Commodity Brokers Certification

Study and Reference Guide Outline

May, 2015 [

Copyright © 2015 Institute of Capital Markets Karachi, Pakistan All rights reserved This is document is for educational purposes only and the Institute of Capital Markets (ICM) accepts no responsibility for persons undertaking trading or investments in whatever form. While every effort has been made to ensure its accuracy, no responsibility for loss occasioned to any person acting or refraining from actions as a result of any material in this publication can be accepted by the ICM or its members. ICM has prepared its study guides with the best intent for educational reference purposes only and the documents shall not be considered as an ultimate authority on the subject or to pass the ICM qualifications. Readers are encouraged to study additional relevant material and as recommended by ICM. The ICM's training materials are solely for the purpose of referencing and the matter provided may not be taken as any empirical theory on the subject which is dynamic and evolving with latest research and developments. While some of the content has been taken from third-party sources, their efforts and work on the topic are highly acknowledged. For any comments, suggestions and information, you may reach ICM at [email protected]

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OBJECTIVE OF THE EXAMINATION This certification course design aims to cover fundamentals necessary for operating commodity futures brokerage operations in Pakistan. It is divided in six parts and starts with introduction to futures markets, their background, basic functions and terminology in the first two chapters. Second part of the course covers regulatory framework, setup of Pakistan Mercantile Exchange, its operations and risks associated with futures trading. The primary focus of the course is to instil a working knowledge of the regulatory environment for commodity futures trading in the country as lack of this understanding of this area is seen as a primary cause of investor grievances.

TARGET AUDIENCE The primary audience of this course are commodity futures brokers. All staff working at commodity brokerages must take this course to better prepare themselves for client advisory and trade execution services. In addition to brokers, this course is also recommended for futures traders, asset managers, bankers, regulators, academia and anyone else interested in learning and participating in commodity futures trading. SYLLABUS STRUCTURE The unit is divided into elements. These are broken down into a series of learning objectives. Each learning objective begins with one of the following prefixes: know, understand, be able to calculate and also be able to apply. These words indicate the different levels of skill to be tested. Learning objectives prefixed:  know require the candidate to recall information such as facts, rules and principles  understand require the candidate to demonstrate comprehension of an issue, fact, rule or principle  be able to calculate require the candidate to be able to use formulae to perform calculations  be able to apply require the candidate to be able to apply their knowledge to a given set of circumstances in order to present a clear and detailed explanation of a situation, rule or principle

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EXAMINATION SPECIFICATIONS Each examination paper is constructed from a specification that determines the weightings that will be given to each element. The specification is given below. It is important to note that the numbers quoted may vary slightly from examination to examination as there is some flexibility to ensure that each examination has a consistent level of difficulty. However, the number of questions tested in each element will not change by more than plus or minus 2. Examination Specification 100 multiple choice questions Element No. Elements 1 Introduction to Commodity and Futures markets 2 3 4 5 6

Questions 15 15

Mechanics and Fundamentals of Commodity Markets Commodities and Futures Exchanges Regulatory Frameworks PMEX Traded Commodity Futures Risk of Trading and Risk management Total

15 15 20 20 100

ASSESSMENT STRUCTURE   

This will be a two-hour examination of 100 Multiple Choice Questions. All questions will carry equal marks. There will be no negative marking.

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SUMMARY OF THE SYLLABUS

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CHAPTER 1 1.1 1.2 1.3 1.4 1.5

1.6

1.7

1.8

1.9

Introduction to Commodity and Futures markets

What are Commodity Markets Role of Commodity Markets Commodity markets in Pakistan Introduction to Pakistan Mercantile Exchange PMEX Types of Commodities at PMEX - Energies - Grains - Soft - Metals - Financial Segments in Commodity Markets - Over the counter (OTC) Market - OTC contract - Exchange Traded Market Introduction to Futures Contracts - What is a Futures contract - Key Features of Futures Contracts - Who trades Futures and Why - Social Utility of a Futures Market - Taking a position - Taking Delivery - Clearing House Types of Futures - Commodity Futures - Financial Futures - New Generation - Implicit Futures Components of Futures Contracts - The Asset - The contract size - Duration - Delivery arrangements - Delivery months - Price Quotes - Price Limits - Position Limits 8

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Margins

CHAPTER 2 2.1 2.2 2.3 2.4

2.5 2.5

The customer and the commission merchant Price discovery in commodity market Physical Market (Spot Market) Factors Affecting the Prices Inventories and Stocks Currency Inflation Weather Seasonal variations Market Conditions Political and economic condition Technology and Human Demographics NCEL Business Systems Order Process Flow

CHAPTER 3 3.1 3.2

Mechanics and Fundamentals of Commodity Markets

Commodities and Futures Exchanges

Introduction to Pakistan Mercantile Exchange PMEX Role of PMEX Principles of clearing and margin • Definition and purpose of clearing • Margin • Market transparency, Trade reporting and monitoring

3.3

Components of PMEX

IT and SYSTEMS - Trading Systems - Connectivity and networks - Database & Disaster Recovery - Application development ANALYTICS - Risk Management - Research - Real-time Analysis - Software Specifications

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OPERATIONS - Clearing and Settlement - Margining and Accounting - On-line Banking - Delivery COMPLIANCE - Member Services - Surveillance and Monitoring - Discipline and Enforcement RESEARCH & PRODUCT DEVELOPMENT - Contract Development PMEX Drivers and Advantages - Technology o Low Cost of Trading o Bigger Reach (Geographical & Numerical) o Scalability - Market Making

CHAPTER 4 4.1 4.2 4.3

Regulatory Frameworks

4.4

SECP Role and Function SBP Role and Function PMEX regulatory Framework - Securities and Exchange Ordinance 1969 - Commodity Exchange & Futures Contract Rules 2005 - NCEL Regulations Ethics, Disclosure and best practices

4.5

Role and Responsibility of Brokers - towards Exchange - towards SECP - towards customers

4.6

Requirements for obtaining and maintaining PMEX Membership

4.7

Requirements for obtaining and maintaining SECP Commodity Broker Registration

CHAPTER 5

PMEX Traded Commodity Futures

5.1

Market platform and trade processing & matching rule at PMEX

5.2

Order/Instruction flow and order types at PMEX

5.3

Taking a Position • •

5.4

Long Position Short position

Delivery and Settlement

CHAPTER 6 6.1

Risk of Trading and Risk management

Understanding Risk • • • • • •

Financial Risk Market risk Credit risk Operational risk Reputational Risk Business and Strategic risk

6.2

Market Risk • Equity • Interest rate • Currency • Commodity

6.3

Credit Risk • Settlement Risk • Replacement cost risk

6.4

Identification and Risk Mitigation Strategy • Margined risk • Un margined Risk • Framework for Risk Management • Policies • Methodologies • Infrastructure

6.5

6.6

Market Risk mitigation • Complete segregation – cornerstone • Initial Margins determined using VAR • No netting-off between clients • Pre-Trade Check • Spot Month • Delivery Margin • Credits • Intra commodity spreads • Inter commodity spreads • Daily Mark-to-Market of Positions • Variation Margin in Cash only • Daily Settlement Price Process