Professional Documents
Culture Documents
December 2006
NCEL
Contents
Welcome Risks in Trading Futures Introduction to Futures
PMEX Highlights
PMEX Business Model How to Trade at PMEX Investor Safeguards Demo
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Introduction to Derivatives
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Those who wish to invest (investors) and have a view extremely important as they provide liquidity and depth to the market
Investors are essential for the market
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Futures Perspectives
Gains (Losses) for longs are offset by equal losses (gains) for shorts Counterparties in Futures are involved in a zero sum game - for every winner there is an offsetting loser
Futures exchanges counter excessive speculation and concentration through position limits
Clearinghouse runs a perfectly matched book and does not take positions in the market A common fallacy - high margin mitigates risk
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FUTURES Definition: a contract between a buyer and a seller under which the seller agrees to deliver a specific commodity on a specific future date to the buyer for a predetermined price to be paid on the delivery date It conveys an Obligation Price is negotiated at the time of execution of a trade on an exchange
Buying/selling an Obligation only requires a margin hence you continue to be exposed to risk of paying additional margins till expiration A futures investor can sell a future without having first bought it if he is expecting prices of the commodity to go down in the future. This option is not available in stocks.
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Types of Futures
Commodity Futures (Agricultural, Precious Metals, Base
Metals, etc)
Implicit Futures
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Futures v. Forwards
Futures
Exchange Traded Standardised Guaranteed Settlement
Forwards
Over-the-Counter (OTC) Non-Standard No Guarantee
Margined
All participants treated same Liquidity
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No Margining
Prices can vary according to credit risks Can be illiquid
History
Implied Futures have been traded historically
Japanese Rice Futures 17th Century Chicago first example of modern futures exchange Mid 19th Century Commodity Futures - first products Commodity Exchanges trade contracts on commodities and not commodities themselves
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PMEX
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Highlights
Demutualised, all-electronic commodity futures exchange Provide secure Client Level online access via the Internet with a unique id for each and every Client Broker/Client & Client/Client segregation of funds NCEL Clearing House will provide complete Novation act as the Central Counterparty Settlement Guarantee Fund to provide complete protection for all open positions Investor Protection Fund to cover losses in case of closed positions and idle balances with Brokers Daily Marking-to-market of Open positions and collection of variation NCEL margin on T+0 basis, electronically
Regulatory Framework
Primary Legislation
Securities and Exchange Ordinance 1969
Rules
Regulations
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PMEX Regulations
Exchange does not have any powers to make or grant exceptions Complete Segregation of funds: Broker level (Broker/Client & Client/Client) Clearing bank (Broker/Client) Exchange (Broker/Client & Client/Client) Clearly defined events leading to financial and nonfinancial defaults Financial default leads to automatic cancellation of Membership
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ANALYTICS
Risk Management Research Real-time Analysis Software Specifications
OPERATIONS
Clearing and Settlement Margining and Accounting On-line Banking Delivery
COMPLIANCE
Member Services Surveillance and Monitoring Discipline and Enforcement Process Management
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Trader A
Trader B
Short
Clearing Deposit
Deposit Margin
Long
Clearing House
Financial Safeguards
Market Participants
Clearing Participants
SGF
Clearing Participants
Market Participants
Market Participants
Clearing Participants
SGF
Clearing Participants
Market Participants
X
Prop Prop
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Prop X
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Position Update
Risk Mgmt
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Present
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Time Maturity
Price Quotes
Price Limits Position Limits Margins
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Risk Management
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What is Risk?
Risk is multidimensional
Market Risk Credit Risk
Financial Risks
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What is Risk?
One can slice and dice these multiple dimensions of risk
Equity Risk Market Risk Interest Rate Risk Currency Risk Credit Risk
Commodity Risk
Operational Risk Reputational Risk Business and strategic risks
Financial Risks
Settlement Risk
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What is Risk?
Identification
Market Risk
Margined Risk
Credit Risk Commodity Risk Operational Risk Reputational Risk Business and strategic risks
Financial Risks
Settlement Risk
Unmargined Risk
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Daily Mark-to-Market of Positions Variation Margin in Cash only Daily Settlement Price Process
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Electronic Broker
MCB
SARA
No
If P or C (SODNLV) > Order Margin Required
SODNLV Updates
Yes
Matching Engine
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Variable Margin
B eg in
th
Tr ad
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D el
iv er y
in g
Sp
ot
M on
on
th
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Position Limits
Position Limits Members & Clients To counter excessive speculation and manipulation Limits the number of contracts that can be entered into:
Gross across all clients Gross across all contracts Grossed up to the Member level
Open contracts held by one individual investor with different brokers are combined using Client IDs
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PMEX will provide a complete end-to-end online trading & Client Management system to brokers: Risk Management (pre-trade check), Electronic Fund Transfer, Margin Call generation, online 24/7 access to daily ledgers and accounting, secure access (USB key and personal digital certificates), access to historical data, etc. Margin calls with online bank transfers facility Pre-trade check and daily mark-to-market protects brokers from client defaults
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PMEX Technology
Focus on availability , strong security, and ease of use State-of-the-art data center with biometric access control and fire protection system Redundant network both internal and external, multiple ISP links 100% Internet driven exchange Strong two factor authentication of traders using USB Keys (smart cards) Authentication based on Digital Certificate credentials Disaster recovery based on Veritas clustering, remote replication and tape library backup solutions Separate Disaster Recovery site for business NCEL continuity
USB Key
Trading on PMEX
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Trading on PMEX
Investors have two methods of trading on PMEX:
1. Direct access to the market 2. Traditional route of placing orders through brokers
In both cases, Broker is the Obligor to the Exchange Broker responsible for ensuring all Client Margins are paid Broker responsible for ensuring Clients comply with PMEX Regulations Broker responsible for Exposure/Margin/Position monitoring of all clients Broker earns commissions from both types of Clients Less Overheads if Clients allowed direct access
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Clearing Bank
Client A Rs.5,000
Client B Rs.5,000
Brokerage House
PMEX
Rs. 5,000
Rs. 5,000
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Step 5
Step 6 Step 7 Step 8 Step 9
www.pmex.com.pk
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