“Trading and Settlement Process for Interest Rate Futures in TFEX”

Outline

Get to Known by Tanavatt BhanijkasemKnow about TFEXInterest Rate Futures Contract Specification Contract Specification

Derivative Back Office Operation Process by Rungrat SriniratsaiTrade & Settlement FlowProcess Flow• Account Opening• Settlement and MTM

Report List

The Thailand Futures Exchange Plc (TFEX), A subsidiary of The Stock Exchange of Thailand (SET), was established on May 17, 2004 as a derivatives exchange. The TFEX is governed by the Derivatives Act B.E. 2546 (2003) and is under the supervision of the Securities and Exchange Commission (SEC).

Products in TFEXApril 28, 2006 Launch SET50 Index Futures as the first product October 29, 2007 Launch SET50 Index Options as the second product November 24, 2008 Launch Stock Futures February 2, 2009 Launch 50 Baht Gold Futures August 2, 2010 Launch 10 Baht Gold FuturesOctober 18, 2010 Launch Interest Rate Futures

Know about TFEX

Trading Mechanism

Broker A

Clearing A Clearing B

Broker B

Clearing House

ExchangeAutomatic

Matching Order

Buyer Seller

Clearing House : Guarantee & Cancel Position

Order/Confirm Order/Confirm

Inform to Split Contract

EOD:Settlement Price

Margin Margin

Margin Margin

Trading in TFEX

Trading in TFEX

Trading ProcessOpen the accountOpen position

Send “Long” or “Short” order

Deposit Margin (Collateral)Mark to MarketMonitor Margin• Initial Margin• Maintenance Margin

Close positionSend “Short” or “Long” orderHold to Maturities

Interest Rate Futures Contract Specification

•10,000,000 BahtContract Size

• Calculate from Interest rate 6M THBFIX which announce by Reuters at 11.00 am of the last trading day . By using 4 decimal digits

Final Settlement Price

• The 3rd Wednesday of the contract month. On that day the new series will be generated.• Time at which trading ceases on Last trading day is 11.00 a.m.

Last Trading Day

•Cash SettlementSettlement Method

•From 500 contracts net long or short in any contract month or all contract month combined.Large Position Report

•Net 20,000 contracts on one side of the market in any contract month or all contract month combined.Position Limit

•March (H), June (M), September (U), December (Z) up to 4 quartersContract month listed / Series

•Pre – open 9:15 a.m. – 9:45 a.m.Morning session 9:45 a.m. – 12:30 p.m.Pre – open 14:00 p.m. – 14:30 p.m.Afternoon session 14:30 p.m. – 16:00 p.m. ( Others TFEX products Market close at 16.55 p.m.)

Trading Hours

• Ceiling /Floor within + 1.25% of previous day settlement price (circuit breaker) • After trading resumes, Ceiling /Floor will be expanded to + 2.50 % of previous day settlement price

Price limit

•0.005 point (Equivalent to 250 Baht per Contract)Minimum Tick Size

•Quotations in terms of index 100.000 – Yield (3 decimal points)Price Quotation

•Interest Rate THBFIX 6 monthUnderlying Index

5 Y Government Bond Futures Contract Specification

2 nearest quarter months on March (H), June (M), September (U), December (Z) cycleSettlement Month

•1,000,000 BahtContract Size

• Based on basket of eligible bond – A designated of Government Bonds with a minimum issuance size of B5,000 Billion and 4-6 year term to maturity on the first calendar day of the contract month. •Calculate from average yield quoted by primary dealers. By using 4 decimal digits

Final Settlement Price

The 3rd Wednesday of the contract month. On that day the new series will be generated.• Time at which trading ceases on Last trading day is 16.00 a.m.

Last Trading Day

•Cash SettlementSettlement Method

•From 500 contracts net long or short in any contract month or all contract month combined.Large Position Report

•Net 20,000 contracts on one side of the market in any contract month or all contract month combined.Position Limit

•March (H), June (M), September (U), December (Z) up to 4 quartersContract month listed / Series

•Pre – open 9:15 a.m. – 9:45 a.m.Morning session 9:45 a.m. – 12:30 p.m.Pre – open 14:00 p.m. – 14:30 p.m.Afternoon session 14:30 p.m. – 16:00 p.m. ( Others TFEX products Market close at 16.55 p.m.)

