Trading » Risk Management

Clearing & Settlement Mechanism and Risk Management

efficient clearing & settlement of trades, MEX has an automated clearing and settlement system with its Clearing Bank. The software automatically calculates Initial Margins using VAR (Value At Risk) and MTM (Mark to Market) margins on a daily basis. In the same way, Members’ positions are also computed on a daily basis. The information regarding pay-ins and pay-outs arising in calculations of positions of Members is transferred at the end of trading hours electronically, using flat files for the clearing banks and Members.

Risk Management

The objective of MEX is to organize trading in such a way that possibility of defaults is almost eliminated. To achieve this, MEX has adopted various means as follows.

• Exposure Limits
  Exchange provides facility in the system enabling the CMs to select the commodities in which the NCMs can trade and also fix the trading limits for each NCM. CM can also monitor the position of affiliated NCMs online.
• Initial Margin
  The initial margin (IM) is levied on all open positions (Buy or sell positions) of the Members and their clients. The IM calculation on each commodity varies depending upon its market volatility. The margin so calculated is reduced from the total margin of the Member available with the exchange and accordingly further exposure is given on the balance amount. As the IM increases, the exposure shall decrease.
• Mark to Market (MTM) Margins
  MTM is a mechanism devised by the exchanges to prevent the possibility of the potential loss accumulating to the level where the participants might willingly or unwillingly commit default. All trades done on the exchange during the day and all open positions for the days are marked to closing price for the respective contract and notional gain or loss is worked out. Such loss/gain is debited/credited to respective Members account at the end of each day. The outstanding position of the Member is then carried forward the next day at the closing price.
  
• Special and variation Margins:
  Have primarily been introduced not as a risk management tool, but to act as a speed-breaker and to vary margin levels for sharply rising or falling price. It is applied when price reaches a particular level above/below the previous day’s closing or current day’s opening price. Variation margin shall be applicable after crossing the certain percentage of price level and this margin call should meet within 2 hours by receiving the margin call.
• Delivery Margins
  Are applicable to the contracting parties (buyer) from the last remaining of 5th day of the contract maturity period.
• Price Bands: Daily Cap & Life Time Cap
  Has been imposed on all commodities to prevent extreme volatility and unhealthy practices of cornering the market.
• Final Settlement
  On the expiry of the futures contracts, the settlement procedure followed as seller’s option. The pay-in/pay-out for settlement is by way of debit to the buyer and credit to the seller to the relevant CM's clearing bank account on T+1 day (T=date of allocation of settlement).
  
  On schedule date if seller fails to tender delivery or fails to square-off his position then the highest price of the contract during its currency is taken for cash settlement in marking all undelivered outstanding position to final settlement price. Resulting profit/loss settled in cash. Final settlement loss/profit amount is debited/credited to the relevant Clearing Member’s clearing bank account on T+2 day. (T=expiry day).
• On-Line Surveillance
  Includes the monitoring of prices, volume & volatility in various series and its analysis using various methods like real time graphs, queries, alerts etc.
• Off-Line surveillance
  Includes margining requirements, procedures in respect of exception handling, position monitoring, exposure limits, investigation techniques & disciplinary action procedures.