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Settlement Mechanism


Settlement of futures contracts on interest rate

The positions in the futures contracts for each member is marked-to-market to the daily settlement price of the futures contracts at the end of each trade day.

The profits/ losses are computed as the difference between the trade price or the previous day's settlement price and the current day's settlement price. The CMs who have suffered a loss are required to pay the mark-to-market loss amount to NSE Clearing which is passed on to the members who have made a profit. This is known as daily mark-to-market settlement.

Daily mark to market settlement in respect of admitted deals in Interest rate futures contracts is cash settled by debit/ credit of the clearing accounts of clearing members with the respective clearing bank.

All positions (brought forward, created during the day, closed out during the day) of a clearing member in futures contracts, at the close of trading hours on a day, shall be marked to market at the daily settlement price and settled on T+1 day basis. The settlement shall be netted with the settlement of Currency futures.

a. NSE Bond Futures II (NBF II)

The daily settlement price (DSP) would be determined in the following manner:

Step 1:

The DSP is the volume weighted average Futures Price (VWAP) of the trades in the last 30 minute of trading.

Step 2:

If the DSP cannot be calculated as above, a theoretical settlement rate would be used. theoretical settlement rate of the contract is calculated as per the below formula.

Theoretical Future price = Cash price + Financing cost - Income on cash position

where

Cash price = Clean Price + Accrued Interest

  • Clean price of the security is the weighted average cash price of the respective underlying bond during the last two hours of trading on the NDS Order Matching platform.
  • If no trades are executed in the underlying bond then, a theoretical settlement rate with reference to the FIMMDA rates shall be used

The day count convention for accrued interest shall be on the basis of a 360 days year, consisting of 12 months of 30 days each and half yearly coupon payment.

The financing cost and income on cash position shall be computed using the applicable MIBOR on the basis of 365-day year, consisting of 12 months and actual days in the month.


b. Futures on 91 day T-bill 
All the open positions in futures on 91 day GOI T-Bill shall be marked to market on the Daily Settlement Price. The daily settlement price would be determined in the following manner: 

100 - 0.25 * Yw

Where Yw (futures yield) shall be volume weighted average futures yield of traded futures contracts in the last 30 minutes of trading subject to there being at least 5 trades. Failing which, trades during the last 60 minutes shall be used for the calculation, subject to at least 5 trades. Failing which, trades during the last 120 minutes shall be used for the calculation, subject to at least 5 trades.

If the daily contract settlement value cannot be calculated as above, a theoretical futures yield would be used for computation. The latest available Treasury Bill benchmark rates published by FIMMDA of various tenors shall be used for computation of theoretical futures yield as follows:

Step - 1 
Interpolate / Extrapolate yield for residual maturity (90 plus Days to maturity of contract) period using Treasury Bill benchmark yield curve. 

Step - 2 
Interpolate / Extrapolate yield for remaining maturity (Maturity of contract minus Today) period using Treasury Bill benchmark yield curve.

Step - 3 
Forward yield for 90 days i.e. from remaining maturity of the contract till residual maturity of the contract may be computed using yields calculated in step 1 and 2.

Interpolation and extrapolation in step1 and step2 shall be applicable only when the yield of required tenor is not available on Treasury Bill Yield Curve published by FIMMDA.

Final Settlement 
On the expiry of the futures contracts, NSE Clearing marks all positions of a CM to the final settlement price and the resulting profit / loss is settled in cash.

The final settlement profit / loss is computed as the difference between trade price or the previous day's settlement price, as the case may be, and the final settlement price on the last trading day.

The settlement shall be netted along with the settlement of other instruments in the Currency Derivatives Segment. 

Open positions in futures contracts cease to exist after their last trading day / expiry.


Final Settlement Price 

NSE Bond Futures II (NBF II)

The final settlement price is the weighted average price of the underlying bond based on the process during the last two hours of the trading on NDS-OM subject to minimum of 5 trades.

If less than 5 trades are executed in the underlying bond during the last two hours of trading, then FIMMDA price shall be used as final settlement price.

Futures on 91 Day T-bills

The final settlement price would be determined in the following manner: Rs 100 - 0.25 * Yf

Where Yf is weighted average discount yield obtained from RBI's weekly auction of 91-day GOI T-Bill on the day of expiry.

The weighted average price obtained from the weekly auction of 91day GOI Treasury Bill on the day of expiry of the contract (notified by the RBI in its press release announcing the auction results of the day) shall be used for arriving at the weighted average discount yield as per the below formula specified in the RBI press release 2010-2011/ 1334 dated March 17, 2011.

c.MIBOR Futures

Daily Mark to Market settlement of futures on T+1 Day

All the open positions shall be marked to market on the daily settlement rate. The profit/ loss resulting there from shall be either paid to/ received from such member in accordance with the laid down settlement procedures as may be in place in the relevant segment.

Step 1:

Daily settlement rate shall be Volume Weighted Average Rate of trades done .

  • In last 30 minutes of trading, subject to min 5 trades else
  • In last 60 minutes of trading, subject to min 5 trades else


Step 2:

In the absence or non-fulfilment of the above, theoretical settlement rate shall be considered for computation of Daily Settlement Value. Theoretical rate for the overnight MIBOR futures for near month contract shall be computed as follows:

Theoretical Daily Settlement rate =

If the DSP cannot be calculated as above, a theoretical settlement rate would be used. theoretical settlement rate of the contract is calculated as per the below formula.

(Realised Rate * No.of days lapsed)/(Tenor in days) + (Expected Rate * Residual No.of days)/( Tenor in days)

Realised rate shall be computed using daily simple average of Overnight Call Rate (MIBOR) for lapsed number of days.

Expected rate shall be computed using interpolation method using the relevant MIBOR OIS rates.

Theoretical rate for the overnight MIBOR futures for other month contract shall be computed as forward rate using the relevant MIBOR OIS rates.

All open positions on the last trading day of the futures contract shall be marked to the final settlement price for the relevant futures contract and shall be cash settled on T+1 day. The profit/ loss resulting there from shall be paid to / received from such members in accordance with the laid down settlement procedures in this regard. Upon completion of the final settlement, no positions in such futures contracts shall exist.

Final Settlement Rate shall be simple average of Overnight Call Rate (MIBOR) applicable for the expiry month (based on Overnight MIBOR rate published daily at 10:45 am by FBIL and rounded up to 4 decimals). In case there is a holiday, the rate will be considered for more than one day. The period for computation of final settlement rate shall start from the first working day in the contract month till one day prior to final settlement date including Saturdays, Sundays and Scheduled holidays.

The pay-in and pay-out of daily mark to market settlements and final settlement of futures contracts shall be effected in accordance with the settlement schedule issued by the Clearing Corporation periodically. The clearing members are required to have clear balance of funds in their clearing account towards their pay-in obligation by the declared pay-in time on the settlement day. The pay-out of funds shall be credited to the receiving members clearing account thereafter.

Updated on: 29/11/2019
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