Futures Market and Clearinghouse
Futures contracts, as already mentioned above, are sold and bought in organized futures markets (exchanges). To implement trading on futures exchanges, the centralized clearing settlement mechanism provided by the settlement (clearing house) is used, which after becoming a deal becomes a "buyer for the buyer". and buyer for the seller & quot ;. The clearing house is obliged to deliver the goods to the buyer of the contract and settle with the seller of the contract. In other words, the clearing house takes the risk that if you buy a futures and your counterparty does not fulfill its obligations, you will not suffer.
In order to protect themselves against potential losses related to possible refusals by futures participants of their obligations under the relevant contracts, the clearing house establishes and provides:
1) mandatory entry by buyers and sellers of the initial contribution (margin);
2) Daily clearing of accounts of buyers and sellers;
3) maintaining a certain level of margin on accounts of buyers and sellers.
In order to buy or sell a futures contract, the investor must open a special futures account, making an initial margin on it, insuring his current financial relationship with the exchange and designed to guarantee the fulfillment of all obligations under the futures contract by its parties. The size of the initial margin is for various assets from 5 to 15% of the total cost of the futures contract. The initial, or operating, margin provides the clearing house with some protection, but, of course, not fully. Additional protection for the clearing house is given by clearing and supporting, or variation, margin, about which will be rendered below.
During the life of a futures contract, prices for the underlying asset may rise or fall. Instead of waiting for the profits and losses of the participants in the transaction to be distributed at the time of settlement of the futures contracts, the clearing house deposits the respective profits (losses) on their accounts daily. Since in the futures transaction the profit of one counterparty exactly corresponds to the losses of the other, the money is transferred from one account to another. In particular, with an increase in the price of the underlying asset, the margin is paid by the sellers of contracts and is credited to the buyers' accounts of the contracts. When the price decreases - on the contrary: the margin is paid by the buyers and credited to the accounts of the sellers.
The procedure for mutual settlements of participants in a futures transaction, reflecting the change in the quoted price of a futures contract, is actually called clearing.
Example. If an investor bought a futures contract for $ 100, and the next day the price of this contract fell to $ 90, then if he wanted to liquidate his obligations to the stock exchange he would have to conclude a reverse transaction at a price of $ 90. and leave the futures market, paying the exchange $ 10. Since he did not do this, say, hoping for a price increase in the future, the exchange will write off his account to guarantee the fulfillment of his obligations under the contract
$ 10 but the results of this trading day, crediting them to the account of the counterparty for the contract in question.
If, for example, the next day the price rises to $ 110, then the buyer's account will be credited with $ 20, and its total result for the two trading days will be $ 10 of profit. These $ 20 will be listed, by the way, from the seller's account. Now the seller is the guarantor of the exchange's performance of its obligations to the buyer of the futures contract. And so every day (and in the case of an unstable market and more often), the margin is recalculated and either the sellers or buyers contribute or receive them depending on the direction of the price change for the underlying asset.
Graphical illustration of clearing calculations for the considered futures contract is presented in Fig. 4.15.
Fig. 4.15. Profits of the seller and the buyer of the futures contract:
I, II - the profit of the investor buying and selling the underlying asset (futures contract), respectively
The futures contract, as it follows from the foregoing, is inherently a zero-sum game: the profits and losses for all positions sum up to zero, since the seller's result for each contract is compensated by the buyer's result. The aggregate profit from futures trading for all investors should also be zero, as is the final risk of a change in the price of the asset.
The general procedure for the clearing settlement scheme, reflecting the logic of changes in the profit and loss of participants in the futures market, depending on its situation, is presented in Table. 4.6.
Due to the futures margin and the clearing house of the clearing house, which is permanently performed by the clearing house, the guarantees for the fulfillment of traders' obligations to the exchange and, accordingly, the exchanges before the traders under futures contracts are practically one hundred percent.
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