Clearance & SettlementFutures
The clearance and settlement process for futures trading is slightly different compared to other investment markets, if trading on an exchange. Parties to a futures contract have no responsibility to each other after the future is initially traded. The exchange itself will step into both sides of the transaction, becoming the counterparty for both parties. The exchange buys from the seller, and sells to the buyer. This eliminates any obligational risk on both sides of the transaction. Their duty to one party is cancelled by another.
This eliminates concerns about counterparty’s ability to meet their obligation. The exchange has deeper pockets than your trading partner. Even if your trading partner fails to meet obligations, the exchange will still meet its obligations to you. The exchange is the only party in the trade that can be hurt by insolvency or failure.
In order to settle transaction an exchange must document their dealings. They maintain lists of trades and their details. The broker, order, commodity, and contract details have digital or written time stamps. This preserves a record of events. Order discrepancies will be investigated and corrected by the exchange.
Settlement and Margins
The settlement process begins immediately after investors enter a contract on the buy or sell side. Each day, open positions change based on the difference between market prices and future delivery prices. The price differences are marked daily in accordance with fair value accounting. This allows accounts to be adjusted against unrealized profits/gains.
These adjustments are held against the trader’s account margin, which was established when they opened the account. Unrealized losses reduce margin, unrealized gains increase margin. These gains and losses are finalized on the expiry dates. If margin falls below the minimum maintenance level a margin call will be issued. If the problem is unresolved the exchange will liquefy positions, keeping them afloat for the safety of other traders.
At delivery, both parties either pay or receive from the exchange. The commodities deliverer on the sell side gives the commodities or their financial value to the exchange. The commodities receiver on the contract’s buy side receives the underlying assets or their financial value. The obligational risks are eliminated by both parties handling their agreement properly.
Brokerages must separate client’s accounts from their own. Bankruptcies have wiped out client funds, and clearance and settlement processes were disrupted due to these occurrences. If they collapse, they may be tempted to fund business operations with client money. They cannot mix accounts, or withdraw cash from client’s accounts to maintain their finances.
Did we help you? Vote with a Crypto-Donation!
Donate Bitcoin Cash
International Economic Analysis:
- Major Currency Economic Summaries
- Performance of Major Imports and Exports
- Mandates of Central Banks versus Expectations
- Performance Indexes of Major Economies
- Economically Correlated Currency Projections
- Large Funds Currency Sentiment Readings
- List of Technical Indicators to Look For
- Occasional: Foregin Exchange Technicals Markups
American Markets Analysis:
- Summaries of American Economic Structure
- Performance of Major
- Federal Reserve Mandate versus Expectations
- Performance Indexes of U.S Economy
- Economically Correlated U.S Dollar Projections
- Large Trading Fund Index Sentiment Readings
- Market Wide Earnings Versus Valuations
- Fundamental Ranking of U.S Business Sectors
- Best and Worst Future Consensus Estimates
- Occasional: Firm Fundamental Strength Report
- List of Technicals to Look for While Trading
Investment and Finance, Serviced by Amazon
No Results Found
The page you requested could not be found. Try refining your search, or use the navigation above to locate the post.