Pakistan Commodities Exchange

PMEX

Compiled By:

Syed Abbas Haider Zaidi

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Table of Contents
 Welcome
 Risks in Trading Futures
 Introduction to Futures
 PMEX Highlights
 PMEX Business Model
 How to Trade at PMEX Investor
Safeguards
 Demo
Risks in Trading Future

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 SHOULD YOU TRADE COMMODITY
FUTURES?
Trading commodity futures is not for everyone. It can
be a volatile and risky business. Before you invest any
money in futures contracts, you should: –
Consider your financial experience, goals, and financial
resources
Understand commodity futures contracts and your
obligations before entering the market
Be aware that you can lose more than your initial
investment
Only take risk for the amount that you can afford to lose
Understand your exposure to risk and other aspects of
trading by thoroughly reviewing the risk disclosure
documents your broker is required to provide you
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CAN I LOSE MONEY TRADING FUTURES?

Yes, if you are reckless

Negligent controls, poor corporate
governance, over confidence, hoping to
recover through taking an even bigger
position, etc.
But it is not Rocket Science
Proper Understanding and Respect of Risk
can ensure losses are contained and gains
are preserved
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Introduction to
Derivatives

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Who Participates in Futures Markets?

Meets the needs of three groups:

Those who wish to discover information about future
prices of commodities (suppliers such as farmers) -
Natural Longs
Users & intermediaries – Natural Shorts
Those who wish to invest (investors) and have a
view – extremely important as they provide liquidity
and depth to the market.
Investors are essential for the market

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FUTURES PERSPECTIVES
 Gains (Losses) for longs are offset by equal
losses (gains) for shorts.
 Counterparties in Futures are involved in a zero
sum game - For every winner there is an
offsetting loser.
 Futures exchanges counter excessive
speculation and concentration through position
limits
 Clearinghouse runs a perfectly matched book
and does not take positions in the market
 A common misconception - high margin mitigates
risk 13
 What are Derivatives?
A derivative can be defined as a contract that
derives most of its value from some basic
underlying asset:
Examples:
Futures – a right and an obligation
Commodity, precious metals, single stock,
interest rates, stock index, energy, etc.
Options – a right but NOT an obligation???
Swaps
Etc…
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WHAT ARE FUTURES CONTRACTS?

FUTURES
Definition: A contract between a buyer and a seller
under which the seller agrees to deliver a specific
commodity on a specific future date to the buyer for a
predetermined price to be paid on the delivery date
– It conveys an “Obligation”
Price is negotiated at the time of execution of a trade on
an exchange
Every futures contract has predetermined:
- Quantity of commodity
- Quality of commodity
- Delivery location
- Delivery date 15
WHY ARE FUTURES DIFFERENT
TO EQUITIES?
• It is a “Promise”/ “Obligation” and not an “Asset”
• By buying/selling an “Asset” by paying the price in full
there is no further liability – transaction over a short
time period
• Buying/selling an “Obligation” only requires a margin
hence you continue to be exposed to risk of paying
additional margins till expiration
• A futures investor can sell a future without having
first bought it if he is expecting prices of the
commodity to go down in the future. This option is not
available in stocks.
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WHY ARE FUTURES DIFFERENT
TO EQUITIES?
• Frequent checks on the Price of Futures given
Convergence arising out of regular cycle of
expiries
• It is important to emphasize that sellers of Futures
have the same margin obligations as buyers
• Whereas, buyers may be called on to deposit
additional margin when prices decline
• Sellers may be called on to deposit additional
margin when prices increase
• Losses can be many times your investment (initial
margin) and unlimited!
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TYPES OF FUTURES

