Trading Clearing House Related Terms

8/8/2019 Trading Clearing House Related Terms

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Trading Clearing HouseTrading Clearing House

related termsrelated termsAn OverviewAn Overview


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VolatilityVolatility

It is a measurement of the variability rateIt is a measurement of the variability rate

(but not the direction) of the change in(but not the direction) of the change in

price over a given time period. It is oftenprice over a given time period. It is oftenexpressed as a percentage and computedexpressed as a percentage and computed

as the annualized standard deviation ofas the annualized standard deviation of

percentage change in daily price.percentage change in daily price.


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Demutualised ExchangeDemutualised Exchange

In the demutualised exchange unlike the mutualIn the demutualised exchange unlike the mutual

form of exchange the owners do not getform of exchange the owners do not get

automatically get the trading right by virtue ofautomatically get the trading right by virtue of

their ownership. Though demutualised as suchtheir ownership. Though demutualised as suchdoes not bar an owner (equity holder) fromdoes not bar an owner (equity holder) from

acquiring trading rights, he has to comply withacquiring trading rights, he has to comply with

the admission criteria laid down by thethe admission criteria laid down by the

Exchange. Also it is a good corporateExchange. Also it is a good corporategovernance practice to have in the organizationgovernance practice to have in the organization

of the equity holder.of the equity holder.


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Client AccountClient Account

A client account is an account maintainedA client account is an account maintained

for any individual or entity being servicedfor any individual or entity being serviced

by an agent (broker, members) for aby an agent (broker, members) for acommission. A customers business mustcommission. A customers business must

be segregated from thebe segregated from the

brokers/members/principals ownbrokers/members/principals own

business and clients money should bebusiness and clients money should bekept in segregated accounts.kept in segregated accounts.


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Trade Guarantee FundTrade Guarantee Fund

The main objective of Trade GuaranteeThe main objective of Trade Guarantee

fund are :a) to guarantee settlement offund are :a) to guarantee settlement of

bonafide transactions of the members ofbonafide transactions of the members ofthe exchange, b) to inculcate confidence inthe exchange, b) to inculcate confidence in

the minds of market participants, c) tothe minds of market participants, c) to

protect the interest of the investors. All theprotect the interest of the investors. All the

members of the exchange are required tomembers of the exchange are required tomake initial contribution towards trademake initial contribution towards trade

guarantee fund of the exchange.guarantee fund of the exchange.


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Role of Clearing HouseRole of Clearing House

Clearing House performs post tradingClearing House performs post trading

functions like confirming trades, workingfunctions like confirming trades, working

out gains or losses made by theout gains or losses made by theparticipants during the course of theparticipants during the course of the

clearing periodclearing period--usually a day collecting theusually a day collecting the

losses from the members and paying outlosses from the members and paying out

to the other who have made gains.to the other who have made gains.


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NovationNovation

Some clearing houses interpose betweenSome clearing houses interpose betweenbuyers and sellers as a legal counter party i.e.buyers and sellers as a legal counter party i.e.the clearing house becomes buyer to everythe clearing house becomes buyer to every

seller and vice versa. This obviates the need forseller and vice versa. This obviates the need forascertaining the credit worthiness of eachascertaining the credit worthiness of eachcounter party and the only credit risk that thecounter party and the only credit risk that theparticipants face is the risk of clearing houseparticipants face is the risk of clearing housecommitting a default. Clearing house puts incommitting a default. Clearing house puts inplace a sound risk management system toplace a sound risk management system todischarge its role as a counter party to alldischarge its role as a counter party to allparticipants.participants.


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Performance of the contractPerformance of the contract--contd.contd.

All the transactions at the closing price ofAll the transactions at the closing price of

the day). All the profits or losses are eitherthe day). All the profits or losses are either

paid in or paid out. This minimises thepaid in or paid out. This minimises the

chances of default as buyer or seller ischances of default as buyer or seller is

exposed to one day of price movements.exposed to one day of price movements.

The exchange also maintains its ownThe exchange also maintains its own

TGF/SGF (Trade Guarantee Fund/SaleTGF/SGF (Trade Guarantee Fund/SaleGuarantee Fund) which can be used inGuarantee Fund) which can be used in

case of default.case of default.


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Basis RiskBasis Risk--contd.contd.

It may be 20 paise under (thereby nettingIt may be 20 paise under (thereby netting

a higher price than anticipated) or it maya higher price than anticipated) or it may

be 30 paise under (thereby netting a lowerbe 30 paise under (thereby netting a lower

price than anticipated). The uncertainty asprice than anticipated). The uncertainty as

to what the basis will be at a given time into what the basis will be at a given time in

the future is known as Basis Risk. Basisthe future is known as Basis Risk. Basis

can generally be predicted with far greatercan generally be predicted with far greateraccuracy than the level of pricesaccuracy than the level of prices


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Types of MarginsTypes of Margins--contd.contd.

MarkMark--toto--market marginmarket margin--MTM are payablesMTM are payables

based on closing prices at the end of eachbased on closing prices at the end of each

trading day. These margins will be paid bytrading day. These margins will be paid by

the buyer if the price declines and by thethe buyer if the price declines and by the

seller if the price rises. The margin isseller if the price rises. The margin is

worked out on difference between theworked out on difference between the

closing/clearing rate and the rate of theclosing/clearing rate and the rate of thecontract.contract.


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Types of MarginTypes of Margin--contd.contd.

Variation MarginVariation Margin--All daily losses must beAll daily losses must be

met by depositing of further collateralmet by depositing of further collateral

known as variation margin, which isknown as variation margin, which is

required by the close of business therequired by the close of business the

following day.following day.


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Trading Clearing House Related Terms

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