Pakistan Stock Exchange (PSX) has launched Cash-Settled Futures (CSF), giving investors a simpler way to take a view on future share prices without worrying about the physical delivery of shares. In this market, investors enter into a contract today based on their expectations about where a share’s price will be in the future and, at the end, only the difference in price is paid or received in cash, along with the daily Mark-to-Market (MtM) settlement.
A futures contract that settles only in cash
In a CSF contract, an investor agrees to buy or sell eligible shares at a future date at an agreed “futures price”. There is no exchange of the actual shares against complete transaction amount at expiry . Instead, on the last day, the contract is settled in cash: the futures price is compared with the final settlement price (the closing price in the Ready market), and the difference is credited or debited to the investor’s account.
For example, if the CSF Futures price was Rs 150 and, at expiry, the underlying share closes at Rs 160, the buyer receives Rs 10 / share in cash from seller (or Rs 5,000 = 10 x 500, as each contract represents 500 shares). If the price closes below Rs 150, the seller gains and loss is paid by buyer in cash instead.
What is the Edge of Cash-Settled Futures (CSF)??
The CSF market has been designed to be lighter on capital and smoother in operations. First, settlement is purely in cash, which reduces the operational and settlement risks linked with arranging physical delivery of shares.
Second, CSF uses the globally recognized Ratio-based method to handle corporate actions (such as dividends, bonus and right issues). Instead of breaking contracts into A and B series, contract prices and contract multipliers are adjusted so that the investor’s overall exposure remains broadly the same before and after the corporate action event (excluding any tax effects).
Third, Unlike DFC, the MtM profit is fully distributed to the account holder by NCCPL on T+1, which account holder can withdraw completely.
Moreover, the basic deposit requirement has been completely waived off for brokers, compared to PKR 1 million required by brokers to trade in Deliverable Futures Market. In addition, there CSF market is given a trading fee holiday for initial three months by Pakistan Stock Exchange and National Clearing Company of Pakistan i.e., these institutions will not charge any trading fee in CSF market for initial three months.
Who can invest, and what can they trade?
All types of investors – individual, institutional, local or foreign are allowed to trade in the CSF market through their brokers, subject to usual account opening, KYC and risk-profiling requirements.
Initially, 82 stocks have qualified the CSF eligibility criteria. These include many well-known names from banking, cement, energy, fertilizer, technology and other sectors. List of these tradable stocks under CSF is readily available on PSX website and social media channels. The eligibility list is reviewed every quarter against the quantitative and qualitative thresholds set in the Criteria.
Each standard CSF contract currently represents 500 shares of the underlying stock, known as the “contract multiplier”. This multiplier may be adjusted if there is a corporate action, but the idea of a fixed block of shares per contract remains the same.
Contract tenors and how much money is needed
At any time, investors can trade CSF contracts with three maturities – roughly one-month, two-months and three-months contract. New contracts are listed on the first trading day after the last Friday of each month, and the current month’s contract expires on the last Friday of its calendar month.
The investment needed is much lower than buying the same number of shares in the Ready market. For instance, buying 500 shares of a company at Rs 200 in the ready market requires Rs 100,000. Taking exposure to the same 500 shares via CSF, with an assumed margin requirement of 10%, would require only Rs 10,000. The investor still gains or loses on the full 500-shares exposure, but only a fraction of that value is paid upfront as margin.
Leverage: a powerful tool that cuts both ways
This margin system introduces “leverage”. Because only part of the contract value is deposited, any change in price results in a larger percentage gain – or loss – on the investor’s own money.
For example, if an investor uses Rs 100,000 to buy shares in the Ready market and the price rises from Rs. 200 per share to 240, the gain is Rs 20,000 or 20%. In a leveraged CSF position on the same underlying, the same Rs 100,000 could provide a much larger exposure for instance a maximum of 10 times due to 10% margin requirement, so a similar move in the share price could lead to a significantly higher percentage profit, in example 10x i.e., Rs. 100,000 or 100%. But the reverse is also true: a relatively small adverse move in price can quickly eat up the margin and trigger losses. Hence, if it has a potential to magnify the profits, it can also magnify the losses in adverse movement.
For this reason, CSF should be used in a systematic manner with clearly understanding the rules of the product to avoid or minimize adverse market movements.
How profits and losses are settled
CSF positions are “marked to market” every trading day. The Exchange calculates a Daily Settlement Price for each contract, usually based on trading price in the CSF market and considered aligned with underlying spot price. Positions are revalued at this price each day.
If an investor is in profit for the day, that amount is credited in cash on the next day. If there is a loss, it is collected in cash. At expiry, a final settlement is made using the Ready-market closing price of the underlying shares against the futures price, and the contract is closed.
This daily settlement system ensures that gains and losses are realized gradually, and helps the clearing company manage risk across the market.
Corporate actions: simpler than before
Dividends, bonus shares and rights issues are a fact of life in the stock market. In the DFC market, such events often meant splitting contracts by creating A and B series. Under CSF, the approach is more investor-friendly. When a corporate action is announced and the share price goes ex-dividend, ex-bonus or ex-right, PSX and the clearing company adjusts both the futures price and the contract multiplier using a defined formula. The aim is to keep the overall exposure of the investor approximately the same before and after the corporate action adjustment (excluding tax impact), and any small difference due to rounding-off impact will be adjusted by NCCPL. This means investors can hold their CSF positions through corporate actions without worrying about managing multiple series, which is a key improvement over DFC.
How investors can use CSF in practice
There are several practical ways in which investors can use CSF:
Taking a view on price direction: If an investor expects a share’s price to rise, they can buy a CSF contract (go long). If they expect it to fall, they can sell a CSF contract (go short). In this way, they can benefit from both upward and downward moves without owning the underlying shares.
Hedging an existing portfolio: An investor who already holds shares but fears a short-term decline can protect themselves by shorting CSF on the same underlying. Losses in the Ready market can then be offset by gains in the CSF position, and vice versa.
Spread strategies: More advanced investors may use calendar spreads (buying a nearer-month contract and selling a longer-month contract, or the other way around) or spreads between DFC and CSF to take advantage of price differences across maturities or products, while keeping overall market exposure limited.
The relaunch of Cash-Settled Futures at PSX is an important step in deepening Pakistan’s derivatives market. It has taken into account investors input and expectation while designing the product in line with international benchmarks. It gives investors a tool to trade, hedge and manage risk with lower capital requirement, no physical delivery and a more transparent settlement process. As with all leveraged products, CSF requires understanding and caution, but used wisely, it can become a valuable part of the toolkit for both individual and institutional investors.
Disclaimer: “Investments in the Stock Market are subject to market risks. The prices of securities may go up or down depending upon the factors and forces affecting the securities market. The past performance of any security is not necessarily indicative of its future performance. Investors are requested to review all details carefully and obtain expert professional advice with regard to specific legal, tax, and financial implications of the investment before making any decision relating to the purchase or sale of security in the Stock Market”
Published by: Pakistan Stock Exchange
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