Margins

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For every future contract traded in the market a margin, or deposit is required to be paid to Clearing House. The exact amount of the margin may vary from time to time according to the price volatility of the underlying commodity. The margin is returned at the time the contract is settled, whether by delivery, or by offsetting. The margin is more of a performance bond than a down payment on the contract being traded. In addition to the initial margins required to open contracts, any adverse price movements in the market must be covered daily by further margins called variation gains/losses or daibf settlement If a trader has bought a contract and the price subsequently falls, the trader will be required to pay additional funds to cover the current unrealised loss. The trader will be in a similar position if a contract has been sold on the futures market and the price rises.

All positions are settled-to-market daily

The fundamental exposure, once a futures contract is opened, is the movement of the current price of the contract in an adverse direction from the originally contracted price. For example, if a contract is established between a buyer and seller at 100 units and over the following days, weeks or months prior to maturity, the actual value of the contract moves up to 200 units, the seller is, on paper, showing a debit, or loss, of 100 units. The system of variation margins, where the seller or buyer progressively pays this debit amount, effectively maintains the participants at current market values. This ensures that the buyer or seller is fully paid up or settled-to-market, and importantly, does not present a risk to the clearing house.

Thus, by a system of daily margin calls, the financial integrity of the market is established. By maintaining every Clearing Member at current market values with variations gains/losses, plus the retention of a margin to cover the potential exposure until the next day's variation gain/loss, the Clearing House is able to guarantee each Clearing Member's fulfilment of their contractual obligation pri regardless of default by any other participant. ^ Monitor Clearing Members Positions In protecting its guarantee, the clearing house monitors the size position, relative to the overall market It also assesses each ability to give or take delivery when contracts approach a spot and performs other monitoring functions arising from the unique I futures market.

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Arrange Delivery or Cash Settlement Finally, at maturity of a futures contract Clearing Members remaining with 'open* sold or bought contracts, are obliged through the rules of the Exchan^ and Clearing House, to deliver or receive the specified asset or in these mavkots where no delivery provision exists, to make a cash settlement. It is at this point that the Clearing House re-links the parties remaining.