Financial Risk Management
Future Contracts: Future contract is a contract in which Purchase and sale of Securities takes place at some future date normally with in a calendar month or year at a fixed price today.
Rules for a future Contract:
1 a) There are proper rules and regulations for trading of shares on the future Contract Market of the Stock Exchange, These rules and regulation can be amended from time to time by the BOD of KSE, However prior approval from SECP is required in this regard.
b) Shares of Future contracts are traded on an automated system known as Karachi Automated Trading System (KATS).
c) There are separate Exposure deposits and Clearance House for the future markets, where the clearing House enjoying the rights of adjusting any cash surpluses lying in the cash counter of the Broker and these surpluses are used to offset any shortfall in the future counter section.
2 All members of the exchange are allowed to enter into the future contract under the rules and regulations specified, for this the interested member will express his desire in writing to the exchange and will also submit a basic deposit of an amount of 150,000 PKR. This Deposited amount along with the returned earned if any will be kept separately in the clearing house and will be used only for meeting obligations of members arises from time to time in the future market and for none else.
3 a) The deposited amount (Mentioned above) shall be paid in advance in the form of Cash or in Cash and Approved securities (T-bills, TFC, CDC, FBI’s).
b) In a specific script with amount exceeding 50 million PKR, the members are not allowed to take Short position (Sale Position). However the sale position can be taken if the actual numbers of shares are sold over and above the prescribed limits ad these shall have deposited with some bank, lying in the shape of CDC and bearing documentary proof.
d) No member is allowed to trade in future contract on the exchange except those who have deposited the amount required against the losses and exposures. In case of corporate Brokerage house they are not allowed to use their own shares for depositing as Loss deposits or exposures.
e) If in a calendar year the member of exchange fails or delayed to pay the exchange with in the stipulated time period, three times, his initial margin requirements will be doubled for a period of three months and if the same happens for fourth time, His initial margin requirement will be increased to an amount equal to the amount of exposure charged for a period of six months.
f) In case if the margin is deposited in cash with the clearing house, an appropriate return may be allowed to him/her by the exchange.
4 a) Determination of the size of the contract and the inclusion of number of companies willing to trade on future market and the selection criteria, is the responsibility of the board, however its size should be greater than the marketable securities lot in the ready market.
b) The contract is deemed as completed and binding upon the acceptance of bid/offer by the buyer or seller.
C) Bids/offers beyond the limits of Bids/Offers may not be accepted and if the bids/offers are within the limits accepted once becomes binding on both parties.
6. a) Contracts shall be for the period specified by the Exchange through a Notice but shall be for a period not less than one calendar month. However, where a corporate announcement is expected in a scrip, during a contract period, the Exchange shall be allowed to open more than one contract of shortened periods in such scrip, in a month, on the basis of cumulative and excluding announcement/entitlement. Contract for different months shall trade simultaneously.
b)The Contract tenure is specified by the Exchange and in majority cases it is not less than one month, however in any special case i.e. corporate announcement during the contract tenure it may be of tenure less than one month i.e. is shortened contracts and contracts of different periods may be traded simultaneously.
c) The Exchange shall notify the following while opening the contract
- Date of Opening
- Date of settlement
- Other relevant details
Any company from the contract can be removed by giving a reasonable notice.
In order to maintain or open a future position, Members of the exchange in future contracts are required to post performance margins, and usually exchange specify or set these margin requirements which is two to ten percent of the value of the contract.
Initial Margin
Initial margin is the amount required to be present in the Future trader margin account to open the future position. When the trader opens the future position an amount equal to the initial margin are deducted from the trader margin account and is transferred to the exchange clearing firm. This transferred amount remains in the exchange clearing house until the future position become closed.
Maintenance Margin
It is the minimum amount which the futures traders must maintain in its margin account in order to hold the future position, It is usually below the initial margin level. A trader will receive a margin call if the balance in its margin account falls below the maintenance margin level.