Clearing and Settlement of Derivatives

In the US markets, for example, a ‘hedge’ rate of initial margin is

quoted which can be applied to positions that are a hedge. This is a

position where the opposite side reduces the risk of one side of the

position.

Movements in the market would have a negative impact on one side

but a positive impact on the other side. This would be a significantly

lower initial margin rate than a ‘spec’ rate, which carries the full risk

of the position, as there is no balancing side to offset any of the risks.

London SPAN calculates an inter-month spread charge to compen-

sate for the basis risk incurred because futures prices do not correlate

exactly ...