Clearing and Settlement of Derivatives

Futures processing 81

account, and the broker at the clearing house is the party the clear-

ing house deals with, irrespective of how or when the client and bro-

ker settle the obligations.

Summary

The processing of futures contracts is really about the VM and the

initial margin requirements plus the ability to successfully reconcile

the open positions with the clearing house, broker and client.

Part of that process is managing the posting and allocation of

trades, closeouts and also deliveries, should they occur as a result of

tender or assignment.

Financial futures and commodity futures have not only various

similarities but also many differences. As a result, good-quality static

data on margin rates, deliverable underlyings, notice days, last trad-

ing day and of course the tick size and value are all important to the

operations teams.

The delivery process for physical and cash-settled products are

also very different, and the deadlines and responsibilities are impor-

tant to understand. The clearing member is liable to the clearing

house for the settlement of contracts and if they are operating for a

client it is vital to ensure that they are aware of the disciplines asso-

ciated with settlement and delivery.

Futures contracts are legally binding obligations on both the buyer

and the seller, so efficient position management is crucial if unwanted

deliveries, and therefore cost, are to be avoided.

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