Pakistan Stock Exchange (PSX) has launched Cash-Settled Futures (CSF), offering investors a more streamlined way to speculate on future share prices without the complexities of physical delivery. In this innovative market, investors enter contracts based on their expectations of where a stock price will be at a future date, and settlements are completed in cash rather than exchanging the actual shares. Daily Mark-to-Market (MtM) settlements ensure that gains and losses are accounted for systematically.
A CSF contract allows an investor to agree to buy or sell eligible shares at a predetermined futures price. At expiry, the contract is settled in cash, comparing the agreed futures price with the final settlement price from the Ready market. For instance, if a CSF contract is priced at Rs 150 and the stock closes at Rs 160, the buyer receives Rs 10 per share in cash from the seller. Conversely, if the stock closes below Rs 150, the seller gains while the buyer pays the difference in cash. Each standard CSF contract represents 500 shares.
The CSF market reduces capital requirements and operational risks. Since settlements are purely in cash, the need to arrange physical delivery of shares is eliminated. Corporate actions like dividends, bonus shares, and rights issues are handled using a globally recognized ratio-based adjustment, keeping investor exposure broadly consistent. Mark-to-Market profits are credited daily by the National Clearing Company of Pakistan (NCCPL) on T+1, allowing account holders full access to their earnings. Brokers benefit from waived deposit requirements and a three-month trading fee holiday in the new CSF market.
All types of investors, including individual, institutional, local, or foreign, can participate in CSF trading through their brokers, following standard account opening, KYC, and risk profiling procedures. Initially, 82 stocks from sectors including banking, cement, energy, fertilizer, and technology are eligible for CSF contracts, with the eligibility list reviewed quarterly. Investors can trade contracts with one-month, two-month, or three-month maturities, with new contracts listed on the first trading day after the last Friday of each month.
CSF contracts introduce leverage, allowing investors to control a larger exposure with a smaller upfront margin. For example, purchasing 500 shares at Rs 200 each in the Ready market requires Rs 100,000. With a 10% margin in CSF, the same exposure requires only Rs 10,000, magnifying both potential gains and losses. Daily Mark-to-Market settlements ensure that profits and losses are realized gradually, providing transparency and risk management for all participants.
The CSF framework simplifies trading during corporate actions. Adjustments to contract prices and multipliers allow investors to maintain consistent exposure without managing multiple series, a significant improvement over Deliverable Futures Contracts (DFC).
Investors can use CSF contracts for directional trades, hedging existing portfolios, and implementing spread strategies across maturities or between DFC and CSF products. By reducing capital requirements, eliminating physical delivery, and offering transparent settlements, the re-launch of CSF strengthens Pakistan’s derivatives market while aligning it with global best practices.
CSF presents a valuable tool for both individual and institutional investors to trade, hedge, and manage risk efficiently, provided they understand the leverage and systematic rules of the product. It represents a significant step toward modernizing Pakistan’s stock market and integrating digital finance solutions for diverse investors.
Follow the PakBanker Whatsapp Channel for updates across Pakistan’s banking ecosystem.