Net obligation report

At the close of every trading day a member needs one number. How much money does it owe, or is it owed, tomorrow morning?

The net obligation report is where that number lives.

After the trading session ends, files and reports are downloaded by trading members over FTP. They carry three things: the day's executed transactions, the positions carried forward from the previous day, and the closing position of the day including the member's net obligation.

The net obligation report then adds the money detail around it. What margin has been deposited, how much of it is used up, what is left, what must be paid in or will be paid out, and the transaction fee due.

So it is the member's daily reconciliation sheet. Not a statement of profit — a statement of what has to move.

The word net is the point. Obligations are netted before they are settled, so far fewer transactions actually happen than trades were done.

What arrives, and how. After the end of the trading session every day, files and reports are downloaded by the trading members through FTP (File Transfer Protocol). They contain:

1. details of transactions executed by the member on that day;
2. positions carried forward from the previous day; and
3. the closing position of the day, including the net obligation of the member.

What the net obligation report itself adds — five items, and the list is the examinable part:

Why the obligation is net at all, and the asymmetry to remember. Transactions involving transfer of ownership of commodities are settled on a delivery-versus-payment (DVP) basis, by netting at a client level and grossing up at the member level. Fund obligations are netted at the member level, to reduce the number of settlement transactions as part of the clearing process. So goods and money do not net the same way, and that contrast is the sharpest point on the page.

Where it fits in the day's flow. Trade details are transmitted from the exchange to the clearing corporation in real time. The clearing corporation notifies them and computes members' obligations. The obligation and the pay-in advice of funds are communicated to clearing members. Instructions go to the clearing banks to make funds available by the pay-in time; the banks debit clearing members and credit the clearing corporation; and pay-out is made on the clearing corporation's instruction, crediting clearing members' accounts.

At expiry the term widens. Because futures and Options on Goods on the same commodity expire on the same date — on NCDEX the 20th of the expiry month in most cases — their delivery and payment obligations are considered together and subsumed to arrive at the net obligation for the final settlement procedure, which starts the next day.

The workbook attaches no threshold, minimum or tolerance to the report itself. Its content is a list, not a limit.

Dhanvantari Commodities Pvt Ltd, a trading-cum-clearing member, downloads its files at the close on 14 November. Three clients traded; 214 trades were executed between them.

The net obligation report, money side:

Available deposit is simply 1,50,00,000 - 1,18,40,000 = Rs 31,60,000. And notice the scale of the netting: 214 trades across three clients collapse into a single pay-in of Rs 2,35,000 the next morning, because fund obligations are netted at member level.

Now the goods side, which does not net the same way. In the December gold contract:

Netting happens at client level, so A is long 2 and B is short 4. Grossing up at member level means those two do not cancel. Dhanvantari must arrange to deliver 4 kilograms of gold for client B and receive 2 kilograms for client A — not deliver 2 kilograms net.

At a Final Settlement Price of Rs 71,800 per 10 grams, that is 4 x 100 x 71,800 = Rs 2,87,20,000 of gold to deliver and Rs 1,43,60,000 to receive, rather than one convenient net figure. Money nets; goods do not.

And on the 20th, if client A also held Options on Goods in the same commodity expiring that day, those delivery and payment obligations would be subsumed into the same net obligation before final settlement begins the following morning.

Chapter 7 (Clearing, Settlement and Risk Management), section 7.2 on the clearing and settlement process, where the FTP download and the report's five contents are listed at the very start of the chapter. Section 7.12.3 on Options on Goods reuses the phrase for the expiry-day netting of futures and Options on Goods.

Expect a straight list question: the net obligation report provides — margin deposit, margin utilised, available deposit, required pay-in or pay-out, and transaction fee payable or receivable. The harder point, and the better question, is the netting asymmetry: commodity transfers are netted at client level and grossed up at member level, while fund obligations are netted at member level.

• Five items, and the list is the answer. Margin deposit, margin utilised, available deposit, required pay-in or pay-out, and transaction fee payable or receivable.
• Goods and funds net differently. Commodity ownership transfers settle DVP, netted at client level and grossed up at member level. Fund obligations net at member level. This is the most examinable line on the page.
• Netting at client level is not netting across clients. One client's long does not cancel another client's short for delivery purposes.
• It is a member-level file downloaded over FTP, not a client contract note and not a bhav copy.
• Available deposit is margin deposit minus margin utilised. It is not a pay-out, and it is not free cash until positions are closed.
• The phrase appears twice in the paper with different scopes. Here it is the daily funds and positions report. At expiry, futures and Options on Goods delivery and payment obligations are subsumed together to arrive at a net obligation for final settlement.
• No threshold attaches to it. The workbook gives no minimum, cut-off or tolerance for the report, so any numerical limit offered in a question is not from this paper.