Types of Settlement in Derivatives Market

Settlement Mechanism

Daily MTM settlement for Futures

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:

1. The trade price and the day’s settlement price for contracts executed during the day but not squared up.
2. The previous day’s settlement price and the current day’s settlement price for brought forward contracts.
3. The buy price and the sell price for contracts executed during the day and squared up. Daily settlement price on a trading day is the closing price of the respective futures contracts on such 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 price is the closing price of the relevant underlying index/security in the capital market segment on the last trading day of the contract.

Daily premium settlement for Options

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 for Options

Final exercise settlement is affected 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.

There are two types of settlements in a derivative contract.

Daily Settlement (MTM): All derivative contracts are settled in cash on t+1 basis by computing the difference between the traded price and the daily settlement price. The daily settlement price is announced by the exchange. It is the weighted average price of the last 30 minutes of trading. For Example, Purchase of Nifty Futures 8000. Settlement Price: Rs 7900. This position is at a loss on a MTM basis. The purchaser of Nifty Futures at 8000 will end up with a loss of Rs.100 if his position were to be settled at the price at the end of the day. Therefore, there is a pay in obligation of Rs.5000 (100 times lot size of 50 contracts) for this member. He has to credit the clearing bank account of the clearing member with this amount.

Final Settlement: The final settlement of a futures contract happens on its expiry date when all open positions are closed. The only difference between the MTM settlement and final settlement is the price. The final settlement happens at the closing price of the relevant underlying index or security in the cash market on the final trading day of the futures contract. Clearing Bank-A clearing bank is a designated bank empanelled by the clearing corporation to receive and make payments for settlement of securities transactions. Every clearing member has to open a specific clearing account with the clearing bank, at specific branches as designated by the clearing corporation. These clearing accounts have to be used only for the purposes of settlement with the clearing corporation.