Clearing, Settlement and Operations
Domain 5 tests the post-trade chain: how trades become obligations, how margin is called and how contracts are settled or delivered.
Core rules
- The clearing house acts as central counterparty by novation: it becomes buyer to every seller and seller to every buyer. Clearing members guarantee client obligations to the CCP; clients face their broker.
- Initial margin is posted at inception; variation margin is the daily mark-to-market profit or loss. Maintenance margin is the minimum equity; a breach triggers a margin call and possible close-out.
- The daily settlement price is set by exchange rules, not simply the last traded price. Final settlement may be cash or physical delivery; delivery notices and payment deadlines are strict.
- On PSX, NCCPL clears and settles securities trades while CDC holds securities in book-entry form. PMEX contracts follow PMEX clearing rules, with cash or physical settlement per contract specification.
Worked example
A client is long 1 contract, size 100 units, entry PKR 500. Initial margin PKR 10,000; maintenance PKR 7,500. Day 1 settlement price = 495. Variation loss = 100 × (500 − 495) = PKR 500. Equity = 10,000 − 500 = PKR 9,500, above maintenance, so no call. Day 2 settlement = 470. Loss = 100 × (495 − 470) = PKR 2,500; equity = 7,000, below 7,500. The broker calls for at least PKR 3,000 to restore initial margin to 10,000, or closes the position under the client agreement.
Traps
- Confusing initial margin with variation margin.
- Assuming the broker is the CCP; the CCP faces clearing members.
- Using the last traded price as the official settlement price.
- Missing delivery notice deadlines; physical delivery is not automatic.