Settlement mechanism, Financial Management

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Settlement Mechanism:

Nifty index futures and option contracts are cash settled. All CMs are required to open a separate bank account with NSCCL designated clearing banks.

The open positions in the index futures contracts are marked-to-market at the settlement price of the contract at the end of each trading day. The members who have a loss position should pay the loss amount to NSCCL which is then transferred to the members who have made profits. This is known as daily mark-to-market settlement. The daily settlement price of the Nifty index futures contract is the closing price of the index futures contract which is computed by taking the weighted average of the prices of the daily settlement price. The mark-to-market losses and profits are directly debited and credited to the CM's and clearing bank account respectively.

On the expiry of the futures contract, NSCCL marks the open position of a clearing member to the final settlement price and the resulting profit or loss is settled in cash. The final settlement price is the closing value of the index price on the expiration day of the relevant index futures contract. The final settlement profit is the difference between the last mark-to-market price and the final settlement price of the corresponding index futures contract. Final settlement loss or profit is debited or credited to the relevant CM's bank account on the next day to the expiry day.

As the price of the futures contract changes, gains or losses accrue to the holder of the contract. The gains or losses are credited or debited to the margin account. If the price movements are adverse, the balance in the account falls. In these circumstances, the trader is required to replenish the margin, bringing it on par with the initial value whenever the level or value of funds on deposit with the broker reach a certain level. This level is referred to as the Maintenance Margin. The additional amount, which the trader deposits with the brokerage firm, is called the "Variation Margin".

 


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