Trading Hours

• Ceiling /Floor within + 2. 50% of previous day settlement price (circuit breaker) • After trading resumes, Ceiling /Floor will be expanded to +5.00% of previous day settlement price

Price limit

•0.01 point (Equivalent to 100 Baht per Contract)Minimum Tick Size

•Price quoted by percent of Par value with 2 decimal pointsPrice Quotation

•5-Year Thai Government Bond with 5% CouponUnderlying Index

Trading Symbol

11 : Year 201110 : Year 2010Last 2 characters, 6th and 7th represents year

TGB : 5Y Government Bond Futures

TBF6 :6M THBFIX Futures

The first 4 characters represents Underlying

TBF6Z10 : 6 M THBFIX Futures which expires on December 2010TGB5H11 : 5 Year Government Bond Futures which expires on March 2011

The 5th character represent the contract month

DecemberZ

NovemberX

OctoberV

SeptemberU

AugustQ

JulyN

JuneM

MayK

AprilJ

MarchH

FebruaryG

JanuaryF

MonthCode

Symbol UUUU M YY

TBF6Z10 : 6 M THBFIX Futures which expires on December 2010TGB5H11 : 5 Year Government Bond Futures which expires on March 2011

Contract Specification

TBF6 PriceQuote in 100 – yield (3 decimal), spread 0.005(Bt250 on 10MN Notional)

Bid 97.500 (2.500%) – Offer 97.505 (2.495%)Cash flow ?

Margin when open position & P/L at expiration

TGB5 PriceQuote in percent of Face (2 decimal), spread 0.01(Bt100 on 1MN Notional)

Bid 97.50 (5.5799%) – Offer 97.51 (5.5775%)Cash flow ?

Margin when open position & P/L at expiration

Derivatives Back Office Operation Process

Outline

Get to Known by Tanavatt BhanijkasemKnow about TFEXTrading in TFEXContract Specification

Derivative Back Office Operation Process by Rungrat SriniratsaiTrade & Settlement FlowProcess Flow• Account Opening• Settlement and MTM

Report List

Clients

FAX / E-mail Pay-in Slip

Place OrderTrading

T+1

Submit Application1& Supporting Doc.

Account Opening

Before Trading

Investment

Deposit Initial Margin1

2

3

4

EOD

KYC / CDDCredit ReviewAccount Opening

2

Segregate Bank A/C

Clients

Clients

Submit Order

Order MatchingConfirm Deal

5

7

Pre-Trade Confirmation

+/- Credit Line 6

9

Settlement12

Mark to Market8

Clients

+/- Collateral based on settlement amount

11

Segregate Bank A/C

Margin CallDaily Confirmation (e-Mail)

10

Clients

Monthly Monthly Statement

12 Generate month-ended statement

14

Segregate Bank A/C

Interest Payment*13

* Interest payment and WHT Slip shall be processed at 6th, 12th month

BrokerBroker

BrokerBroker

BrokerBroker

BrokerBroker

BrokerBroker

Account Opening

Application Form and Agreement signed by authorized personRisk DisclosureKYC / CDD processSupporting Document

Latest financial statements List of authorized directors to act on behalf of the companyLatest of Business Registration Certificate

Copy of key passport / personal ID card of authorized directors and/or authorized signatory and key work permit pages

Position Limit

Position Limit (Contracts)

--<= 20,000Interest Rate

Futures Option F&O

SET50 <= 20,000 <= 20,000 <= 20,000

Single Stock <= 20,000 - -

Gold No limit - -

Mini Gold No limit - -

Margin Required

2 Type of marginsInitial Margin• The minimum amount of money that must be in and

investment account on the day of a transaction.• On futures accounts, the initial margin must be met on any day

in which the opening balance starts off below the maintenance margin requirement.

Maintenance Margin• The minimum amount of money that much be kept in a margin

account on any day other than the day of a transaction.

Collateral Rate

Collateral Rate (Baht/Contract)

Note : for single stock futures please see at www.thaiclearing.com

Margin Multiplier

-TBD4,200Govt Bond - 5 Yrs

-TBD20,000Interest Rate - 6 Mth

Outright margin

Spread Margin (each pair)

Option Min. Charge

SET 50 24,000 6,000 500

Gold 30,000 7,500 -

Mini Gold 6,000 1,500 -

Initial Margin Maintenance Margin

1.35 1.00

Settlement Value – 6 Mth Interest Rate

Settlement Value = Initial Margin + Commission + VAT – WHT

Example

Symbol : TBF6Z10 (6 M THBFIX Futures which expires on December 2010)

Open Position : 1 contract

Initial Margin : 27,000 Baht / contract (20,000 * 1.35)

Commission : 200 Baht / Contract

FAX / E-mail Pay-in Slip

Deposit Initial Margin1

2 Segregate Bank A/C

ClientsBrokerBroker

Before Trading

Settlement Value

Settlement Value = Initial Margin + Commission + VAT – WHT27,208 27,000 + 200 + 14 - 6

Mark to Market – 6 Mth Interest Rate• Margin Method : Net or Gross (by using PC-SPAN)

