Clearing: This is the process of updating the accounts of the trading parties and arranging for the transfer of money and securities. The Clearing function of the Company entails crystallization of obligations of a Clearing Member (member) through multilateral netting that determines settlement obligations which results in either delivery or receipt positions. Hence, for any given settlement, post netting, a member shall either have a pay-in or pay-out position.
Settlement: This is the actual exchange of money and securities between the parties of a trade on the settlement date after agreeing on the trade. At NG Clearing all settlement activities are carried out electronically through a straight through process. Settlement of futures transactions involve marking -to-market of trading member accounts using the settlement price for the day. For exchange traded derivatives in NGX, mark to market (MTM) settlement are carried out daily i.e., T+0 settlement cycle. Our settlement is a two-way process which involves pay-in (obligation to pay) and pay-out (rights to receive) on the settlement date.
- Pay-in of a member – obligation to honor amounts payable/securities deliverable by the member to the Company
- Pay-out of a member – Right to receivable amounts/securities by the member on the settlement date.
Clearing Members shall be responsible for the settlement of obligations including all obligations arising out of a trade such as the payment of marked to market (“MtM”) losses, margins, penalties, and any other levies.
The settlement obligations shall be effected in line with the below and in accordance with any settlement schedule issued from time to time.
- Each trade day, NG Clearing will send payment instructions to the Nigerian Interbank Settlement System PLC’s payment platform at 5:00pm on transaction day, for cash credit or debit to the account of the respective Clearing Members with the CBN.
- Clearing Members with payment obligations are required to have, towards their payment obligations, sufficient and unencumbered cash balance in their clearing account on or before the stipulated funds pay-in day and time.
Index futures and single stock futures shall be cash settled
The settlement price, typically used in the derivatives markets, is the price used for determining a position’s daily profit or loss as well as the related margin requirements for the position. This can be calculated as using any of the below method:
- The Volume Weighted Average Price (VWAP)- settlement price for unexpired futures contracts which are traded during the day.
- The daily settlement price for unexpired futures contracts which are not traded during the day will be calculated based on theoretical pricing/cost of carriage model.
- The final cash settlement price for futures contract shall be determined on the date of expiry of the futures contract when all open positions shall be marked-to-market, using the closing price of the underlying. After the expiration date, all open positions shall cease to exist.
- Daily Mark-to-Market Settlement of Futures Contracts: All open positions (including those brought forward or created during the day) of futures contracts are MtM to the daily settlement price of the futures contracts at the end of each trade day. MtM profit/loss across contracts of a client are netted to arrive at a client level MtM profit/loss.
- Determination of Clearing Member Settlement Obligation: Clearing Members are responsible for settling the final settlement obligations of the trading members, while trading members are responsible for settling the final settlement obligations of the clients. The settlement obligation of Clearing Members shall be determined by rolling up the MtM settlement value for all open positions (including those brought forward or created during the day) for all the clients to the trading members level and ultimately to the Clearing Member. Clearing Members who have a net payable settlement obligation are required to pay such sums to NG Clearing’s account which is in turn passed on to the Clearing Members who have a net receivable settlement obligation.
- Designated Settlement Account: Funds to be paid by and/ or received by NG Clearing or a Clearing Member shall respectively be made through an account opened by NG Clearing or the Clearing Member (as applicable) with an Approved Settlement Bank for settlement and clearing purposes. Details of NG Clearing’s or the Clearing Member’s settlement account shall be set out in the Clearing Membership Agreement between NG Clearing and the Clearing Member.
Clearing Members shall irrevocably authorise their settlement bank to, without further permission from the Clearing Member:
- honour any instruction from NG Clearing, for the crediting and debiting of their settlement account;
- grant NG Clearing the right to apply the funds in their settlement account (or, as the case may be, funds on such other bank accounts to which the funds in their settlement account are transferred to) in or towards the payment of any of the Clearing Member’s obligations to NG Clearing;
- comply with the terms of any written instruction issued by NG Clearing in relation to their settlement account;
- provide to NG Clearing upon request, the balance and other information relating to the settlement account, notwithstanding any duty of confidentiality owed by the settlement bank to the Clearing Member; and
- waive any non-mandatory statutory restrictions that are in conflict with rights granted to NG Clearing.