• Commodity Futures (Agricultural,

Precious Metals, Base Metals, etc)
• Financial Futures (Bonds, Interest
Rates, Currency, Stock indices, single
stocks, etc)
• New Generation (Weather, Economic
Indicators, Inflation, etc..)
• Implicit Futures (Property, Farms, etc)
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 FUTURES V. FORWARDS FUTURES
Futures Forward
Exchange Traded Over-the-Counter
(OTC)
Standardized Non-Standard
Guaranteed Settlement No Guarantee
Margined No Margining
All participants treated Prices can vary
same according to credit
risks
Liquidity Can be illiquid
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HISTORY
• Implied Futures have been traded
historically
• Japanese Rice Futures – 17th Century
• Chicago first example of modern futures
exchange – Mid 19th Century
• Commodity Futures - first products
• Commodity Exchanges trade contracts
on commodities and not commodities
themselves
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Options
• In finance, an option is a contract
which gives the buyer (the owner or
holder of the option) the right, but
not the obligation, to buy or sell an
underlying asset or instrument at a
specified strike price prior to or on a
specified date, depending on the
form of the option
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WHAT IS SWAP AND TYPES?
• A swap is a derivative contract
through which two parties exchange
the cash flows or liabilities from two
different financial instruments.
• The five generic types of swaps, in order
of their quantitative importance, are:
interest rate swaps, currency swaps,
credit swaps, commodity swaps and
equity swaps.
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 GLOBAL COMMODITY EXCHANGES

Continents No of Exchanges

Africa 7

Asia 32

Australia 1

Europe 15

North America 11

South America 3

Total 69

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PMEX

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HIGHLIGHTS
• Demutualized, all-electronic commodity futures exchange
• Provide secure “Client Level” online access via the
Internet with a unique id for each and every Client
• Broker/Client & Client/Client segregation of funds
• NCEL Clearing House will provide complete “Novation” –
act as the Central Counterparty
• Settlement Guarantee Fund to provide complete
protection for all open positions
• Investor Protection Fund to cover losses in case of
closed positions and idle balances with Brokers
• Daily Marking-to-market of Open positions and collection
of variation margin on T+0 basis, electronically
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 Regulatory
Framework
 Primary Legislation Securities and
Exchange Ordinance 1969 Rules
Commodity Exchange & Futures
Contract Rules 2005 NCEL Regulations

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PMEX Regulations
Exchange does not have any powers to make or
grant exceptions
•Complete Segregation of funds:
• Broker level (Broker/Client & Client/Client)
• Clearing bank (Broker/Client)
• Exchange (Broker/Client & Client/Client)
•Clearly defined events leading to financial and non-
financial defaults
•Financial default leads to automatic cancellation of
Membership

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CORE COMPONENTS OF PMEX
IT & SYSTEMS ANALYTICS
Trading Systems Risk Management
Connectivity and networks Research
Database & Disaster Recovery Real-time Analysis
Application development Software Specifications

OPERATIONS Member
Clearing and Settlement Services
Margining and Accounting Surveillance and Monitoring
On-line Banking Discipline and Enforcement
Delivery Process Management

PRODUCT RESEARCH & DEVELOPMENT

Contract Development
Specifications and Testing
Logistics and Spot Market Practices 29
WHAT ARE KEY DIFFERENTIATORS?
• Intellectual Capital is our greatest asset
• Use of state-of-the-art technology to offer
transparent platform for easy and equal
access to all market participants
• Unambiguous Trading Regulations to
provide complete confidence and
protection to investors and users
• Risk Management and Market Monitoring
based on international “Best Practices”
• Thoroughly researched contract
specifications to mirror market practices
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Is there a Social Value?
Yes!
Managing and transferring risk
Generates publicly observable prices
containing markets expectations of current
and future economic value of certain assets
Reduces price volatility and brings in
stability
Brings in standardization – quality
Warehousing, Commodity Financing
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Benefits of a Derivatives Exchange
• Transparency in price discovery of both cash
and futures
• Transferring risk from someone averse to risk to
someone with an appetite
• Transitioning investors into a more controlled
environment
• Creating savings and investments in the long
run
• Developing intellectual capital and awareness
• Enhances markets image and standing, and
leads to an increase in FDI
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 CONTRACT CHOICE AND DESIGN
• Four out of Five new futures contracts fail
and are de-listed within the first three
years of trading
• Two possible reasons:
• Lack of demand for the contract itself
• Poor contract design
• Of course these two reasons are related
to one another

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HOW DO YOU DESIGN A CONTRACT?
• Research is critical to the success of a
contract
• Interaction with market participants
• Simplicity Designed for industry to mirror
industry practice
• Minimal entry/exit costs
• Ensure Price Convergence through
credible threat of delivery
• Tracking of Basis - Responsibility of Market
Oversight Dept.
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WHAT ARE CONTRACT SPECIFICATIONS?

