A detailed note on product design and operational processes pertaining to Trading and Clearing & Settlement in Options is provided in Annexure.

Transcription

1 NATIONAL COMMODITY & DERIVATIVES EXCHANGE LIMITED Circular to all Trading and Clearing Members of the Exchange Circular No. : NCDEX/OPTIONS-002/2018/005 Date : January 03, 2018 Subject : Options Trading Parameters and Clearing & Settlement Procedures Reference is drawn to the Exchange Circular No. NCDEX/TRADING-053/2017/144 dated June 15, 2017 on Options on Commodity Futures - Product Design and Risk Management Framework. A detailed note on product design and operational processes pertaining to Trading and Clearing & Settlement in Options is provided in Annexure. For and on behalf of National Commodity & Derivatives Exchange Limited Hemant Singhvi Executive Vice President Encl: Annexures For further information / clarifications, please contact 1. Customer Service Group on toll free number: Customer Service Group by to : askus@ncdex.com 1 / 10

2 ANNEXURES PRODUCT DESIGN FOR OPTIONS ON COMMODITY FUTURES A. TRADING PARAMETERS 1. Underlying Option on Commodity Futures shall have Commodity Futures (of a specified month) traded on the exchange as the underlying. 2. Option Symbol Descriptor Instrument symbol is combination of following - <UNDERLYING SYMBOL><OPTIONS EXPIRY DATE-DDMMMYY><CE/PE><STRIKE PRICE><UNDERLYING TYPE- F/S><UNDERLYING EXPIRY-MMMYY> Example: For GUARSEED10 option expiring on 30-Jan-18, the underlying future shall be GUARSEED10 expiring on 20-Feb-18 and the Option symbol will be GUARSEED1030JAN18CE3200FFEB18 For option instruments Underlying : Underlying Future name, Market type : N (Normal) Instrument Type : OPTFUT 3. Number of s Each option expiry shall have minimum Eleven strikes available viz., five each for In the Money (ITM), Out of the Money (OTM) and one At the Money (ATM). 4. Trading Hours and Holidays Trading Hours and Trading Holidays for option s shall be same as of corresponding futures. 5. Order and Trading parameters The trading parameters and order attributes are given below: a. Order Type / Order TIFs Regular lot order Stop loss order Immediate or cancel Good till day orders Good till cancelled order Good till date order 2 / 10

3 b. Expiry period of GTC orders Good Till Cancelled (GTC) orders shall be cancelled at the end of the period of 7 calendar days from the date of entering an order. c. Order matching rule The orders in the Normal market shall be matched on price-time priority basis. Best buy order shall match with the best sell order. The best buy order would be the one with the highest price and the best sell order would be the one with the lowest price. Orders are numbered and time-stamped on receipt and then immediately processed for potential match. Every order has a distinctive order number and a unique time stamp on it. Orders are stored in price-time priority in the following sequence: i. Best Price ii. Within Price, by time priority d. Permitted lot Size The permitted trading lot size for the options s shall be as per the respective specification. e. Maximum Order Size The maximum order size shall be same as corresponding Futures. f. Tick size for s The tick size is the smallest price change that can occur for the trades on the Exchange. The tick size in respect of options s shall be as per the respective specification. g. Base Price Base Price on launch date of option shall be theoretical price computed as per Black76 option pricing model. The base price of the s on all subsequent trading days will be the closing price of the option s on the previous trading day. h. Daily Price Range Daily price range will be computed based on Daily Price Range (DPR) of the underlying Futures and the volatility. The DPR (minimum / maximum operating price range) shall be applicable for the trading day. Orders submitted beyond the price range will be rejected by the Exchange. Daily price range for each option shall be available daily on extranet common folder. 3 / 10

4 6. Client Code Modification (CCM) The client code modification shall be allowed for 15 minutes after the close of the trading session. The guidelines issued vide circular no NCDEX/TRADING-033/2016/072 dated April 06, 2016 and NCDEX/TRADING-041/2016/093 dated April 25, 2016 will also be applicable for CCM s carried out for trades executed in option s. 7. Position Limits: a. The Exchange vide Circular NCDEX/RISK-037/2016/244 dated September 28, 2016 prescribed norms for position limits for commodity futures, clubbing of open positions, penalties for violation of position limits. Position limits for options shall follow the same norms as provided in the said circular for futures. b. Position limits of options would be separate from position limits of futures s and numerical value for client level/member level limits shall be twice of corresponding numbers applicable for futures s. c. Due to separate position limits for options, there is a possibility that post exercise of options i.e. after devolvement of options into corresponding futures positions open positions for clients/members may exceed their permissible position limits for future s. Such clients/members shall be permitted maximum up to two trading days post option expiry day to reduce their futures positions to bring them within the permissible position limits. 8. Prevention of Self-Trades at PAN Level The provisions of the circular no. NCDEX/TECHNOLOGY-020/2016/144 dated June 22, 2016 and NCDEX/TRADING-048/2017/133 dated June 09, 2017 on self-trade prevention check shall also be applicable for trading in option s. 9. Guidelines on Algorithmic Trading The Broad Guidelines on Algorithmic Trading issued vide circular no. NCDEX/TECHNOLOGY- 038/2016/249 dated September 28, 2016 shall also be applicable for trading in option s. 10. Reports and File Formats The changes in the existing file structures on account of Options and additional reports which shall be provided with the commencement of trading in Options are available in circular no. NCDEX/CLEARING-013/2017/226 dated September 8, 2017 and NCDEX/RISK-019/2017/248 dated September 28, / 10

