Page 175 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes Self Assessment

Fill in the blanks:
1. …………………………… undertakes clearing and settlement of all trades executed on the
futures and options (F&O) segment of the NSE.

2. In the F&O segment, some members, called …………………………… clear and settle their
trades executed by them only either on their own account or on account of their clients.
3. For the purpose of settlement all …………………………… members are required to open
a separate bank account with NSCCL designated clearing bank for F&O segment.

11.2 Clearing Mechanism

The clearing mechanism essentially involves working out open positions and obligations of
clearing (self-clearing/trading-cum-clearing/professional clearing) members. This position is
considered for exposure and daily margin purposes. The open positions of Clearing members
(CMs) are arrived at by aggregating the open positions of all the trading members (TMs) and all
custodial participants clearing through him, in contracts in which they have traded. A TM’s open
position is arrived at as the summation of his proprietary open position and clients’ open
positions, in the contracts in which he has traded. While entering orders on the trading system,
TMs are required to identify the orders, whether proprietary (if they are their own trades) or
client (if entered on behalf of clients) through ‘Pro/Cli’ indicator provided in the order entry
screen. Proprietary positions are calculated on net basis (buy - sell) for each contract. Clients’
positions are arrived at by summing together net (buy - sell) positions of each individual client.

Did u know? A TM’s open position is the sum of proprietary open position, client open
long position and client open short position.

Example: Given from Table 11.1 to Table 11.4. The proprietary open position on day 1 is
simply = Buy - Sell = 200 - 400 = 200 short. The open position for client A = Buy (O) - Sell (C) = 400
– 200 = 200 long, i.e. he has a long position of 200 units. The open position for Client B = Sell (O)
– Buy(C) = 600 – 200 = 400 short, i.e. he has a short position of 400 units. Now the total open
position of the trading member Mr. X at end of day 1 is 200 (his proprietary open position on net
basis) plus 600 (the Client open positions on gross basis), i.e. 800.
The proprietary open position at end of day 1 is 200 short. The end of day open position for
proprietary trades undertaken on day 2 is 200 short. Hence the net open proprietary position at
the end of day 2 is 400 short. Similarly, Client A’s open position at the end of day 1 is 200 long.
The end of day open position for trades done by Client A on day 2 is 200 long. Hence the net open
position for Client A at the end of day 2 is 400 long. Client B’s open position at the end of day 1
is 400 short. The end of day open position for trades done by Client B on day 2 is 200 short. Hence
the net open position for Client B at the end of day 2 is 600 short. The net open position for the
trading member at the end of day 2 is sum of the proprietary open position and client open
positions. It works out to be 400 + 400 + 600, i.e. 1400.

The following table illustrates determination of open position of a CM, who clears for two TMs
having two clients.

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