NISM Series XVI · Chapter 7: Clearing, Settlement and Risk Management

L1 · Foundation

Foundation — The clearing corporation, the settlement cycle and the delivery process

What the clearing corporation is and how novation makes it the counterparty to everyone; clearing versus settlement, and why commodities net at client level but gross at member level while funds net at member level; the pre-trading, intra-trading and post-trading tasks; the gold worked example showing one client's mark-to-market loss becoming another's gain; the eight-step physical delivery process; compulsory delivery, both-options and cash settlement; and the entities involved — clearing members, clearing banks, repositories and warehouses.

21 min read · Worth 15% of the paper · Written from pages 142–173 of the official NISM workbook · Updated 18 September 2026

Clearing, settlement and delivery

1. The clearing corporation

⚠️ "Clearing Corporation's MAIN ROLE IS TO CARRY OUT CLEARING AND SETTLEMENT OF THE TRADES executed on the Exchange platform THROUGH THE PROCESS OF 'NOVATION'. THE ENTITY WHICH GUARANTEES SETTLEMENT OF ALL THE TRADES done on an exchange IS CLEARING CORPORATION. To do this, Clearing Corporation COLLECTS MARGINS, DEALS WITH THE PAYMENT AND DELIVERY MECHANISM."

⚠️ "Various governance aspects like REGULATORY, MEMBER COMPLIANCE, etc. ARE SEPARATE for the Exchange and Clearing Corporation. SEBI had mandated to have SETTLEMENT OF EXCHANGE TRADES THROUGH A CLEARING CORPORATION, which may be UNDER THE SAME SPONSOR OR OUTSOURCED TO ANOTHER CLEARING CORPORATION."

1.1 The six-step cycle

⚠️ "(1) DECISION TO TRADE → (2) PLACING BUY OR SELL ORDER → (3) TRADE EXECUTION → (4) CLEARING OF TRADES → (5) SETTLEMENT OF TRADES → (6) PAY-IN / PAY-OUT OF FUNDS AND DELIVERY OF GOODS / CASH SETTLEMENT."

2. Clearing versus settlement

⚠️ The netting rule — a favourite exam point: "Transactions involving transfer of ownership of commodities are settled on DELIVERY-VERSUS-PAYMENT (DVP) BASIS BY NETTING AT A CLIENT LEVEL AND GROSSING UP AT THE MEMBER LEVEL, whereas FUND OBLIGATIONS ARE NETTED AT THE MEMBER LEVEL to reduce the number of settlement transactions."

Read that twice. Goods net at the client level and then gross up at the member level — because two different clients of the same broker each need their own delivery. Funds net all the way at the member level, because money is fungible in a way that a warehouse receipt is not.

⚠️ "In other words, CLEARING refers to the process of ADJUSTING FINANCIAL POSITIONS of the parties to reflect THE NET AMOUNTS DUE TO THEM OR DUE FROM THEM."

2.1 The end-of-day reports

⚠️ "After the end of the trading session every day, FILES/REPORTS ARE DOWNLOADED BY THE TRADING MEMBERS THROUGH FTP (FILE TRANSFER PROTOCOL), which contains: (a) DETAILS OF TRANSACTIONS EXECUTED on that day, (b) POSITIONS CARRIED FORWARD FROM THE PREVIOUS DAY, (c) CLOSING POSITION OF THE DAY, INCLUDING NET OBLIGATION."

⚠️ "The NET OBLIGATION REPORT further provides (a) AMOUNT OF MARGIN DEPOSIT (b) MARGIN UTILIZED (c) AVAILABLE DEPOSIT (d) REQUIRED PAY-IN/PAY-OUT AMOUNT (e) TRANSACTION FEE PAYABLE/RECEIVABLE."