If Equity Balance < Maintenance Margin, Client pay Margin Call up to Initial Margin required.• Closing Method : FIFO or Manual

Example Mr. A open has position 1 contract on TBF6Z10

102,000-25,000Sell TBF6Z10 @ 99.0004

127,000+ 100,00099.500MTM

27,000+ 25,000Margin Call3

2,000- 75,00097.500MTM2

77,000+50,00099.000MTM

27,000Buy TBF6Z10 @ 98.0001

CollateralDeposit / Withdraw

Gain / LossClosing PriceTransactionDay

In summary, Mr. A gain = (99.000 – 98.000) * 50,000 = 50,000.00 Baht

Settlement Value – 5 Years Government Bond

Settlement Value = Initial Margin + Commission + VAT – WHT

Example

Symbol : TGB5H11 (5 Year Government Bond Futures which expires on March 2011)

Open Position : 1 contract

Initial Margin : 5,670 Baht / contract (4,200 * 1.35)

Commission : 200 Baht / Contract

FAX / E-mail Pay-in Slip

Deposit Initial Margin1

2 Segregate Bank A/C

ClientsBrokerBroker

Before Trading

Settlement Value

Settlement Value = Initial Margin + Commission + VAT – WHT5,878 5,670 + 200 + 14 - 6

Mark to Market – 5 Years Government Bond

• Margin Method : Net or Gross (by using PC-SPAN)If Equity Balance < Maintenance Margin, Client pay Margin Call up to Initial Margin required.

• Closing Method : FIFO or Manual

Example Mr. A open has position 1 contract on TGB5H11

20,670-5,000Sell TGB5H11 @ 99.0004

25,670+ 20,00099.500MTM

5,670+ 5,000Margin Call3

670- 15,00097.500MTM2

15,670+10,00099.000MTM

5,670Buy TGB5H11 @ 98.0001

CollateralDeposit / Withdraw

Gain / LossClosing PriceTransactionDay

In summary, Mr. A gain = (99.000 – 98.000) * 10,000 = 10,000.00 Baht

On Last Trading Day

Cash SettlementInterest Rate THBFIX 6 month• Calculate from Interest rate 6M THBFIX which announce by Reuters at

11.00 am of the last trading day.

• By using 4 decimal digits

• Final Settlement Price = 100 – 6M THBFIX rate

99.9500 = 100 – 0.0500

5-Year Thai Government Bond with 5% Coupon• Based on basket of eligible bond – A designated of Government Bonds with

a minimum issuance size of B5,000 Billion and 4-6 year term to maturity on the first calendar day of the contract month.

• Calculate from average yield quoted by primary dealers. By using 4 decimal digits

On Last Trading Day – 6 Mth Interest Rate• The 3rd Wednesday of the contract month. • Time at which trading ceases on Last trading day is 11.00 a.m.• Closing position by using TFEX Settlement Price

Example Mr. A open has position 1 contract on TBF6Z10

99.500Auto Close position TBFZ10 @ TFEX settlement price

Last Trading Day

127,000+ 100,00099.500MTM

27,000+ 25,000Margin Call3

2,000- 75,00097.500MTM2

77,000+50,00099.000MTM

27,000Buy TBFZ10 @ 98.0001

CollateralDeposit / Withdraw

Gain / LossClosing PriceTransactionDay

In summary, Mr. A gain = (99.500 – 98.000) * 50,000 = 75,000 Baht

On Last Trading Day – 5 Years Government Bond• The 3rd Wednesday of the contract month. • Time at which trading ceases on Last trading day is 16.00 a.m.• Closing position by using TFEX Settlement Price

Example Mr. A open has position 1 contract on TGB5H11

99.500Auto Close position TGB5H11 @ TFEX settlement price

Last Trading Day

25,670+ 20,00099.500MTM

5,670+ 5,000Margin Call3

670- 15,00097.500MTM2

15,670+10,00099.000MTM

5,670Buy TGB5H11 @ 98.0001

CollateralDeposit / Withdraw

Gain / LossClosing PriceTransactionDay

In summary, Mr. A gain = (99.500 – 98.000) * 10,000 = 15,000 Baht

Payment Method

Payment MethodChequeBahtNetGood Fund TransferATS

For margin call, Money shall be good fund before noon.

For excess margin withdrawal, Request in written document signed by authorized persons

Money shall be good fund at T+1

Report Scheduling

TPre Confirmation

<= M+7

<= M+7

T+1

T+1

Report Scheduling Client Acting

Daily Confirmation

Margin Call Pay margin call before noon

Monthly Statement

WHT Slip (every 6 month)

Excess Margin withdrawal request

T 10.00 a.m.

12 October 2010 25

Q & A

tanavatt@phatrasecurities.com

rungrat@phatrasecurities.com