Pakistan Mercantile Exchange Limited (PMEX) is the first futures commodity market in Pakistan. It is the only organization in Pakistan to provide a centralized and regulated place for commodity Futures trading and is regulated by the Securities and Exchange Commission of Pakistan (SECP).
Crucial Features
Pre-Trade Checks
Being a new electronic exchange, PMEX was suitable to take advantage of recent advances in technology when erecting its systems. One major point has been the capability to perform-trade checks before orders are accepted for trading by the system. The utmost advanced exchanges of the world still don’t have this functionality as they calculate on post-trade margining and reliance on clearing brokers. Still, given the specific nature of original actors and their practices, having a-trade check that doesn’t allow orders to be entered unless there are sufficient perimeters with the exchange is a pivotal functionality.
Isolation of Client Accounts at Exchange-Level
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PMEX is one of the world’s first exchanges to apply a system of segregated reporting of individual end- client checks and accounts at the exchange and clearinghouse position. While this point was needed by the absence of strong institutional clearing brokers in the country, it has also redounded in better threat operation, lesser investor protection, and more effective broker operations.
Direct Market AccessPMEX is a colonist in furnishing direct request access to all actors. Typically, this is a service only handed to large guests by other exchanges but using technology to the fullest; PMEX provides direct trading outstations to all actors free of cost.
Class
One important aspect of being a demutualized exchange is that the class of the exchange is separate from trading rights on the exchange. Class of the exchange doesn’t entitle one to partake in the power of the exchange and hence the important separation of power and trading is saved. To exclude implicit conflicts of interest, it’s also necessary that the class of the exchange is kept open for new entrants. Maintaining such an open class model is an important measure to ensure the true spirit of demutualization. Restrictions on new entrants result in an unrestricted culture of a club where the essential vested interests of maintaining walls to entry affect the geste of members. Such a setup is generally considered to be sour and ineffective to the advanced ideal of having deep and liquid requests.
There are two kinds of enrollments at PMEX
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Universal Membership
Commodity Specific Membership
Universal Membership allows brokers to trade all listed contracts on the exchange whereas commodity-specific class gives access to trade contracts on just one specified underpinning commodity. There are certain differences in fiscal demand for both types of enrollments. Other than that, all other rules and regulations are inversely applicable to both orders.
Trading, Clearing & Settlement
. Utmost futures exchanges have separate trading and clearing places for brokers. This separation is considered more effective in terms of threat operation and functional effectiveness. Still, being a new exchange and given the incipient state of unborn trading in the country, PMEX operates a unified, trading-cum- clearing class model. Under this model, all PMEX brokers are responsible for clearing their trades.’Own trades’ also means all trades of broker’s guests. Under the nonsupervisory relationship between a member-broker and the exchange, as written in PMEX General Regulations, a broker is the primary obligor to the exchange for all his as well as his client trades.
The current nonsupervisory setup of PMEX implies that all members of the exchange are clearing as well as trading members. In the future, the exchange may produce clearing-only and trading-only enrollments but current regulations stipulate that brokers must clear all trades done through their brokerage house. This also makes it important for all brokers to be well acquainted with rules, scores, and procedures regarding trading, clearing, and agreement. To do this, a clear understanding of the delineations of these functions is the first step.
Trading
In the environment of the current discussion, trading can be defined as the act of placing orders in the request and their posterior prosecution. As a function, it can be separated from what happens after a trade happens, which will be bandiedlater. However, he can be said to involve in trading-only exertion, If a broker only provides a service whereby he or his guests make orders to be executed in the request. This functionality can be insulated within a trading-cum- clearing brokerage establishment as well as where trading is handled independently by the trading office of the member.
Clearing
The clearing is defined as the process of processing details of buyers and merchandisers once a trade has been executed. It involves the transfer of power and cash between the buyer and dealer and the disbenefit and credit of separate accounts of buyers and merchandisers. This matching between the accounts of buyers and merchandisers is essential to complete the scores of buyers and merchandisers arising out of the trade.
With advances in technology and operations, it now seems an automatic step from trading to clearing. Still, the two ways can be divided distinctly if separate realities are handling the processes. Numerous exchanges around the world calculate on other clearinghouses to reuse trades executed at their systems. Inversely current is the system of own clearing. PMEX falls under this order where it has its clearinghouse. Having own clearinghouse, along with a unified system and database, the exchange is suitable to operate straight-through-processing. This eliminates disagreement and pitfalls that were possible in aged, homemade trading systems.
In terms of futures trading, clearing also involves the essential process of central counterparty novation. Novation involves the clearinghouse getting counterparty to all trades, i.e. a buyer to every dealer and a dealer to every buyer. The clearinghouse has no net position and all actors face the clearinghouse as their counterparty.
Agreement
The agreement is the third part of the sale which completes the whole trade process. It involves the check of all scores arising out of the original sale results in payment and delivery of cash and asset. An ultramodern, straight-through-processing systems trading and clearing are frequently integrated with robust-trade checks, rimming administrations, and other threat operation measures. An agreement, still, can involve a certain element of homemade or out-of-the systems reliance. This can be due to dependence on banking systems that may not be completely integrated with the trading and clearing systems of the exchange and clearinghouse.
On the delivery side, frequently the underpinning means are traded and settled according to trade conventions of the spot request. Depending on how well an exchange’s delivery system is integrated with the underpinning request, the agreement process can be as effective or clumsy.
At PMEX, the cash agreement process is veritably advanced in that it’s linked through the CSR system with online banking networks of the exchange’s designated clearing banks. Transfer of finances is affected in real- the time between the broker and the exchange if done through exchange designated clearing banks.
