All futures and options contracts are cash settled, i.e. through exchange of cash. The underlying for index futures/options of the Nifty index cannot be delivered. These contracts, therefore, have to be settled in cash. Futures and options on individual securities can be delivered as in the spot market. However, it has been currently mandated that stock options and futures would also be cash settled. The settlement amount for a CM is netted across all their TMs/ clients, with respect to their obligations on MTM, premium and exercise settlement.
Settlement of Futures Contracts
Futures contracts have two types of settlements, the Mark-to-Market (MTM) settlement which happens on a continuous basis at the end of each day, and the final settlement which happens on the last trading day of the futures contract.
MTM settlement :
All futures contracts for each member are marked-to-market (MTM) to the daily settlement price of the relevant futures contract at the end of each day. The profits/losses are computed as the difference between :
- The trade price and the day’s settlement price for contracts executed during the day but not squared up.
- The previous day’s settlement price and the current day’s settlement price for brought forward contracts
- The buy price and the sell price for contracts executed during the day and squared up. Table 8.6 explains the MTM calculation for a member. The settlement price for the contract for today is assumed to be 105.
Table Computation of MTM at the end of the day
|Trade details||Quantity MTM bought/sold||Settlement price||MTM|
|Brought forward from previous day||[email protected]||105||500|
|Traded during day Bought Sold||[email protected] [email protected]||102||200|
|Open position (not squared up)||[email protected]||105||500|
The table above gives the MTM on various positions. The MTM on the brought forward contract is the difference between the previous day’s settlement price of Rs.100 and today’s settlement price of Rs.105. Hence on account of the position brought forward, the MTM shows a profit of Rs.500. For contracts executed during the day, the difference between the buy price and the sell price determines the MTM. In this example, 200 units are bought @ Rs. 100 and 100 units sold @ Rs. 102 during the day. Hence the MTM for the position closed during the day shows a profit of Rs.200. Finally, the open position of contracts traded during the day, is margined at the day’s settlement price and the profit of Rs.500 credited to the MTM account.
So the MTM account shows a profit of Rs. 1200.
The CMs who have a loss are required to pay the mark-to-market (MTM) loss amount in cash which is in turn passed on to the CMs who have made a MTM profit. This is known as daily mark-to-market settlement. CMs are responsible to collect and settle the daily MTM profits/losses incurred by the TMs and their clients clearing and settling through them. Similarly, TMs are responsible to collect/pay losses/profits from/to their clients by the next day. The pay-in and pay-out of the mark-to-market settlement are effected on the day following the trade day.
In case a futures contract is not traded on a day, or not traded during the last half hour, a ‘theoretical settlement price’ is computed as per the following formula:
F = SerT
After completion of daily settlement computation, all the open positions are reset to the daily settlement price. Such positions become the open positions for the next day.
Final settlement for futures :
On the expiry day of the futures contracts, after the close of trading hours, NSCCL marks all positions of a CM to the final settlement price and the resulting profit/loss is settled in cash. Final settlement loss/profit amount is debited/ credited to the relevant CM’s clearing bank account on the day following expiry day of the contract.
Settlement prices for futures
Daily settlement price on a trading day is the closing price of the respective futures contracts on such day. The closing price for a futures contract is currently calculated as the last half an hour weighted average price of the contract in the F&O Segment of NSE. Final settlement price is the closing price of the relevant underlying index/security in the capital market segment of NSE, on the last trading day of the contract.
Settlement of options contracts
Options contracts have two types of settlements, daily premium settlement and final exercise Settlement.
Daily premium settlement
Buyer of an option is obligated to pay the premium towards the options purchased by him. Similarly, the seller of an option is entitled to receive the premium for the option sold by him.
The premium payable amount and the premium receivable amount are netted to compute the net premium payable or receivable amount for each client for each option contract.
Final exercise settlement
Final exercise settlement is effected for all open long in-the-money strike price options existing at the close of trading hours, on the expiration day of an option contract. All such long positions are exercised and automatically assigned to short positions in option contracts with the same series, on a random basis. The investor who has long in-the-money options on the expiry date will receive the exercise settlement value per unit of the option from the investor who is short on the option.
Exercise process The period during which an option is exercisable depends on the style of the option. On NSE, index options and options on securities are European style, i.e. options are only subject to automatic exercise on the expiration day, if they are in-the-money. Automatic exercise means that all in-the-money options would be exercised by NSCCL on the expiration day of the contract. The buyer of such options need not give an exercise notice in such cases.
Exercise settlement computation
In case of option contracts, all open long positions at in-the-money strike prices are automatically exercised on the expiration day and assigned to short positions in option contracts with the same series on a random basis. Final exercise is automatically effected by NSCCL for all open long in-the-money positions in the expiring month option contract, on the expiry day of the option contract. The exercise settlement price is the closing price of the underlying (index or security) on the expiry day of the relevant option contract. The exercise settlement value is the difference between the strike price and the final settlement price of the relevant option contract. For call options, the exercise settlement value receivable by a buyer is the difference between the final settlement price and the strike price for each unit of the underlying conveyed by the option contract, while for put options it is difference between the strike price and the final settlement price for each unit of the underlying conveyed by the option contract. Settlement of exercises of options is currently by payment in cash and not by delivery of securities.
The exercise settlement value for each unit of the exercised contract is computed as follows:
Call options = Closing price of the security on the day of exercise — Strike price
Put options = Strike price — Closing price of the security on the day of exercise
The closing price of the underlying security is taken on the expiration day. The exercise settlement value is debited / credited to the relevant CMs clearing bank account on T + 1 day (T = exercise date).
Special facility for settlement of institutional deals
NSCCL provides a special facility to Institutions/Foreign Institutional Investors (FIIs)/Mutual Funds etc. to execute trades through any TM, which may be cleared and settled by their own CM. Such entities are called custodial participants (CPs). To avail of this facility, a CP is required to register with NSCCL through his CM. A unique CP code is allotted to the CP Funds etc. to execute trades through any TM, which may be cleared and settled by their own CM. Such entities are called custodial participants (CPs). To avail of this facility, a CP is required to register with NSCCL through his CM. A unique CP code is allotted to the CP by NSCCL. All trades executed by a CP through any TM are required to have the CP code in the relevant field on the trading system at the time of order entry. Such trades executed on behalf of a CP are confirmed by their own CM (and not the CM of the TM through whom the order is entered), within the time specified by NSE on the trade day though the on-line confirmation facility. Till such time the trade is confirmed by CM of concerned CP, the same is considered as a trade of the TM and the responsibility of settlement of such trade vests with CM of the TM. Once confirmed by CM of concerned CP, such CM is responsible for clearing and settlement of deals of such custodial clients. FIIs have been permitted to trade subject to compliance of the position limits prescribed for them and their sub-accounts, and compliance with the prescribed procedure for settlement and reporting. A FII/a sub-account of the FII, as the case may be, intending to trade in the F&O segment of the exchange, is required to obtain a unique Custodial Participant (CP) code allotted from the NSCCL. FII/sub-accounts of FIIs which have been allotted a unique CP code by NSCCL are only permitted to trade on the F&O segment.