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Futures Clearing


 A futures contract is a financial contract which either obligates the buyer to buy an asset or the seller to sell one, like commodity or a financial instrument, at a pre-set and agreed upon future date for an agreed upon price settled upon today. Futures contracts spell out the quality and quantity of the underlying asset, and they're standardized so that futures exchanges can deal in the buying and selling of them. A futures contract might demand physical delivery of the underlying asset, or it might simply demand cash settlement. It is very uncommon for the underlying asset of a futures contract to actually be delivered, as the contracts themselves are heavily traded and very often used as hedges or speculative investing.

For the purposes of futures clearing, a clearing house or clearing firm is a separate corporation or a specialized agency set up to facilitate futures exchange trades and has the responsibilities of settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery and reporting trading data. Clearing houses act as third parties to all futures and options contracts - as a buyer to every clearing member seller and a seller to every clearing member buyer. 

Each futures exchange has its own clearing house (or "clearing firm" or "clearing corporation"), and it deals in conjunction with that futures exchange in a similar way of bank clearing houses. All members of an exchange must be well-capitalized and clear their trades through the clearing house at the close of every trading session. If there are members of the exchange who don't join the house's clearing association, they have to clear their trades through an association member. All members have to give the clearing house a deposit, which is based on that clearing house's margin requirements, sufficient to cover their member debit balance. Also, each clearinghouse member is required to put up fixed original margins and maintain them with the house should there be adverse price fluctuations. Indeed, under those circumstances, the clearing house could call for additional margins throughout a trading day rather than holding out for the usual end-of-day settlement.

So, under normal circumstances, let's say that a member reports buying 200,000 bushels of September corn and total sales of 100,000 bushels of September corn; that member is now net long 100,000 bushels of September corn. Let us also say that this is that member’s only position in corn futures and the clearing house margin is $.06 per bushel. That member must have not less than $6000 on deposit with the clearing house for the trade to clear.

All members of the association must clear their trades through the clearing house and therefore have to maintain sufficient funds to cover their debit balances, making the clearing house responsible to every member for the fulfilment of all member contractual obligations.  

If parties do enter into a dispute about the price, number of contracts, month of trade, or so on they agreed upon (a rare occurrence), they have to settle their differences and clear the trade before they are allowed to return to the floor or trading screen of the exchange the next day. The exchanges have mapped out methods of resolving these disputes, but the trade must be cleared through the clearing house.

A high quality futures clearing house or firm should have top bespoke risk management tools, sensitive margin requirements and maintenance, superior oversight of all traders' exposure, and an experienced back room settlement department. 



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EXECUTION

The Kyte Group Limited was founded by David Kyte in 1985 on LIFFE, the embryonic futures exchange in the heart of the City of London.
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Kyte's customers are market professionals, either sole traders, teams of market,
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Providing clearing and settlement services to professional traders who transact business on the world's leading exchanges.
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