Open position
An outstanding, unsettled long (buy) or short (sell) position in a contract; margins, exposure limits, daily MTM and corporate-action adjustments are all applied to open positions.
In plain language
When you buy a futures contract and have not yet sold it or let it expire, you hold an open position. The workbook's definition: an outstanding/unsettled either long (buy) or short (sell) position in various derivative contracts.
Open positions are what a clearing corporation worries about. A closed trade has no further risk; an open one can still lose money tomorrow. That is why margins are computed on open positions, why they are marked to market every day, and why corporate-action adjustments are applied to them.
The trick is in how positions are added up. A client's buys and sells in the same contract are netted, but different clients are never netted against each other.
How it works
Building up the open position (Chapter 5, section 5.6.4)
- A contract is identified by futures/option, underlying, expiry date, option type and strike price.
- Proprietary position = buy − sell, netted for each contract.
- Each client's position = that client's buy − sell in the contract. Positions are netted per client at contract level, then added up across clients, not netted.
- Trading member's open position = proprietary open position + client open long position + client open short position.
- Clearing member's open position = the open positions of all trading members and custodial participants clearing through it.
Where open positions are used
- Margins (Chapter 4): margining computes the potential loss on open positions, buy and sell. Initial margin is payable upfront on all open positions, up to client level. Extreme loss margin is 2% (index futures) or 3.5% (stock futures) of the notional value of gross open positions; for calendar spreads it is levied on one third of the far-month open position.
- Cash segment: VaR and ELM are collected on the member's gross open position, the gross of all net client positions plus proprietary, with no netting across settlements.
- Risk reduction mode: fresh orders that reduce the open position are accepted.
- Daily MTM (Chapter 6): after each day's settlement all open positions are reset to the daily settlement price and become the next day's open positions.
- Expiry: all open futures positions after the close on expiry day are considered for physical settlement where applicable.
- Corporate actions: adjustments are carried out on all open positions.
- Business disruption (Chapter 3): the exchanges' Contingency Pool Trading facility lets brokers square off clients' outstanding open positions.
A worked example
This is the workbook's own illustration; the price used for ELM at the end is illustrative.
Clearing member A clears for two trading members in the INDEX May futures contract.
| TM | Proprietary (buy/sell/net) | Client 1 (buy/sell/net) | Client 2 (buy/sell/net) |
|---|---|---|---|
| PQR | 5,000 / 3,000 / +2,000 | 3,000 / 2,000 / +1,000 | 3,000 / 1,000 / +2,000 |
| XYZ | 1,000 / 2,000 / −1,000 | 2,000 / 1,000 / +1,000 | 3,000 / 4,000 / −1,000 |
PQR: everything is long, so long = 2,000 + 1,000 + 2,000 = 5,000, short = 0.
XYZ: proprietary short 1,000; client 1 long 1,000; client 2 short 1,000. Client 1's long is not netted against client 2's short. Proprietary net is −1,000, so long = 1,000, short = 1,000 + 1,000 = 2,000.
Clearing member A: long 5,000 + 1,000 = 6,000; short 0 + 2,000 = 2,000.
ELM on gross open positions: gross = 6,000 + 2,000 = 8,000 units. If the last traded futures price were Rs 2,500, notional value = 8,000 × Rs 2,500 = Rs 2 crore, and index futures ELM at 2% = Rs 4,00,000. Netting 6,000 long against 2,000 short would have wrongly produced only 4,000 units.
Why NISM asks about it
Open positions run through Chapter 3 (square-off via Contingency Pool Trading), Chapter 4 (sections 4.1.1.1 and 4.1.2.1: margins, gross open positions, ELM and risk reduction mode), Chapter 5 (section 5.6.4, the aggregation rules and the PQR/XYZ illustration) and Chapter 6 (daily MTM reset, physical settlement and corporate-action adjustments). The PQR/XYZ table is a classic numerical question: compute a clearing member's long and short open position.
Common exam traps
- Net within a client, gross across clients. Never set one client's long off against another client's short.
- Proprietary is netted per contract, but proprietary and client positions are not set off against each other.
- A TM's open position = proprietary + client long + client short.
- ELM uses gross open positions, so it is larger than a net figure would suggest.
- No netting across settlements in the cash segment's gross open position.
- After daily MTM, open positions carry forward at the daily settlement price, not at the original trade price.
Where this is taught
- Series IV · Chapter 3: Exchange Traded Interest Rate Futuresintroduced here
- Series XVI · Chapter 7: Clearing, Settlement and Risk Managementintroduced here
- Series V-D · Chapter 20: Exchange Traded Interest Rate Futuresintroduced here
- Series VII · Chapter 5: Clearing Processintroduced here
Related terms
- Adjustment factorThe ratio by which the strike price, market lot and position of an equity F&O contract are revised after a bonus, split, consolidation or rights issue, so the position's value stays the same.
- Extreme Loss MarginA flat 3.5 per cent margin collected on cash-market positions to cover losses falling outside what the VaR margin is designed to capture.
- Risk reduction modeThe restricted state a stock broker is put into when 90% of its collateral is used up by margins: pending orders are cancelled, only IOC and margin-checked orders pass, until utilisation falls below 85%.
- Gross open positionThe sum of long and short open positions across all clients of a trading or clearing member, added up without netting one client against another — the base figure position limits and extreme loss margin are computed on.
- Mark to MarketThe daily settlement of a futures position at that day's closing price, so gains and losses are paid in cash every evening instead of accumulating until expiry.
- Initial marginThe deposit both the buyer and the seller of a futures contract must place before the position is accepted, sized to cover a 99% worst-case one-day loss on that position.
- NOOP limitThe cap the RBI framework places on a bank's net overnight open foreign exchange position — fixed by the bank's own board, reported to the RBI, and not exceeding 25% of its total Tier I plus Tier II capital.
- Settlement numberA unique identifier tagging a trade or batch of trades to a particular settlement cycle and date, used by brokers, clearing corporations and depositories to match and reconcile obligations.
- Ban periodThe state a derivative security enters once its market-wide Open Interest exceeds 95% of the Market Wide Position Limit, during which members and clients may only trade to reduce their positions.
- Gross settlementA settlement method where transactions in a security are not netted: a member's security pay-in equals cumulative sell quantity and pay-out equals cumulative buy quantity, trade by trade.
- Long positionAn outstanding, unsettled buy position in a derivatives contract — the buyer of a futures contract, or the buyer (holder) of an option, is said to be long.
- Short positionAn outstanding, unsettled sell position in a derivatives contract — the seller of a futures contract, or the seller (writer) of an option, is said to be short.
- Naked positionA long or short position in a futures contract held without any position in the underlying asset or an offsetting contract — fully exposed to price moves in one direction.