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In 2008-2009 RBI has permitted Currency futures USD-INR , EUR-INR,GBP-INR , JPY-INR & Options in USD-INR. P.C.S SECURITIES LTD. offers trading facilities to investors on the Currency derivatives segment of the NSE & MCX-SX. The contract Specification of the futures shall be as under:

CATEGORY	DESCRIPTION
Exchange	NSE & MCX-SX
Trading Hours & Days	9A.M to 5P.M from Monday to Friday
Contract months	12 near calendar months
Min Price fluctuation	0.25 paisa or INR 0.0025
Settlement	Cash settled in INR on relevant RBI reference rate
Final Settlement Date	Last business day of the month
Daily settlement Price	Last half-an-hour weighted average price of such contract ( other prices may be decided by relevant authority from time to time
Margin/lot	Dictated by exchange (nearly 3% to 4%)
Client level Position Limit	USD 10 million or 6% of Open interest, whichever is higher on each exchange
Final Settlement Price	The reference rate fixed by RBI two working days prior to the final settlement date will be used for final settlement

The Currency Derivatives trading system provides a fully automated screen-based trading for currency futures on a nationwide basis as well as an online monitoring and surveillance Mechanism. It supports an order driven market and provides complete Transparency of trading operations. The online trading system is similar to that of trading of equity derivatives in the Futures & Options (F&O) segment of NSE

Client Broker Relationship in Derivatives Segment

A client of a trading member is required to enter into an agreement with the trading member before commencing trading. A client is eligible to get all the details of his or her orders and trades from the trading member. A trading member must ensure compliance particularly with relation to the following while dealing with clients:

• Filling of 'Know Your Client' form
• Execution of Client Broker agreement
• Bring risk factors to the knowledge of client by getting acknowledgement of client on risk disclosure document
• Timely execution of orders as per the instruction of clients in respective client codes.
• Collection of adequate margins from the client.
• Maintaining separate client bank account for the segregation of client money.
• Timely issue of contract notes as per the prescribed format to the client.
• Ensuring timely pay-in and pay-out of funds to and from the clients
• Resolving complaint of clients if any at the earliest.
• Avoiding receipt and payment of cash and deal only through account payee Cheques.
• Sending the periodical statement of accounts to clients.
• Not charging excess brokerage
• Maintaining unique client code as per the regulations

The system allows the trading members to enter orders with various conditions attached to them as per their requirements. These conditions are broadly divided into the following categories:

• Time conditions
• Price conditions
• Other conditions

Charges

The maximum brokerage chargeable by a trading member in relation to trades effected in the contracts admitted to dealing on the Currency Derivatives segment is fixed at 2.5% of the contract value. The transaction charges payable to the exchange by the trading member for the trades executed by him on the Currency Derivatives segment would be as prescribed by the Exchange from time to time. The trading members would also contribute to Investor Protection Fund of Currency Derivatives segment at the rate as may be prescribed by the Exchange from time to time.

Clearing and Settlement

National Securities Clearing Corporation Limited (NSCCL),MCX-SX Clearing Corporation Limited undertakes clearing and settlement of all trades executed on the Currency Derivatives Segment of the NSE & MCX-SX. It also acts as legal counterparty to all trades on the Currency Derivatives segment and guarantees their financial settlement.

Settlement of currency futures contracts

Currency futures contracts have two types of settlements, the 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.

Mark to Market settlement (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.

Final settlement for futures

On the last trading day of the futures contracts, after the close of trading hours, Clearing Corporation’s 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 T+2 working day following last trading day of the contract (Contract expiry Day).

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 Currency Derivatives Segment . The final settlement price is the RBI reference rate on the last trading day of the futures contract. All open positions shall be marked to market on the final settlement price. Such marked to market profit / loss shall be paid to / received from clearing members.