2.2 The automated steps

⚠️ "Trade details are transmitted from commodity exchange to clearing corporation ON A REAL-TIME BASIS"
⚠️ "The trade details are NOTIFIED by the clearing corporation TO COMPUTE OBLIGATIONS OF TRADING MEMBERS"
⚠️ "OBLIGATION AND PAY-IN ADVICE OF FUNDS are communicated to clearing members"
⚠️ "INSTRUCTIONS ARE ISSUED TO CLEARING BANKS to make funds available by the pay-in time"
⚠️ "Funds are PAID IN by clearing banks, which DEBIT THE ACCOUNTS OF THE CLEARING MEMBERS AND CREDIT THE CLEARING CORPORATION ACCOUNTS"
⚠️ "PAY-OUT of funds is done on the clearing corporation's instruction to CREDIT ACCOUNTS OF CLEARING MEMBERS BY DEBITING ITS ACCOUNT"

3. The three sessions

Session	⚠️ Tasks
⚠️ PRE-TRADING	"UPLOADING OF MEMBER MARGIN LIMITS to the trading system · UPLOADING OF OBLIGATION AND MARGIN FILE TO THE BANK · VERIFYING MARGINS"
⚠️ INTRA-TRADING	"TRACKING FUNDS COLLECTION against margins/obligations · TRACKING UTILIZATION OF OPEN POSITION LIMITS by the members · PROCESSING OF MEMBERS' INCREASE/RELEASE MARGIN REQUESTS"
⚠️ POST-TRADING	"CALCULATION OF CLEARING MEMBERS' POSITIONS based on OPEN INTEREST at the CLIENT LEVEL · TRADE PROCESSING · REPORT GENERATION · UPDATING MARGINS AND MIS · EXCHANGE WILL ISSUE PAY-IN AND PAY-OUT INSTRUCTIONS"

⚠️ "The uploaded files include effects of ALL the transactions in COMMODITY FUTURES, COMMODITY OPTIONS ON FUTURES, COMMODITY OPTIONS ON GOODS, AND FUTURES ON COMMODITY INDICES."

⚠️ How the instruments relate: "INDEX FUTURES ARE SIMILAR TO FUTURES CONTRACTS WITH CASH SETTLEMENT. OPTIONS ON FUTURES DEVOLVE ON FUTURES. OPTIONS ON GOODS that have delivery obligations upon expiry IS SUBSUMED WITH DELIVERY OBLIGATIONS OF COMMODITY FUTURES."

4. The gold worked example

"Members A & B are two clearing members. X is a client of member A and Y is a client of member B. X BUYS a futures contract of GOLD with a lot size of 1 KG at Rs 50,000 PER 10 GRAMS from Client Y."

4.1 Margin at trade time

⚠️ "At the time of trade execution, THE AMOUNT OF MARGIN IS BLOCKED BY THE EXCHANGE ON REAL-TIME BASIS FROM THE RESPECTIVE CLEARING MEMBER ACCOUNT, in turn THE MEMBERS BLOCK THE MARGIN FROM THE CLIENT ACCOUNT."

⚠️ "Assuming the total margin is 5%, an amount of Rs 2,50,000 IS BLOCKED FROM BOTH X's AND Y's ACCOUNTS" — because Rs 50,000 per 10 grams × 100 units in 1 kg = Rs 50,00,000 contract value, and 5% of that is Rs 2,50,000.

4.2 Mark-to-market at end of day

"Assume the closing price of the day was Rs 50,100 per 10 grams."

Party	Position	⚠️ Outcome
⚠️ Y	SHORT at Rs 50,000	"Closing price Rs 50,100 gives him a NOTIONAL LOSS of Rs 100 per 10 grams. Based on the lot size of 1 kg, THE NOTIONAL LOSS IS Rs 10,000. The amount WILL HAVE TO BE PAID IN BY Y ON T+1 BASIS"
⚠️ X	LONG at Rs 50,000	"Makes a NOTIONAL PROFIT of Rs 100 per 10 grams — Rs 10,000 on the position. The amount WILL BE PAID OUT TO HIM ON T+1 BASIS"

⚠️ "Thus, on EVERY TRADING DAY TILL THE EXPIRY of the futures contract, THERE IS SOME AMOUNT OF MTM GAIN EQUAL TO MTM LOSS depending on the movement of closing prices, across members."

5. The delivery process

⚠️ "The tendering of deliveries is permitted by the exchange ON SPECIFIC TENDER DAYS BEFORE THE EXPIRY. THE BUYER WILL BE OBLIGED TO TAKE DELIVERY IF HE HAS NOT SQUARED OFF HIS POSITION within such period as may be specified."

