Clearing

Clearinghouse initial margin

As has been widely reported, many customers of MF Global have had their futures positions and a portion of the related initial margin transferred to accounts at a new futures commission merchant. These transfers were undertaken as part of a bulk transfer coordinated by the Trustee in the SIPC proceeding. As emphasized, however, not all of the initial margin has been transferred (or, more accurately, credited) to their new account at the new FCM - the relevant clearinghouse (e.g., CME Clearinghouse for futures traded over the CME) has retained a portion of the margin.

This development has, in turn, prompted many participants to ask:

1) Why is the clearinghouse allowed to retain a portion of the initial margin? Isn't that the customer's property?

2) How much of that initial margin will be recovered?

In this posting, we will explore those two questions.

The Clearing System

A clearinghouse guarantees that the parties to a futures contract will perform their obligations by, as often repeated, becoming the buyer to every seller and the seller to every buyer. To ensure the integrity of the clearing system, only qualified members are permitted to keep a trading account at the clearinghouse. Non-clearing member market participants (i.e., customers) must open an account with a clearing member to trade cleared products.

Both the clearing member and the customer must abide by all of the applicable clearinghouse rules. Among other duties, these rules require the clearing member to maintain a sufficient level of capital, contribute to a gurantee fund maintained by the clearinghouse to backstop its obligations to the market, and to collect a specified amount of initial and variation margin in support of trades entered into by the customers of that clearing member. The Commodity Futures Trading Commission regulates any market participant that collects initial margin from customers as a "futures commission merchant".

Shipping by airmail from UK: items normally reach US addresses within a few days but can take longer THE STOCK EXCHANGE: The clearing House. London, antique print c1880
Home (Shipping by airmail from UK: items normally reach US addresses within a few days but can take longer)
  • Caption below print: The clearing house
  • Condition: Good; suitable for framing. However, please note: Verso text quite apparent in margin; The image shown may have been taken from a different example of...
  • Size: 14.0 x 14.0cm, 5.5 x 5.5 inches (Small)
  • Type & Age: Year printed c1880. Antique wood engraved print
  • Verso: There are images and/or text printed on the reverse side of the picture which are likely to show through the page to some extent because the paper is quite...
Shipping by airmail from UK: items normally reach US addresses within a few days but can take longer LONDON: Clearing House, Lombard St, antique print, 1847
Home (Shipping by airmail from UK: items normally reach US addresses within a few days but can take longer)
  • Caption below print: The Clearing-House, in Lombard-Street
  • Condition: Good; suitable for framing. Please check the scan for any blemishes prior to making your purchase.
  • Size: 14.5 x 23.5cm, 5.75 x 9.25 inches (Medium)
  • Type & Age: Year printed 1847. Antique wood engraved print
  • Verso: There are images and/or text printed on the reverse side of the picture. In some cases this may be visible on the picture itself (please check the scan prior...

Popular Q&A

Related Posts