• The Asset
• Quality & Certification requirements
• The Contract Size
• Quantity
• Duration
• Delivery Arrangements
• Location and Warehouses
• Documentation required
• Delivery Months
• Price Quotes
• Price Limits
• Position Limits
• Margins
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PMEX Gold Futures Contract
 Contract Size: 100 gms of 995 Fineness
 Price Quotation: Rs/10 gms
 Monthly Expiries, starting with Sep 2019
 3 Calendar Months available for trading
 Current Gold Price around Rs. 83,500/ 10 gms
 Contract Value around Rs. 835,000
 Tick Size: Re. 1
 Tick Value: Rs. 10
 Initial Margin 4.25%
 Clearing Margin 2.50% (Leverage 40 times)
 Physically Deliverable Contract
RISK MANAGEMENT

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RISK MANAGEMENT
@
PMEX

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Market Risk Mitigants
 Complete segregation – cornerstone
 Initial Margins determined using VaR
• No netting-off between clients
 Pre-Trade Check
 Spot Month
 Delivery Margin
 Credits
 –Intra commodity spreads –Inter commodity
spreads
 Daily Mark-to-Market of Positions
 Variation Margin in Cash only
 Daily Settlement Price Process
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 Credit Risk - Brokers
 Minimum Networth – ability to meet
obligations with some balance sheet
restructuring
 Segregated Net Capital Balance – Solvency &
Liquidity
 Minimum Clearing Deposit
 Clearing Limit multiple of Clearing
• Deposit –E.g. minimum deposit Rs 0.5 million
• Multiple 40 times (2.5% clearing deposit)
• Clearing Limit = Rs20 million
• Gross/Gross across all commodities and across all clients

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 Other Tools & Measures
 Market Monitoring up to Client Level in real-time
 To counter front running, wash trading, trading
opposites, etc
 Unambiguous default provisions
 Misconduct, un-business like conduct and
unprofessional conduct clearly defined
 Each and every participant has to follow the
Regulations, Circulars, Notices and Guidelines
 Granting Exemptions or making exceptions not in
PMEX’s vocabulary
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 Position Limits
 Position Limits – Members & Clients
 To counter excessive speculation and
manipulation

Limits the number of contracts that can be
entered into:
• Gross across all clients
• Gross across all contracts
• Grossed up to the Member level
 Open contracts held by one individual
investor with different brokers are
combined using Client ID’sbrokers
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 Trading on PMEX
 Investors have two methods of trading on PMEX:
1. Direct access to the market
2. Traditional route of placing orders through brokers
 In both cases, Broker is the Obligor to the Exchange
 Broker responsible for ensuring all Client Margins are
paid
 Broker responsible for ensuring Clients comply with
PMEX Regulations
 Broker responsible for Exposure/Margin/Position
monitoring of all clients
 Broker earns commissions from both types of Clients
 Less Overheads if Clients allowed direct access
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Contracts/ Products
There are 2 kinds of contracts offered at PMEX.
1.Deliverable Contract: This is a contract which is settled through
giving/taking the actual delivery of the underlying commodity on
final settlement after the expiry day. However the investor/trader
has the right to square off their open positions at any time before
expiry and booked their profit/losses in term of cash
2.Cash Settled Contract: There is no obligation of giving/taking
deliveries of underlying commodities after the expiry of contracts.
The profit/loss transferred into the respective traders accounts on
final settlement day if their positions remained open on expiry.
However the investor/trader has the right to square off their open
positions at any time before expiry and booked their profit/losses in
term of cash.

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 Commodities Offered
Products Contracts
  Deliverable Cash Settled

• Gold 100 gram Contract

 Metals
 Mini Gold Contract •
•
Gold Kilo Contract
Gold 50 & 100 Tola
Tola Gold Contract • Gold 1 oz, 10 oz & 100 oz US $ denominated
Milli Tola Gold Contract • Silver 500 oz,100 oz &10 oz Us $ denominated
• Milli Ounce Gold Contracts in USD, EUR ,
GBP and JPY

Energy - Crude Oil (10 & 100 barrel) US $ denominated

  IRRI-6 Rice Futures Contract
 
 
   
  Weekly IRRI-6 Futures Contract
Palm Olein Futures Contract Sugar I-Cotton US $ Denominated
Agricultural Wheat
Red Chilli Weekly Futures Contracts

Financial - KIBOR Futures Contract

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