5.1 The eight steps

Two assumptions first: ⚠️ "(1) SELLER HAS DEPOSITED THE QUALITY CERTIFIED GOODS IN THE WAREHOUSE AND RECEIVED THE WAREHOUSE RECEIPT. (2) BUYER HAS TRANSFERRED THE MONEY to the clearing member equivalent to the value of goods, CALCULATED USING THE FINAL SETTLEMENT RATE/DUE DATE RATE — also taken care of by STEPPING UP DELIVERY MARGIN ON BUYERS once the tender/delivery period starts, IN ORDER TO AVOID SUDDEN SHOCK."

Step	⚠️ Action
1	"Trading Member Q will TRANSFER THE QUALITY CERTIFICATE AND WAREHOUSE RECEIPT for client Y's goods TO CLEARING MEMBER B"
2	"Clearing member B will INITIATE THE COMMODITY PAY-IN process — transferring the warehouse receipt TO THE CLEARING CORPORATION"
3	"Trading member P will TRANSFER FUNDS received from client X TO CLEARING MEMBER A"
4	"Clearing member A will TRANSFER FUNDS TO THE CLEARING CORPORATION, completing the FUNDS PAY-IN"
5	"Clearing Corporation makes a COMMODITY PAY-OUT to clearing member A by TRANSFERRING THE OWNERSHIP OF WAREHOUSE RECEIPT to the ultimate beneficiary — the final buyer X"
6	"Clearing member A TRANSFERS THE WAREHOUSE RECEIPT TO CLIENT X, completing the pay-out of commodities"
7	"Clearing Corporation, with the help of CLEARING BANKS, TRANSFERS THE FUNDS equivalent to the contract value (AT THE FINAL SETTLEMENT PRICE) TO CLEARING MEMBER B"
8	"Clearing member B GIVES A CREDIT in the trading/ledger account TO CLIENT Y, completing the funds pay-out"

5.2 The invoice and GST

⚠️ "The exchange will NOTIFY THE NAME OF THE BUYER TO THE SELLER, and A TAX-PAID INVOICE WILL BE GENERATED BY THE SELLER TO THE BUYER BASED ON THE DUE DATE RATE. Most of the contracts are TRADED AT NET OF GST PRICE and hence, GST IS ADDED IN THE TAX PAID INVOICE BY THE SELLER."

⚠️ "The settlement of DVP is made FOR THE FULL TAX PAID INVOICE VALUE. Exchanges and brokers are supposed to SETTLE THE TRADE AT GROSS OF GST TAXED INVOICE. EXCHANGES ACCEPT THE GST RATES AS PROVIDED BY THE SELLERS and GUARANTEE SETTLEMENT OF GST AT THAT RATE. EXCHANGES DO NOT GO INTO THE CORRECTNESS OF THE GST RATES."

6. The three settlement options

6.1 Compulsory delivery

⚠️ "BOTH THE BUYER AND SELLER WITH AN OPEN POSITION during the tender/delivery of the contract ARE OBLIGATED TO TAKE/GIVE DELIVERY. In some contracts, THE TENDER MARKING PERIOD STARTS MUCH AHEAD OF THE MATURITY DATE."

⚠️ "For example, GOLD IS A COMPULSORY DELIVERY CONTRACT. ALL THE OPEN INTERESTS REMAINING AFTER THE EXPIRY DATE IS COMPULSORILY SETTLED THROUGH PHYSICAL DELIVERIES. So, IF THE SHORT POSITION IS NOT SQUARED OFF, he has TO GIVE PHYSICAL DELIVERY OF QUALITY CERTIFIED COMMODITY, and the BUYER NEEDS TO PAY THE TOTAL AMOUNT equivalent to the contract value's settlement price."

⚠️ "THE TOTAL OPEN INTEREST REMAINING ON THE SETTLEMENT DATE WILL INDICATE THE NUMBER OF CONTRACTS that will potentially END UP IN PHYSICAL DELIVERY compulsorily after the expiry date."

6.2 Both options

⚠️ "Due Date Rate / Final Settlement Price is the rate at which the contract is settled. USUALLY IT IS THE AVERAGE OF SPOT PRICES (POLLED) IN THE LAST FEW DAYS. IT MAY VARY FROM COMMODITY TO COMMODITY. For e.g. FOR ELECTRICITY, IT IS VOLUME WEIGHTED AVERAGE OF ALL THE DAYS IN THE EXPIRING MONTH, WHILE FOR OTHERS IT MAY BE 3-5 DAYS."

