Clearing & Settlement Mechanism and Risk Management

For efficient clearing & settlement of trades, NMCE has an automated clearing and settlement system with HDFC Bank as its Clearing Bank. The software automatically calculates Initial Margins using VAR (Value At Risk) and MTM (Mark to Market) margins on a daily basis. In the same way, members’ positions are also computed on a daily basis. The information regarding pay-ins and pay-outs arising in calculations of positions of members is transferred at the end of trading hours electronically, using flat files for the clearing banks and members.

Risk Management

The objective of NMCE is to organize trading in such a way that possibility of defaults is almost eliminated. To achieve this, NMCE has adopted various means as follows: -

Exposure Limits:

Exchange provides facility in the system enabling the TCMs to select the commodities in which the TM can trade and also fix the trading limits for each TM. TCM can also monitor the position of TMs online.

Initial Margin:

The initial margin (IM) is levied on all open positions (Buy or sell positions) of the members and their clients. The IM percentage on each commodity varies depending upon its market volatility. The margin so calculated is reduced from the total margin of the member available with the exchange and accordingly further exposure is given on the balance amount.  As the IM increases, the exposure shall decrease.

Mark to Market (MTM) Margins:

MTM is a mechanism devised by the exchanges to prevent the possibility of the potential loss accumulating to the level where the participants might willingly or unwillingly commit default. All trades done on the exchange during the day and all open positions for the day are marked to closing price for the respective delivery/contract and notional gain or loss is worked out. Such loss/gain is debited/credited to respective member’s account at the end of each day. The outstanding position of the members is then carried forward the next day at the closing price.

Special Margins :

have primarily been introduced not as a risk management tool, but to act as a speed-breaker for sharply rising or falling price. It is applied when price reaches a particular level above/below the previous day’s closing price.

Delivery Margins :

are applicable to the contracting parties (both, buyer and seller) from the 12th day of the contract maturity month.

Price Bands: Daily Cap & Life Time Cap:

have been imposed on all commodities to prevent extreme volatility and unhealthy practices of cornering the market.

Final Settlement:

On the expiry of the futures contracts, the settlement is by the way of delivery.  The delivery is at seller’s option during last three days of the contract expiry date.  The pay-in/pay-out for delivery is by way of debit to the buyer and credit to the seller to the relevant Clearing Member’s clearing bank account on T+3 day (T=date of allocation of delivery).
On due date if seller fails to tender delivery or fails to square-off his position then the highest price of the contract during its currency is taken for cash settlement in marking all undelivered outstanding position to final settlement price.  Resulting profit/loss settled in cash.  Final settlement loss/profit amount is debited/credited to the relevant Clearing Member’s clearing bank account on T+1 day. (T=expiry day). Please see the circular ref. no.: NMCE/2007-08/0057 dated October 10, 2007 for further clarification.

On-Line Surveillance :

includes the monitoring of prices, volume & volatility in various series and its analysis using various methods like real time graphs, queries, alerts etc.

Off-Line surveillance :

includes margining requirements, procedures in respect of exception handling, position monitoring, exposure limits, investigation techniques & disciplinary action procedures.

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