Risk Management

Clearing Corporation’s has developed a comprehensive risk containment mechanism for the Currency Derivatives segment. The salient features of risk containment mechanism on the Currency Derivatives segment are:

• The financial soundness of the members is the key to risk management. Therefore, the requirements for membership in terms of capital adequacy (net worth, security deposits) are quite stringent.
• Clearing Corporations charges an upfront initial margin for all the open positions of a CM. It specifies the initial margin requirements for each futures contract on a daily basis. It also follows a value-at-risk (VaR) based margining through SPAN®. The CM in turn collects the initial margin from the TMs and their respective clients.
• The open positions of the members are marked to market based on contract settlement price for each contract. The difference is settled in cash on a T+1 basis.
• On-line position monitoring system monitors the member open positions and margins on a real-time basis vis-à-vis the deposits provided by the CM/ limits set for the TM by the CM. The on-line position monitoring system generates alerts whenever the margins of a member reaches X% of the capital deposited by the CM or limits set for the TM by the CM. Clearing Corporations monitors the CMs for initial margin and extreme loss margin violations, while TMs are monitored for initial margin violation.
• CMs are provided a trading terminal for the purpose of monitoring the open positions of all the TMs clearing and settling through him. A CM may set limits for a TM clearing and settling through him. Clearing Corporations assists the CM to monitor the intra-day limits set up by a CM and whenever a TM exceeds the limit, it stops that particular TM from further trading.
• A member is alerted of his position to enable him to adjust his position or bring in additional capital. Margin violations result in withdrawal of trading facility for all TMs of a CM in case of a violation by the CM.
• A separate settlement guarantee fund for this segment has been created out of the capital of members.

The most critical component of risk containment mechanism for the Currency Derivatives segment is the margining system and on-line position monitoring. The actual position monitoring and margining is carried out on-line through Parallel Risk Management System (PRISM). PRISM uses SPAN® (Standard Portfolio Analysis of Risk) system for the purpose of computation of on-line margins, based on the parameters defined by SEBI.

Margining System

• The risk of each trading and clearing member is monitored on a real-time basis and alerts/disablement messages are generated if the member crosses the set limits. Clearing Corporation’s uses the SPAN® (Standard Portfolio Analysis of Risk) system; a portfolio based margining system, for the purpose of calculating initial margins.
• In order to determine the largest loss that a portfolio might reasonably be expected to suffer from one day to the next day based on 99% VaR methodology, the price scan range has been currently fixed at 3.5 standard deviation The initial margin so computed would be subject to a minimum of 1.75% on the first day of currency futures trading and a minimum of 1 % thereafter.

Types of margins

• Initial margin: Margin in the Currency Derivatives segment is computed by NSCCL upto client level for open positions of CMs/TMs. These are required to be paid up-front on gross basis at individual client level for client positions and on net basis for proprietary positions. NSCCL collects initial margin for all the open positions of a CM based on the margins computed by NSCCLSPAN ®. A CM is required to ensure collection of adequate initial margin from his TMs up-front. The TM is required to collect adequate initial margins up-front from his clients.
• Extreme loss margin of 1% on the value of the gross open positions shall be adjusted from the liquid assets of the clearing member on an on line, real time basis.
• Client margins: NSCCL intimates all members of the margin liability of each of their client. Additionally members are also required to report details of margins collected from clients to NSCCL, which holds in trust client margin monies to the extent reported by the member as having been collected form their respective clients.

Reporting of client margin:

• Clearing Members (CMs) and Trading Members (TMs) are required to collect initial margin, extreme loss margin, calendar spread margin and mark to market settlements from all their Trading Members/ Constituents.
• CMs are required to compulsorily report, on a daily basis, details in respect of such margin amount due and collected, from the TMs/ Constituents clearing and settling through them, with respect to the trades executed/ open positions of the TMs/ Constituents, which the CMs have paid to NSCCL, for the purpose of meeting margin requirements.
• Similarly, TMs are required to report on a daily basis details in respect of such margin amount due and collected from the constituents clearing and settling through them, with respect to the trades executed/ open positions of the constituents.

The Exchange shall impose stringent penalty on members who do not collect margins from their clients. The Exchange shall also conduct regular inspections to ensure margin collection from clients.

Position limits

• Client Level: The gross open positions of the client across all contracts should not exceed 6% of the total open interest or 10 million USD whichever is higher. The Exchange will disseminate alerts whenever the gross open position of the client exceeds 3% of the total open interest at the end of the previous day’s trade.
• Trading Member level: The gross open positions of the trading member across all contracts should not exceed 15% of the total open interest or 25 million USD whichever is higher. However, the gross open position of a Trading Member, which is a bank, across all contracts, shall not exceed 15% of the total open interest or 100 million USD, whichever is higher.
• Clearing Member Level: No separate position limit is prescribed at the level of clearing member. However, the clearing member shall ensure that his own trading position and the positions of each trading member clearing through him is within the limits specified above.

For further details on this product please contact K C Daga on +91-98490 44474 or currency@pcssecurities.co.in