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Chapter 4 - Commodity and Bond Futures > THE MARGINING SYSTEM AND THE CLEARING ...
THE MARGINING SYSTEM AND THE CLEARING HOUSE
Unlike over-the-counter (OTC) contracts, futures are essentially standardized products, which encourages active and liquid trading. On the other hand, the clearing house associated with the exchange protects against credit risk by guaranteeing the performance of all trades made on an exchange. Trades are registered with the clearing house by major financial institutions called clearing members (see Chapter 20).
To buy or sell futures, a trader who is not a member of an exchange has to have a margin account with a broker and must deposit initial margin into the account. This is a performance bond (i.e. collateral) held against the possibility that the trader may not meet the contractual obligations. The clearing house stipulates the minimum initial margin that must be deposited. The amount varies according to the type of contract and is based on a calculation of the maximum likely movement in the value of the futures contract over a close-out period.