5 B. CLEARING & SETTLEMENT PROCESS 1. Premium settlement for option s a. Premium settlement in respect of trades in options s shall be settled in cash by debit/ credit of the clearing accounts of clearing members with the respective clearing bank. b. The premium payable or receivable value of clearing members shall be computed after netting the premium payable or receivable positions at trading member level, for each option, at the end of each trading day. c. The premium pay-in shall be effected before the start of trading on T+1 day along with payin of daily mark to market losses in respect of trades / positions in futures s. ( T is the trade date) d. The Clearing Members should make the amount of funds available in their clearing account before 9:30 AM on T+1 day e. The pay-out of funds (Options Premium + Futures MTM) shall continue to be done as per the existing time i.e. after noon, or as declared by the Exchange from time to time f. The Premium Pay-in / Pay-out obligation of the clearing member for trades in option s will be netted with daily MTM Pay-in / Pay-out obligation of trades / positions in futures s. 2. Mark to Market The options positions shall be mark to market by deducting/adding the current market value of options (positive for long options and negative for short options) times the number of long/short options in the portfolio from/to the margin requirement. Thus, mark to market gains and losses would not be settled in cash for options positions. 3. Exercise Style European Style Options which can be exercised only on the day of Expiration of the Options 4. Final Settlement Price (FSP) Daily Settlement Price (DSP) of the underlying Futures on the Options Expiration day shall be the Final Settlement Price. 5. Settlement Method On exercise, option position shall devolve into underlying futures position as follows:- Long call position shall devolve into long position in the underlying futures Long put position shall devolve into short position in the underlying futures Short call position shall devolve into short position in the underlying futures Short put position shall devolve into long position in the underlying futures 5 / 10

6 All such devolved futures positions shall be opened at the strike price of the exercised options. 6. Exercise / Devolvement Mechanism On expiry, following mechanism shall be adopted for exercise / devolvement of the options s: a. Option series having strike price closest to the Daily Settlement Price (DSP) of Futures shall be termed as At the Money (ATM) option series. This ATM option series and two option series having strike prices immediately above this ATM strike and two option series having strike prices immediately below this ATM strike shall be referred as Close to the money (CTM) option series. In case the DSP is exactly midway between two strike prices, then immediate two option series having strike prices just above DSP and immediate two option series having strike prices just below DSP shall be referred as Close to the money (CTM) option series. b. All option s belonging to CTM option series shall be devolved only on explicit instruction for devolvement by the long position holders of such s failing which they will expire worthless. c. All In the money (ITM) option s, except those belonging to CTM option series, shall be devolved automatically, unless contrary instruction has been given by long position holders of such s for not doing so and in that case shall expire worthless. d. All Out of the money (OTM) option s, except those belonging to CTM option series and devolved by the long position holders, shall expire worthless. e. All devolved s within an option series shall be assigned to short positions in that series in a fair and non-preferential manner. Examples The following are the examples for identification of ITM, CTM, ATM and OTM strikes as per the Final Settlement price. Interval 50 Interval 50 Interval 50 Final Settlement Price 3780 Final Settlement Price 3850 Final Settlement Price 3825 For CALL Options For CALL Options For CALL Options Price Type Price Type Price Type 3700 ITM 3700 ITM 3700 ITM 3650 ITM 3650 ITM 3650 ITM 3700 CTM 3700 ITM 3700 ITM 6 / 10

7 3750 CTM 3750 CTM 3750 CTM 3800 ATM 3800 CTM 3800 CTM 3850 CTM 3850 ATM 3850 CTM 3900 CTM 3900 CTM 3900 CTM 3950 OTM 3950 CTM 3950 OTM 4000 OTM 4000 OTM 4000 OTM 4050 OTM 4050 OTM 4050 OTM For PUT Options For PUT Options For PUT Options Price Type Price Type Price Type 3700 OTM 3700 OTM 3700 OTM 3650 OTM 3650 OTM 3650 OTM 3700 CTM 3700 OTM 3700 OTM 3750 CTM 3750 CTM 3750 CTM 3800 ATM 3800 CTM 3800 CTM 3850 CTM 3850 ATM 3850 CTM 3900 CTM 3900 CTM 3900 CTM 3950 ITM 3950 CTM 3950 ITM 4000 ITM 4000 ITM 4000 ITM 4050 ITM 4050 ITM 4050 ITM A table giving gist of devolvement procedure under different option series is given below:- Series Devolvement procedure Effect ITM (Other than CTM) Positions shall devolve automatically Positions would get devolved into Futures at strike price Difference between settlement price and strike price shall be cash settled on T+1 day and form part of the MTM pay-in and pay-out under Futures position. ITM long position holder can give contrary instruction No positions will get devolved into Futures CTM (other than ITM) / CTM (other than OTM) No position shall devolve automatically. An explicit instruction shall be placed for Expire worthless If the option holder do not give the explicit instruction for exercise 7 / 10

