8
Margin and
collateral
For exchange-traded products the risk that the clearing house faces
is that the contracts it clears represent a far greater value than has
actually been settled. To manage this risk the clearing house utilises
several risk management techniques including the use of margin.
By applying an initial margin or deposit and requiring the valuation
amount or obligation associated with open positions in futures and
options to be settled daily, the clearing house is able to monitor and
manage the risk of open positions and closeout trades.
Initial margin
The deposit which the clearing house calls to cover margin require-
ments is called initial margin and is returnable to the clearing member
once the position is closed.
The amount for each product will vary as it is geared to the current
volatility of the particular product. The margin will be sufficient to
cover an approximate 3–5 per cent movement in the price of the con-
tract on a day but can and often is changed to reflect the current
situation. If this occurs during the day it is called intra-day margin.
This will only occur when there is a very large movement up or down
in the price of the contract.
When you buy or sell a futures contract you do not pay the full
value of the contract, only the margin requirement. This initial margin
or deposit is held by the clearing house throughout the time that the
position is maintained. The clearing house must have some kind of
insurance that any settlement or delivery obligations could be fulfilled.
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