7. The entities involved

7.1 Clearing corporation

⚠️ "The clearing corporation, inter alia: COLLECTS DIFFERENT TYPES OF MARGINS prescribed by the commodity exchanges · COMPUTES OBLIGATIONS of clearing members · ARRANGES FOR PAY-IN AND PAY-OUT OF FUNDS · ASSUMES THE COUNTER-PARTY RISK OF EACH MEMBER AND GUARANTEES FINANCIAL SETTLEMENT · ARRANGES FOR PHYSICAL DELIVERY OF GOODS, wherever applicable."

7.2 Clearing members

⚠️ "A clearing member is a member of the clearing corporation PERMITTED TO CLEAR TRADES DIRECTLY WITH THE CLEARING CORPORATION and ALLOWED TO ACCEPT TRADES FOR OTHER CLEARING MEMBERS AND NON-CLEARING MEMBERS to settle on their behalf. The different kinds are TRADING CUM CLEARING MEMBERS (TCM) AND PROFESSIONAL CLEARING MEMBERS (PCM)."

⚠️ "Clearing members are required to MAINTAIN AND OPERATE A SETTLEMENT ACCOUNT with any one of the EMPANELLED CLEARING BANKS at the designated branch... USED EXCLUSIVELY FOR THE PURPOSE OF CLEARING AND SETTLEMENT OPERATIONS."

The workbook lists five primary responsibilities: ⚠️ "COLLECTION OF MARGINS ON A TIMELY BASIS · DAILY CLEARING AND SETTLEMENT · TO ACT AS A LEGAL COUNTERPARTY FOR EVERY CONTRACT · TO MONITOR POSITIONS · MAINTAIN AND MANAGE SETTLEMENT GUARANTEE FUNDS · MANAGE FINANCIAL AND DELIVERY DEFAULTS."

7.3 Clearing banks

⚠️ "The commodity exchange requires EVERY CLEARING MEMBER TO OPEN A DEDICATED AND EXCLUSIVE CLEARING ACCOUNT with one of the empanelled clearing banks. The clearing corporation COMPUTES AND ADVISES THE OBLIGATION, and the clearing member MAKES FUNDS AVAILABLE against pay-in obligations and RECEIVES FUNDS in case of a pay-out."

⚠️ "The clearing banks COMMUNICATE THE STATUS OF FUND FLOW in respect of each trading and clearing member TO THE CLEARING HOUSE TO FACILITATE MONITORING."

7.4 Repositories

⚠️ "Exchanges have ACCREDITED WAREHOUSES FOR METALS AND VAULTS FOR PRECIOUS METALS. ALL WDRA ACCREDITED WAREHOUSES ARE CONNECTED TO EITHER OF THE ABOVE-MENTIONED COMMODITY REPOSITORIES ISSUING e-NWRs ON THEIR BEHALF."

7.5 Warehouses

⚠️ "THE NATIONAL COMMODITY EXCHANGES DO NOT OWN OR HIRE ANY WAREHOUSE. Exchanges SET THE CRITERIA and EMPANEL WAREHOUSE SERVICE PROVIDERS (WSPs) who arrange storage facilities."

⚠️ "Storage facilities may be by way of WAREHOUSING, SILOS, MARINE VESSELS, COLD STORAGE, SHEDS, TANKS, OR PIPELINES, depending upon the nature of the commodity."

⚠️ "As per SEBI Regulations, ONLY WDRA ACCREDITED WAREHOUSES CAN BE EMPANELLED AS WSPs by the clearing corporations for storage of agricultural commodities. THE WDRA REGISTERS WAREHOUSES AND RECOGNIZES EACH WAREHOUSE SEPARATELY RATHER THAN WSP."

Think of it like this

The property registrar who stands between two strangers

When a flat changes hands, neither buyer nor seller trusts the other to go first. The sub-registrar's office solves it: papers and money move through the same desk on the same day, and each side deals only with the office.

⚠️ That is novation, and it is the clearing corporation's central act. Its role is to carry out clearing and settlement "THROUGH THE PROCESS OF NOVATION", and "THE ENTITY WHICH GUARANTEES SETTLEMENT OF ALL THE TRADES done on an exchange IS CLEARING CORPORATION." It "ASSUMES THE COUNTER-PARTY RISK OF EACH MEMBER AND GUARANTEES FINANCIAL SETTLEMENT."