8 exercise of Options by the long position holders No positions will get devolved into Futures Expire worthless If the option holder gives the explicit instruction for exercise Positions would get devolved into Futures at Price Difference between settlement price and strike price shall be cash settled on T+1 day and form part of the MTM pay-in and pay-out under Futures position. OTM (Other than CTM) Positions shall not devolve into Futures All positions will expire worthless 7. Marking Instruction for Devolvement of positions a. The members can mark the instruction to / not to devolve through NCFE post close of trading session of option on expiry day b. Instruction can be marked by holder of the options i.e. long position holder c. For ITM option series except CTM, members shall give instruction for the quantity which is not intended to be devolved Option Status Position Contrary instruction (Instruction to not devolve) ITM ITM ITM Effect Partial Instruction Balance 70 quantity shall devolve into underlying Futures No Instruction 100 quantity shall devolve into underlying Futures Full Instruction No positions will get devolved into Futures 8 / 10

9 d. For CTM option series, members shall give instruction for the quantity which is intended to be devolved Option Status Position Explicit instruction (Instruction to devolve) CTM CTM CTM Effect Partial Instruction - 30 quantity shall devolve into underlying Futures No Instruction - No positions will get devolved into Futures Full Instruction quantity shall devolve into underlying Futures A user manual for marking the instruction shall be available for download in NCFE 8. Assignment Process a. The long positions in options s shall be assigned to short positions in the same. b. The total quantity to be devolved into Futures shall be computed as per devolvement mechanism c. The total quantity to devolve in an options will be divided by the total long open positions in the options to determine the "exercise ratio". d. The short position of each client in the options of same series will be multiplied by the exercise ratio to determine the pro-rata quantity for assignment. e. Quantity equal to the pro-rata quantity rounded down to the nearest multiple of futures lot size will be assigned to short position holders in the first round of assignments. f. If the total long quantity to be devolved has not been assigned in this first assignment round then a second assignment round will be carried out to assign the remaining quantity (i.e., the quantity remaining after subtracting the quantity assigned in the first round from the total long quantity to be devolved) g. The remaining quantity will be assigned one lot at a time in descending order from the short positions with the largest remaining pro-rata quantity to the short position with the smallest remaining pro-rata quantity. h. In the event that two or more short positions has equal remaining pro-rata quantity, and there is an insufficient quantity to assign to all such short positions, then a random number will be used by systems to determine assignment. 9. Non-fulfilment of settlement obligation Non-fulfilment of settlement obligation by scheduled date and time is a violation of the Exchange Rules, Bye-Laws and Regulations and attracts penal action as may be stipulated by the Exchange from time to time. Further, the guidelines issued vide circular no. NCDEX/CLEARING-023/2016/269 dated October 5, 2016 in case of repeated shortfall in margin / pay-in shall be applicable. 9 / 10

10 10. Mechanism for regular monitoring of and penalty for Short-Collection Non Collection of margins from clients The guidelines issued vide circular no NCDEX/CLEARING-017/2016/212 dated September 08, 2016 with respect to Mechanism for regular monitoring of and penalty for Short-Collection Non Collection of margins from clients will also be applicable for trades executed in option s. Further, a. In terms of the above circular, a penalty is levied on members for short-collection/noncollection of the initial margins from clients. Penalty for such short-collection/non-collection of margins from clients due to increase in initial margins resulting from devolvement of options into futures shall not be levied for the first day. E.g. assuming the option expiry is on February 21, In case of devolvement of options into futures, the initial margin requirement shall increase on February 22, 2018 however no penalty for short-collection / non-collection from clients due to increase in initial margins resulting from devolvement of options into futures is applicable for the first day. This increased initial margin amount may be collected by February 23, 2018 and accordingly, the member may report the margin collected from clients after considering the effect of collection of such increased amount. b. Pre expiry margin on Options shall be levied on Options buyers (holders) and Options sellers (writers). The pre-expiry margin on Options shall be apart from other margins like initial margin, additional margins, spread margins etc. Pre-expiry margins shall not be included in standard client margin reporting and hence no penalty shall be levied on short collection / non-collection of the same by the members from their clients. 10 / 10