Futures processing 75
1
Where necessary upon tender, a seller may be instructed by the Clearing House to convert
a Bulk Delivery Unit into Large and/or Standard Delivery Units, or a Large Delivery Unit into
Standard Delivery Units.
2
Bulk Delivery Units are tenderable at a discount of £20 per tonne to the contract price.
3
Contact the Exchange to determine which Delivery Areas have Dual Capacity
Warehousekeepers (i.e. those nominated for the storage of Bulk Delivery Units as well as
Standard and Large Delivery Units).
Trading Platform
• LIFFE CONNECT
®
Trading Host for Futures and Options.
• Algorithm: Central order book applies a pro-rata algorithm,
but with priority given to the first order at the best price sub-
ject to a minimum order volume and limited to a maximum
volume cap.
• Wholesale Services: Against Actuals.
Contract Standard
• Delivery may be made of Cocoa meeting the contract require-
ments.
• Unless otherwise indicated, all times are London times.
Source: Euronext.liffe.
Once again we can see that there are specific issues related to the
delivery of cocoa including the origin, types of beans, etc.
It is quite clear that the commodity derivatives sector is in general
a more technical market from a delivery point of view, and whilst
physical delivery might not occur for the majority of transactions
there are still, nevertheless, significant amounts of a commodity sub-
ject to the delivery process in final settlement of the contract obliga-
tions and as such any settlement team whose organisation is or
might become involved in commodities must have a good under-
standing of the peculiarities associated with each type of commodity
contract.
Workflow road map
Workflow
We can use a futures transaction of a purchase of 10 Sep. FTSE 100
Index Futures @ 4500 as an example to follow the workflow associ-
ated with on-exchange futures transaction.
In the following text we describe the process from the point of view
of the broker, in this case a clearing member of an exchange, and also
make reference to the workflow from an institutional client’s position.
Trade capture
In the case of an electronic exchange these details are automatically
captured from the trader’s action on the dealing screen. In the case
of an open outcry market the details are either input into an elec-
tronic matching system by the trader or alternatively a deal ticket is
completed, which is then passed to support staff for input to the
exchange matching system.
The actual clearing and settlement processes for markets differ as
do the procedures adopted internally by firms. However, the following
table illustrates the kind of option trade details that are likely to be
needed. These will be:
Data Detail Source
Future FTSE 100 Indexes Trade ticket/Deal system
Market Euronext.liffe Trade ticket/Deal system
Maturity September Trade ticket/Deal system
Multiplier £10 Index Contract specification
Tick size 0.5 £5 Contract specification
Buy/Sell Buy Trade ticket/Deal system
Counterparty xxx Trade ticket/Deal system
Time of trade 00/00 dd/mm/yy Trade ticket/Deal system
Transaction reference xxxxxx System generated
Client/Principal trade Client Trade ticket/Deal system
Execution broker N/A Trade ticket/Deal system
The institutional client that has placed the order with their broker
has in essence the same data requirements but obviously has no ref-
erence to Principal Trading.
It is important to note that high-quality static data on futures, like
all products, is crucial as today most firms use systems for the
processes involved from trade to settlement and beyond.
Trade validation
The transaction must be validated.
This process needs the confirmation of the trade details received
from the front office against the data being received from the market.
76 Clearing and settlement of derivatives
Futures processing 77
This may be via a system link to the exchange, for instance the Trade
Registration System (TRS) used on Euronext.liffe.
The TRS provides details of transactions that have taken place in
the market. Each trade is shown whether the firm has transacted it,
it has been ‘given in’ by an executing broker for the firm’s account or
client account or it is to be ‘given up’ to another clearing member. It
is then accepted by the member and internally confirmed against the
order details.
As the trades showing are registered to the firm’s account at the
clearing house and are therefore due for settlement of any obligations
arising, it is important that any discrepancy between the trade details
and the order details is notified to the relevant dealer/trader and
resolved quickly.
Trade enrichment
To be able to process the trade internally we will need to:
1. Book the trade to the relevant client account or trading book.
2. Identify if the trade is an opening or closing transaction.
3. Perform the margin calculation (if applicable).
4. Charge the relevant commission.
5. Charge other fees (if applicable).
6. Perform the settlement of the transaction with the clearing house.
7. Effect the client settlement instructions.
Booking trade to the relevant client account or trading book
The details for this will be on the database and the posting will
either be automatically generated by the dealing system to the oper-
ations system or need to be input from a trade ticket or similar doc-
ument. The accurate posting of the transaction is a vital function as
the trade may have been done to close out an existing obligation,
and a failure to successfully post the trade and complete the close-
out could cause an unwanted assignment. The next section looks at
this issue.
Identify opening and closing transactions
The trades booked to a client account will be either opening transac-
tions, i.e. creating a position, or closing transactions where there is
an existing position that is offset by the trade being booked. When
this occurs the two transactions are closed out to create a realised
profit or loss. If a successful closeout takes place it must happen in
the internal records and also in the Client Account of the Firm held
at the clearing house.
If the latter does not take place then there is a risk that an action
such as an assignment of the long futures open position could take
place. The result could be increased settlement costs.
Principal trading accounts are usually settled net, automatically in
both the internal and the clearing house accounts.
Perform margin calculation
If the transaction undertaken is creating a short position then
there will be a margin requirement that needs to be calculated. In
most cases this will be either Standardised Portfolio Analysis of
Risk (SPAN) or Theoretical Intermarket Margin System (TIMS)
depending on the exchange on which the trade has taken place.
Both these margin systems are described more fully in the
Appendices 9 and 10.
The margin call will be covered by collateral in the form of either
cash or collateral or a combination of both. This collateral will be
needed for both the initial and the variation margin call (if the net of
the positions is a loss) made by the exchange clearing house to the
firm and by the firm to its client.
Margin will be posted to a margin account in the ledger.
Charge the relevant commission
For client transactions, there will be a commission payable to the
broker. The commission may be a rate/amount per contract or some
other rate agreed by the sales desk and the client.
This rate can be charged on the opening trade, the closing trade or
split so that both the opening and the closing transactions carry a
commission.
The amount of commission charged on the transaction may include
what is called floor brokerage. This is the fee charged by an execution
broker who is giving up the trade to a clearing broker. The clearing
broker will charge the client or trading book the combined floor bro-
kerage and clearing fee and then settle the floor brokerage with the
execution broker (Figure 4.6).
Commission will be posted to a commission account in the ledger
and floorbrokerage to a brokerage account pending settlement with
the executing brokers.
78 Clearing and settlement of derivatives
Futures processing 79
Figure 4.6 Floor Brokerage Relationships
Notes:A Trade B Commission (inc floorbrokerage fee) C floorbrokerage.
A
B
C
Clearing
broker
Client/
Trader
Executing
broker
Executing
broker
Charge other fees
There are several other fees that may need to be charged on a trans-
action. These will include exchange fees, regulatory fees and taxes.
Although the client may be charged an all-inclusive commission,
they may want to see the breakdown of commission and fees and the
data will need to be posted separately in the ledgers for accounting
and management information purposes.
Perform the settlement process with the clearing house
A clearing broker will need to settle the initial margin requirement and
any VM with the clearing house. This will most likely be on T 1. The
amount to be settled will be included in the net settlement figure for
the clearing member and will be collected or paid out by the clearing
house through its normal settlement process. In many cases the set-
tlement amount is netted across obligations by currency.
The calculation for the VM amount is:
Number of contracts number of ticks tick value
In our example of the purchase of 10 Sep. FTSE 100 Index Futures
@ 4500, if we assume the contract closes @ 4505 this would be:
10 contracts 10 ticks £5 £500
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