⚠️ And this is what removes principal risk: "PRINCIPAL RISK arises when the buyer/seller has NOT RECEIVED THE GOODS/FUNDS BUT HAS FULFILLED HIS OBLIGATION of making payment/delivery. THIS IS ELIMINATED BY HAVING A CENTRAL COUNTERPARTY such as a clearing corporation AND THROUGH THE PRINCIPLE OF NOVATION."

But note the careful limit the workbook draws: "Exchanges guarantee FINANCIAL SETTLEMENT AND NOT GROSS DELIVERY SETTLEMENT." The registrar guarantees you get paid — not that the flat is exactly as described.

Settling accounts with a shopkeeper you visit daily

A householder who buys from the same kirana shop every day does not carry cash each time. At month end one net figure settles everything — but the goods still had to arrive on the days they were wanted. You cannot net a kilo of rice in April against a kilo in May; you can net the money.

⚠️ That is exactly the workbook's netting rule: "Transactions involving TRANSFER OF OWNERSHIP OF COMMODITIES are settled on DELIVERY-VERSUS-PAYMENT (DVP) BASIS BY NETTING AT A CLIENT LEVEL AND GROSSING UP AT THE MEMBER LEVEL, whereas FUND OBLIGATIONS ARE NETTED AT THE MEMBER LEVEL to reduce the number of settlement transactions."

The asymmetry has a physical reason. Two clients of the same broker each need their own goods delivered to their own account — so commodity obligations net only within a client and are then added up. Money has no such identity: a rupee owed by one client offsets a rupee owed to another perfectly well, so funds net all the way up to the member.

The bill that arrives every evening, not once at the end

Imagine an electricity connection billed only at the end of a decade. Some households would owe an unpayable sum, discovered when nothing could be done. Billing every month keeps the number small enough to pay.

⚠️ That is mark-to-market. In the workbook's gold example, X is long and Y is short at Rs 50,000 per 10 grams, and the day closes at Rs 50,100. "Y has a NOTIONAL LOSS of Rs 100 per 10 grams — Rs 10,000 on a 1 kg contract — TO BE PAID IN ON T+1", while "X has a notional profit of Rs 10,000 TO BE PAID OUT ON T+1."

Nothing is created or destroyed — money simply moves from the losing side to the winning side each evening, so that no one's unpaid loss can quietly grow into a default.

Buying a train ticket on the platform as the train pulls in

Somebody who buys a ticket minutes before departure is not planning a journey some other week — he is boarding this train. The transaction is no longer about the future at all.

⚠️ The workbook says the same about a contract in its tender period: "Once a contract enters into tender/delivery period, ANY NEW BUYING POSITION CARRIES THE RISK ARISING OUT OF THE PAYMENT OBLIGATION if the seller's position matched against the buyer TAGS HIS INTENTION TO PROVIDE DELIVERY, which then GETS ASSIGNED TO THAT BUYER."

Which is why the speculator who buys a compulsory delivery contract at that stage should not be surprised to receive a warehouse receipt. In gold, "all the open interests remaining after the expiry date is compulsorily settled through physical deliveries."

The society sinking fund nobody hopes to use

A housing society collects a small sum monthly into a sinking fund. Nobody expects the lift to fail. But if it does, the repair happens immediately rather than after a year of collecting from unwilling neighbours.

⚠️ That is the Settlement Guarantee Fund. It "acts as A BUFFER FOR ANY RESIDUAL RISK AND OPERATES LIKE AN INSURANCE MECHANISM. In the event of a trading member failing to meet his settlement obligation, THE FUND IS UTILIZED TO THE EXTENT REQUIRED AND ACCESSIBLE AS PER DEFAULT WATERFALL ARRANGEMENT."

⚠️ "SGF is A CORPUS MADE UP OF CONTRIBUTIONS BY THE EXCHANGE, CLEARING CORPORATION, AND THE CLEARING MEMBERS. Besides, A PORTION OF ALL THE PENALTIES RELATED TO SETTLEMENTS collected from participants WILL ALSO BE CREDITED to it." The minimum required corpus for the commodity derivatives segment is Rs 10 crores.

