Finance

What is Clearing Margin?

What is Clearing Margin?

Clearing margins are financial safeguards that guarantee that clearing members (usually businesses or corporations) performed on the open futures and options contracts of their customers. Clearing margins are specific customer margins that are expected to be deposited with brokers by individual buyers and sellers of futures and options contracts.

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Clearing margins are liquid funds to which brokers and other clearing firms must have immediate access in order to ensure that transactions with customers are completed. Should the customer wish to sell their position, they must have enough money to be able to pay out all open positions on accounts.

Our margining process is a multifaceted and time critical process that considers a variety of factors in order to calculate margins that adequately protect you, the Clearing Member, your customers, the Clearing House and therefore the marketplace as a whole. We do this when setting acceptable amounts simultaneously that do not tie up surplus resources.

Why Clear:

  • Risk Mitigation — In the event of a clearing member loss, margin requirements, guaranty funds and other financial guarantees mitigate risk.
  • Capital Efficiency — Cross margin available through correlated ICE goods reduces the cost of capital.
  • Price Transparency — For market participants to value their positions every day, settlement prices offer a straightforward and unbiased pricing technique.
  • Delivery Facilitation — Clearing houses, along with the exchanges, promote the distribution process to varying degrees depending on the commodity.

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Example:

  • The initial margin on the contract could be Rs.3,000 if a trader buys one futures contract. This is the amount of cash they need to have to carry the trade into their account. The maintenance margin may be Rs.2,500. This means if the money in the account drops below Rs.2,500 the trader is required to top up the account to Rs.3,000 again, as they have lost Rs.500 on their positions which reduces the buffer in their account to an unacceptable level. In order to ensure future trade, the amount needed to bring the account to an acceptable level is known as the Variation Margin.
  • Assume now that a broker has thousands of traders, all in diverse positions, earning and losing money. All of these positions must be considered by the broker or clearing member, and then send funds to the clearing houses covering the risk taken by all their trades.
  • Depending on the exact market conditions and price fluctuations encountered over the course of the day, the amount of variation margin varies.
  • When the equity account balance falls below the maintenance margin or initial margin requirement, the variation margin payment of additional funds may be deemed necessary by a broker. This request for funds is known as a Margin Call.

 

Author: Pruthviraj Sondani

About the Author: One day I will find the right words, and they will be simple

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Role of Clearing House in Financial Markets

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