Order Durations
One needed input for all orders is the information regarding how long the order will remain active in the request. PMEX presently offers two types of parameters for orders
Day Orders
This parameter value is the dereliction setting at PMEX and makes all similar orders valid till day end. As the trading day ends, all standing (or working) orders will be canceled.
Good Till Cancelled Orders (GTC)
Still, the order will remain active in the request till it’s canceled or the contract in which it’s placed expires If a dealer flags an order as GTC at the time of entering. This order is useful for dealers who want to maintain a given order till prosecution and don’t want orders to be canceled automatically at the close of the trading day.
Margining
PMEX rimming governance workshop on an effective paradigm that aims to maintain a balance between perimeters and requirements of actors. Perimeters should be set according to the underpinning pitfalls of the traded contract. Lower perimeters can lead to defaults whereas inordinate margining also harms request liquidity and can be a catalyst for defaults. While the exchange requires the same position of minimal perimeters from all actors, brokers have the authority to charge advanced perimeters from guests according to their threat profile of the customer. Brokers can also distinguish between guests in terms of perimeters and are allowed to have different perimeters for different guests. This is grounded on the view that a broker is a stylish person to judge the riskiness of a customer as opposed to the exchange. Exchange requires the minimal position of perimeters from all brokers as all brokers are treated equally by the exchange. Brokers, on the other hand, can distinguish between guests.
There are two primary situations of perimeters at PMEX that a broker has to deposit, Clearing and original. Piecemeal from that, there are other perimeters also listed below
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Clearing Perimeters
Clearing perimeters also appertained to as clearing deposits, are needed from all active brokers of the exchange. The minimal position of clearing deposit needed is Rs. Brokers can deposit advanced clearing periphery as well. PMEX specifies a clearing periphery for each commodity. A broker’s clearing deposit held at the exchange should always be enough to cover the overall exposure taken by all guests of a broker on a gross base. There’s no network across guests or with the broker’s positions. Under the regulations, a broker is a primary obligor for all his as well his guests’ trades. Acceptable clearing deposit paid to the exchange is evidence of a broker’s capability to carry out business and financially support the exposures of all his guests.
As clearing periphery is different for each commodity contract, the quantum of exposure a broker can take will also vary according to what goods are being traded.
Original Perimeters
Original perimeters are specifically designed to feed for request threat of open positions. Original perimeters are needed for each trading account independently with no network across guests. Original perimeters are considered the first line of defense in clearinghouse threat operation, with clearing perimeters acting as the alternate line of defense. The original periphery is the minimal quantum the exchange expects all actors to pay to the clearinghouse. The brokers must collect perimeters from guests and pass them on to the exchange. To help brokers in managing customer pitfalls, exchange regulations give powers to brokers for asking advanced perimeters according to their assessments.
Original perimeters are needed before an order can be accepted for trading in the system. The automated-trade verification of NEXT makes it insolvable for an order to be accepted unless the exchange holds minimal perimeters for that order in the specific account.
Variation Perimeters
All accounts are pronounced-to-request according to exchange specified rules and times. After mark-to-request computations are complete, the value of each account is streamlined in the sanctioned checks of the exchange. The purpose of the mark-to-request exercise is to determine the correct value and profit & loss of each account. Once losses have been linked and applied to loss-making accounts, their periphery conditions are recalculated. Losses are debited straight down from account value, after which the periphery conditions are recalculated and wherever there’s a space in periphery demand, a periphery call is issued. The sanctioned allocation of periphery calls is through a periphery call report available in CSR (Corporate Social Responsibility) as opposed to any specific, physical communication from the exchange. The rearmost periphery call statement in CSR is the sanctioned announcement from the exchange and brokers are needed to view and cover this report after each MTM. The demand to pay the redundant quantum to keep the minimal position of the original periphery is effectively the variation periphery.
Delivery Perimeters
For certain contracts, the exchange specifies redundant perimeters nearer the expiry. This is especially the case in deliverable contracts where pitfalls associated with physical delivery are lesser and the exchange wants to check inordinate enterprise. To ensure that genuine dealers who are interested and able of making and taking delivery of goods are active towards the end of the contract. For those actors who are only interested in price threat operation, the duty of delivery perimeters acts as a catalyst for rolling over positions to the coming contract month. This practice also ensures that prices rightly reflect the underpinning request and a natural confluence occurs at the expiry of the contract. Delivery perimeters can be assessed towards the end of the trading of a contract or after expiry but before the final agreement. Delivery perimeters can be in addition to original perimeters or they can replace original perimeters, depending at what stage of a contract they come applicable. Connection of delivery perimeters is mentioned in the contract specifications document and other applicable leaflets issued by the exchange.
Special Perimeters
The exchange can put other types of perimeters as well if needed by specific circumstances. These can relate to ages of inordinate volatility, price inconsistencies, illiquidity, demand-force mismatch, or any other factor supposed by the exchange as warranting fresh perimeters. PMEX General Regulations give the exchange powers to put fresh perimeters as supposed applicable. These are further defined through contract specifications or leaflets.
Bus Liquidation
To give better threat operation tools to brokers, PMEX also provides a bus-liquidation installation. This performs the same function as a stop-loss order. The difference is that in a stop-loss order, the dealer specifies a specific price at which the order is actuated. In bus liquidation, brokers assign a specific account value (either in rupee terms or in chance terms) at which all positions are liquidated. Bus-liquidation can be considered as an overall, account-position stop-loss order which liquidates all open positions of an account to save its value and stop it from going into negative.