Notice where the delivery default penalty goes: at least 1.75% of settlement price into the SGF. The person who breaks the system helps fund the repair of it.

Weighing the sugar before fixing the price

A sugarcane farmer is paid on recovery percentage, not on tonnage alone. Higher sucrose earns more per tonne; lower earns less. The contract sets the benchmark, and the test decides the adjustment.

⚠️ Commodity delivery works identically. "Quality variations in the goods delivered ARE GENERALLY ACCEPTED BY THE BUYER SUBJECT TO ADJUSTMENT IN THE ORIGINALLY CONTRACTED PRICES either in the form of PREMIUM OR DISCOUNT as mentioned in the contract specifications."

Castor seed — a discount: contracted at Rs 6,000 against 47 per cent, delivered at 46 per cent, with a 1:2 ratio, gives 6,000 × 98/100 = Rs 5,880. Below 45 per cent it is simply rejected.

Gold — a premium: priced on .995 purity, delivered at .999, gives 25,000 × 999/995 = Rs 25,100.50.

The lesson is that a "standard" in commodities is a benchmark with a price formula around it, not an all-or-nothing test — until you fall below the rejection floor, where no price is acceptable at all.

Key terms in this chapter

Additional margin: A margin levied on both buy and sell sides to reduce market overheating from high open interest. The regulator's view must be taken before levying it.
Alternative Risk Management Framework: The negative-price regime under SEBI's circular of 23 February 2021, raising pre-expiry margins by 5 per cent each day over the last five trading days, withdrawing spread margin benefit and applying the Bachelier model to options.
Both options: A delivery logic under which delivery happens only if both buyer and seller agree; if either declines, the position is cash settled at the Due Date Rate.
Clearing: Accounting to update and reconcile the obligations and payments of the parties, adjusting their financial positions to reflect the net amounts due to or from them.
Commodity repository: NERL and CDSL, recognised by WDRA to hold electronic records of warehoused goods. Their functions include maintaining depositor identity, splitting and consolidating deliverable lots, pledge marking, and electronic transfer of title.
Compulsory delivery: A delivery logic under which both buyer and seller holding open positions during the tender or delivery period must give or take delivery. Gold is a compulsory delivery contract, so all open interest after expiry settles physically.
Concentration margin: A margin levied only on selected clients whose open interest is concentrated relative to the total, judged on time to maturity, contract liquidity and market depth rather than a fixed rule.
Cross margin benefit: Up to 75 per cent relief where a client holds opposite positions in index futures and constituent futures, available only at client level, only among the first three expiring contracts, and only after six months of back testing; MTM loss and ELM are still collected.
CSCRF: SEBI's Cyber Security and Cyber Resilience Framework, effective in phases from 1 January 2025, built on five goals — anticipate, withstand, contain, recover and evolve — and applying to the five Market Infrastructure Institutions.
Daily Price Range: The circuit filter. For broad and narrow agri commodities 4 per cent rising to 6 after a 15-minute cooling off; for sensitive commodities 3 rising to 4, beyond which trading stops for the day; up to 9 per cent for globally referenced commodities.
Delivery default penalty: For a seller, 4 per cent of settlement price plus replacement cost for agri and 3 per cent plus replacement cost for non-agri — apportioned at least 1.75 per cent to the SGF, up to 0.25 per cent to the clearing corporation, and the balance plus replacement cost to the buyer.
Delivery versus payment (DVP): The basis on which ownership transfers are settled — commodities netted at client level and grossed up at member level, while fund obligations are netted at member level.
Devolvement margin: Charged equally to buyers and sellers of Options on Futures over the last three days — E-2, E-1 and E — at one-third each day plus any backlog, so that margin obligations on the resulting futures position are already funded.
Due Date Rate: The rate at which a contract is finally settled, usually the average of polled spot prices over the last few days — three to five for most commodities, but a volume weighted average of all days in the expiring month for electricity.
Extreme Loss Margin: One per cent on gross open positions, covering losses beyond the VaR-based initial margin, deducted from the clearing member's liquid assets on a real-time basis and applicable to client positions too.
Initial margin: The VaR-based amount deposited before entering a trade, maintained while the position is open and refundable on settlement or square off.
Investor Protection Fund: A trust-administered fund for investor education and awareness, funded by all penalties other than settlement violations plus 1 per cent of turnover fee or Rs 10 lakh a year, whichever is higher. It also pays client claims on member default beyond margins deposited.
