Vintage allocation
Also written Vintage · Allocation by vintage
The rule for assigning physical delivery of a maturing GOI bond futures contract to long position holders, oldest client-level position first, with random allocation only among holders of the same vintage.
In plain language
A bond futures contract can end in physical delivery of the bond. Many traders hold a long position in that contract. Only some of them can receive the bonds a seller delivers. Someone has to pick who goes first, and it cannot be a favour.
The workbook's answer is vintage allocation. The clearing corporation tracks how long each client's long position has stayed open. That length of time is the position's vintage. Delivery goes to the oldest vintage first, working down the queue until it runs out.
How it works
The delivery process runs on a fixed clock.
T+0, before 6:00 pm IST, second business day prior to delivery. The selling clearing member sends the CC a delivery notice: the notional face value (equal to its short position), the security's ISIN, coupon, maturity date and other details. The CC uses these to calculate the invoice price.
Allocation. The CC identifies eligible long positions and assigns deliveries at client level, starting with the highest vintage — the oldest-standing position — and working down until the delivery is fully allocated. Vintage is computed and maintained at client level for every contract, tracked by the CC on an end-of-day basis. If, at a given vintage, there is more long position than delivery available, allocation among that vintage tier is done on a random basis — so randomness only ever decides ties within the same vintage, never who goes first.
By 8:00 pm IST on the day the notice is received, the CC tells the allocated long holders what they will receive and at what invoice price.
One rule on what can be delivered. A single futures contract cannot be filled with a mixed portfolio of securities — for example, Rs 1,20,000 face value of one bond issue plus Rs 80,000 of another is not permissible against one contract. A seller delivering against two contracts, however, may use two different issues — Rs 2,00,000 face value of one for the first contract, Rs 2,00,000 of another for the second.
T+2. Clearing members discharge their obligations and the CC completes settlement.
A worked example
Three clients hold long positions in the same GOI bond futures contract nearing expiry, ranked by how long each position has stood open:
| Client | Long position (face value) | Vintage (days open) |
|---|---|---|
| Client A | Rs 2,00,000 | 62 days (oldest) |
| Client B | Rs 4,00,000 | 40 days |
| Client C | Rs 2,00,000 | 40 days |
A selling clearing member gives notice to deliver Rs 6,00,000 face value on 4 September, sent before 6:00 pm on 2 September (the second business day prior).
The CC allocates Client A's full Rs 2,00,000 first, being the highest vintage. That leaves Rs 4,00,000 of delivery for Rs 6,00,000 of remaining long positions (Clients B and C, both at the same 40-day vintage) — more demand than supply at that tier, so the CC allocates the remaining Rs 4,00,000 randomly between B and C, for instance giving B its full Rs 4,00,000 or splitting it, purely by chance. Both Client B and Client C entered their positions on the same day, so seniority cannot break the tie; only the random draw can.
By 8:00 pm on 2 September each allocated client is told the security details and the invoice price. Settlement completes on T+2.
Why NISM asks about it
Chapter 7 (Clearing, Settlement and Risk Management of IRD), in the section on the delivery schedule for physically-settled contracts, sets out the delivery notice timeline, the vintage-based allocation rule and the no-mixed-portfolio rule together. Expect a question on the order of allocation (highest vintage first, random only within a tier) and on the notice deadline (6:00 pm IST, second business day prior).
Common exam traps
- Vintage allocation is oldest-first, not random. Randomness is only a tie-breaker among long positions of the same vintage, when there is not enough delivery to go around at that tier.
- Vintage is tracked at client level, per contract, end of day — not at trading-member or clearing-member level.
- The delivery notice deadline is 6:00 pm IST, on the second business day before the day the seller wishes to deliver — not the day before.
- One contract, one issue. A seller cannot mix two bond issues within a single contract's delivery, even though two different contracts may each carry a different issue.
- Allocated long holders are told by 8:00 pm IST on the day the notice is received — same-day notification, not next-day.
Where this is taught
Free preparation for NISM Series IVRelated terms
- Central counterpartyThe clearing corporation that interposes itself in every exchange trade, becoming buyer to every seller and seller to every buyer, so neither side carries the other's credit risk.
- Cheapest-to-deliverThe bond in the deliverable basket that costs a futures seller least to deliver — and, because the seller chooses, the bond whose cash price the futures contract actually tracks.
- Deliverable grade securitiesThe government securities a seller is permitted to deliver against a physically settled bond futures contract — GOI bonds of 7.5 to 15 years from the delivery month with at least Rs 10,000 crore outstanding.
- Invoice priceThe cash a buyer pays the seller on physical delivery: the futures settlement price multiplied by the delivered bond's conversion factor, plus its accrued interest, scaled by the contract amount.