are done on a T+1 basis, with all funds being settled through clearing banks. Custodial Participants (CPs) like Institutions would be able to trade through trading members and settle the trades through their CM. The onus of settlement and margin payments would lie on the CM.
7.4 Risk Management
The F&O segment has an elaborate risk management system that includes rigid capital adequacy requirements for membership. The features of the system are as follows:
- Initial Margin: Initial daily margin is required for all open positions, based on VAR and specified for each contract.
- MTM Settlement: Open positions are settled on an MTM basis, with cash settlements on T+1.
- Real-Time Monitoring: The Clearing Corporation monitors positions in real-time, with alerts for violations in margin or exposure.
- Risk Management System: The system uses SPAN and PRISM to calculate margins for real-time margin and position tracking and risk management in an efficient manner.
- Position Limits: CMs monitor and enforce the limits on the TMs and any violative results in further trades stop.
7.5 Margining and mark to market under SPAN
Indian F&O margining and risk management system uses SPAN (Standard Portfolio Analysis of Risk) to compute the initial margins that determine the potential one-day loss in a portfolio. Key points include:
- Initial Margin: Calculated by the clearing corporation through SPAN based on a 99% Value-at-Risk (VaR) over one day
- Premium & Assignment Margin: As applicable for options positions, plus added margins for assigned options contracts.
- Margin Exposure: Futures and options are marginal, which varies by asset class, such as 3% for index futures/options and 5% or 1.5 standard deviations for individual stocks.
- Cross-Margining: Cash and derivatives are cross-marginable, which enables clients to cross-hedge their margins.
- Position Limits: Market-wide limits exist on futures/options based on free-float market capitalization. Separate limits will apply at the time the product is listed for individual securities as well as index contracts.
- Client & Trading Member Limits: These include limits at the level of clients and trading members which again specifically include limits at FIIs, mutual fund level and sub-accounts
- Penalties on Breaches: The penal consequences on margin shortfall/ position limit breach are that in the case of continuance shortfall, the trading member would incur a fine which will amount to 5 per cent of the shortfall amount per day beyond the third day while breach of position limit in terms of market-wide attracts the imposition of daily penalty.