Know Your Depositor (KYD): The requirement that the WSP and clearing corporation be able at any time to identify both the depositor of stored goods and the actual beneficiary, where they differ.
Lean period margin: An additional margin during the pre-harvest window when volumes and prices are uncertain — levied up to 7 per cent on soybean in 2021, with periods such as July to September for guar and November to January for castor.
Mark-to-market margin: The daily profit or loss computed against the Daily Settlement Price, settled in cash before trading begins on T+1. If uncollected, the exchange scales initial margin up by the square root of two.
Net obligation report: The end-of-day report giving the margin deposit, margin utilised, available deposit, required pay-in or pay-out and transaction fee payable or receivable.
Novation: The process by which the clearing corporation steps between buyer and seller and becomes the counterparty to each. It is what eliminates principal risk and lets strangers trade anonymously.
Open position: The quantity that must be squared off before expiry, otherwise going to final settlement by delivery or cash. For limit purposes it is the higher of buy or sell — netted per commodity at client level, then grossed up across clients at member level.
Peak margin: The 2020-21 reform shifting margin computation from end-of-day positions to the intra-day peak, measured from four trade snapshots taken during the session.
Premium and discount for quality: The price adjustment for goods delivered above or below the contract specification. Castor seed between 45 and 47 per cent takes a 1:2 discount and is rejected below 45; gold delivered at .999 against a .995 basis earns contract rate multiplied by 999/995.
Principal risk: The risk of having paid or delivered without receiving. The other component of counterparty risk, eliminated by a central counterparty acting through novation.
Replacement cost: The compensation element of the default penalty, measured for agri from the average of the three highest of five succeeding days' spot prices and for non-agri from the higher of the pay-out date and the next day. It is zero if neither exceeds the settlement price.
Replacement-cost risk: Also called pre-settlement risk — the cost of substituting the original trade with a new one at a different and probably adverse price. One of the two components of counterparty risk.
Settlement: Matching outstanding buy and sell instructions and transferring ownership of commodities against funds at expiry.
Settlement Guarantee Fund: The buffer held with the clearing corporation, funded by the exchange, clearing corporation, clearing members and settlement-related penalties, and drawn on through a default waterfall. Minimum required corpus for the commodity segment is Rs 10 crore.
SPAN: Standard Portfolio Analysis of Risk — the scenario-based margining methodology developed by the Chicago Mercantile Exchange, which tests 16 risk scenarios of price and volatility change to estimate the maximum one-day loss.
Special margin: A margin levied on one side only — buy or sell — to correct open interest and price momentum on that side where market integrity appears threatened.
Staggered delivery: The window before expiry when open positions may submit intention to give or take delivery. Mandatory for all compulsory delivery contracts, reduced from five days to three by SEBI's circular of 24 May 2024, with buyers randomly allocated and delivery taken on T+2.
Systemic risk: The multiplier effect where one party's default causes others to default, threatening failure of the system. Contained by margining, capital adequacy, settlement guarantee funds and limits on exposure to a single bank's guarantees.
Tender period margin: Levied at client level on open positions entering the tender or delivery period, at 3 per cent plus the 5-day 99 per cent VaR of spot prices, or 20 per cent, whichever is higher. A seller producing a warehouse receipt is exempt.
Volatility Scan Range: SEBI's minimum volatility inputs used for Short Option Minimum Margin — 5, 6 and 7 per cent for agri and 4, 5 and 6 per cent for non-agri commodities showing low, medium and high annualized volatility.
Warehouse receipt: A document of title to goods issued by a warehouse service provider, capable of endorsement and delivery. The endorsee acquires title and the right to possession of the goods.
Warehouse Service Provider (WSP): A company empanelled by a clearing corporation to store deliverable goods. It must be WDRA-accredited for agri commodities, have net worth of Rs 10 to 50 crore, and may never store goods worth more than 33 times that net worth.
WSP trading prohibition: The absolute bar on a WSP, its key managerial personnel, their relatives, group concerns and persons acting in concert from trading in the commodity for which it is accredited. No exemption may be granted.

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Original explanatory writing based on the official NISM workbook for Series XVI, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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