On August 24, 2020, the Bombay Stock Exchange (BSE) issued a notice regarding the clearing and settlement procedure and the risk management framework for gold options and silver options. The notice drew the attention of the Members of the Indian Clearing Corporation Ltd. (ICCL) to an earlier circular issued on August 6, 2020. That circular was about the launch of gold options and silver options.
The notice issued on August 24 came with an annexure attached. The annexure contained the details of the norms relating to the clearing and settlement procedure and the risk management framework for gold options and silver options.
Here’s a summary of the key highlights from the annexures.
♦ Clearing & Settlement Procedure and Risk Management Framework for Gold Options and Silver Options is as under:
Exercise Mechanism at Expiry:
1.All CTM option series shall be exercised only on ‘explicit instruction’ for exercise by the long position holders else they will expire worthless
2.All ITM option series, except those belonging to ‘CTM’ option series, shall be exercised automatically, unless ‘contrary instruction’ given by long position holders for not doing so and in that case shall expire worthless
3.All OTM option contracts, except those belonging to ‘CTM’ option series, shall expire worthless.
Exercise Style: European Style Options can be exercised only on the day of Expiration of Options Contract.
Settlement of Premium: T+1 day
MPOR: It shall be at least equal to three days or MPOR of corresponding futures contracts, whichever is higher.
Price scan Range: 3.5 sigma or any other percentage as may be specified by ICCL.
Volatility Scan Range: 3.5%
SOMC: As per SEBI.
ELM: ELM of 1% on short open positions
Premium: Shall be blocked upfront on real time.
Pre-Expiry margins It shall be levied on the position during predetermined days before the expiry on call and put positions which are in ITM including CTM series during pre-expiry period.
Concentration Margin: It is to be imposed to cover risk of longer period required for liquidation of concentrated positions in any commodity.
Margining at client level: Initial Margins to be computed at the level of portfolio of individual clients comprising of the positions in F&O contracts on each commodity.
Delivery Period Margin: It shall be higher of 3%+6 Day 99% VaR of spot price volatility or 20%. Mark to Market Margin.
Delivery Settlement: Contracts to be settled through delivery shall have exercised call options and exercised put options.
Delivery pay-in and Funds pay-in: E+2 working days by 11 a.m.
Funds pay out and delivery pay out: E+2 working days by 5 p.m
Penal provisions are detailed in the Circular.
Delivery Centre: Exchange designated vaults at Ahmedabad.
Verification by the buyer at the time of release: If the buyer is not satisfied with the quality he can request for assaying by any of the approved independent assayers and then designated vault person will carry the goods to the Assayer’s facilities and will initiate the certificate. In case there is variation of quality in the report, the buyer and seller will have to mutually negotiate the final settlement proceeds within 1 working day and the cost of assaying and transportation will be borne by the buyer.
Deliverable Grade of underlying commodity: As per contract specifications.
Quality Adjustment: 995 purity
Validation process: on receipt, the designated vault personnel will validate if the person carrying gold/silver is the deginated clearing agent of the member, if the selling member is the bonafide member of the BSE/ICCL, whether quantity is from approved refinery, whether serial no. of all the bars is mentioned and whether the individual original assay certificates are accompanied.
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