A Derivative is a security that derives its value from the value or return of another asset or security. Exchange Traded Derivatives are traded at a physical exchange or centralized platform which are standardized and backed by a Clearing House. Looking at the Exchange Traded Options, these are contingent claim types of contracts that depend on a stock price at a future date.
FINSEC supports an anonymous order-driven market. The contract writer shall never know the counterparty and details remain confidential to the Clearing Participants. During trading hours, buy and sell orders will be entered into a central electronic order book by contract writers who are subject to clearing by the Clearing Members of FINSEC using terminals located at their premises. These orders will be matched within the Automated Trading System and execution prices will be determined. The FINSEC matching engine operates on a strict price/time priority rule shall match buy and sell orders. It is the buy order that has the highest buying price and the sell order that has the lowest selling price that is executed first.
The Participants on FINSEC will be responsible for the timely settlement of all transactions. The trading system distinctly identifies two groups of users:
- Contract Writer – responsible for writing and issuing contracts that will be cleared and settled through Clearing Participants.
- Contract Buyers – responsible for buying options and paying premium.
- Clearing Participant – be responsible for the clearing and settlement of the Contract Writer and or Buyer’s trades and or retail investors for whom they will clear trades for. Additionally, they can enter and set limits on positions, which a Contract Writer and or retail investor can take.
The Contract Writer will deposit the required collateral and the Contract buyer deposits premium with a Clearing Participant. The Clearing Participant will assign the corresponding position limits able to be taken up by each investor using the ATP Account Number to identify them.
All executed contracts shall be uploaded and listed for secondary trading. Secondary buy orders shall be posted onto the ATS by Contract Writer. All orders posted shall be matched by the FINSEC matching engine under the FINSEC Matching Engine procedures. The secondary market trading for options contracts shall be open for trades as many times as possible up until the expiration date of the contract and the contract holder placing a sell order shall determine the premium. A secondary market buyer of a contract shall assume the right to exercise that contract on expiry.
Secondary sell orders shall be posted by holders of the contracts. Order management shall be undertaken following FINSEC Order Qualifiers.
FINSEC undertakes clearing and settlement of all trades executed on the FINSEC Derivatives Board. Clearing shall be triggered by an order message being forwarded to the Clearing Participant who is expected to affirm the order by confirming the availability of either the funding (for the buy-side) or security (for the sell-side) and undertaking to settle or deliver when called upon.
Settlement shall be undertaken by the Settlement Bank upon receiving a trade execution message from FINSEC that will trigger the release of funds to the seller.
Delivery shall be undertaken by the Settlement Bank upon receiving a trade execution message from FINSEC that will trigger the release of the security to the buyer.
Trading, clearing, settlement, and delivery shall be on a Delivery Versus Payment basis. Delivery versus Payment (DvP) is the mode of settlement system that stipulates that cash payment must be made before or simultaneously with the delivery of the security. FINSEC ensures that unless the premium and the funds are paid, the securities are not delivered and vice versa and it eliminates the settlement risk in transactions. FINSEC may when there is need, act as the central counterparty (CCP), becoming the buyer to the seller and the seller to the buyer to all trades on this segment and to guarantee their financial settlement. FINSEC shall have the authority to facilitate novation of derivative contracts as well.