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Zeroing in on derivatives contracts – Options


FINSEC is introducing the Exchange Tradeable Options and Futures. A Derivative is a security that derives its value from the value or return of another asset or security. Exchange-Traded Derivatives are traded at a physical exchange or centralized platform which are standardized and backed by a Clearing House.

Looking at the Exchange Traded Options, these are contingent claim types of contracts that depend on a stock price at a future date.  This article is specifically focusing on OPTIONS

An Option is a contract that gives the owner the right, but not the obligation, to either buy or sell an underlying asset at a given price (strike price or exercise price) and date. To acquire this right the taker pays a premium to the writer (seller) of the contract.

It is an exchange tradable instrument and the contract terms are standardized by the Financial Securities Exchange (FINSEC) and are traded in an active market secondary market like forex demo contest and fintech, subject to greater regulation, backed by a Clearing House, and require a deposit of full collateral cover of the underlying security.

While an option buyer can choose whether to exercise an option, the seller is obligated to perform if the buyer exercises the option. The owner of a call option has the right to purchase the underlying asset at a specific price for a specified time.

The owner of a put option has the right to sell the underlying asset at a specific price for a specified time. The Options will be settled using the European Option style. This means Options shall be exercised only on the expiration date of the contract.

For primary trading, the Automated Trading System (ATS) supports an anonymous order-driven market. The contract writer shall never know the counterparty and details remain confidential to the Clearing Participants. During trading hours, buy and sell orders will be entered into a central electronic order book by contract writers who are subject to clearing by the Clearing Members of FINSEC using terminals located at their premises.

These orders will be matched within the ATS and execution prices will be determined. The FINSEC matching engine operates on a strict price/time priority rule to match buy and sell orders. The buy order that has the highest buying price and the sell order that has the lowest selling price that is executed first.

All executed contracts shall be uploaded and listed for secondary trading. Secondary buy orders shall be posted onto the automated trading system by contract writer. All orders posted shall be matched by the FINSEC matching engine under the FINSEC matching engine procedures.

The secondary market trading for options contracts shall be open for trades as many times as possible up until the expiration date of the contract and the contract holder placing a sell order shall determine the premium. A secondary market buyer of a contract shall assume the right to exercise that contract on expiry.

Secondary sell orders shall be posted by holders of the contracts. Order management shall be undertaken following FINSEC Order Qualifiers. FINSEC undertakes clearing and settlement of all trades executed on the FINSEC Derivatives Board. Clearing shall be triggered by an order message being forwarded to the Clearing Participant who is expected to affirm the order by confirming the availability of either the funding (for the buy-side) or security (for the sell-side) and undertaking to settle or deliver when called upon.

Settlement shall be undertaken by the Settlement Bank upon receiving a trade execution message from FINSEC that will trigger the release of funds to the seller. Delivery shall be undertaken by the Settlement Bank upon receiving a trade execution message from FINSEC that will trigger the release of the security to the buyer.

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