Settlement Risk And Management Of Client Margin For Futures Company

With the integration of the global economies, China capital market builds more and more connections with global capital market. That makes futures more and more important. Futures settlement is the key process in the transaction of futures market, which is of great importance. As the variety of commodities on futures market is increasing, more industries are covered. Turnover, volume, margin and the other indexes are expanded 10 times comparing with the numbers a decade ago. All these require a sophisticated clearing system.Currently most literatures focus on the overall futures market, and study the setting, configuration and risk management method of futures clearing house in different countries, from the perspective of the Futures Exchange. Studies from the perspective of futures brokerage company are much less mentioned. Futures brokerage company links investors, the Exchange and the market. The futures settlement risk management of futures brokerage company is vital. Conventionally, futures brokerage company will simply add certain margin on the Exchange’s margin, and accumulate margin for each contract. This inflexible approach occupies too much margin, and leads to high opportunity cost, thus cannot meet client’s expectation.This article studies settlement risks from the perspective of futures brokerage company, by digging into the actual practice of the futures brokerage companies. It quantifies settlement risks by VaR model towards single contract and hedged contracts. Using this quantified value, futures brokerage companies can optimize their settlement policy with controlled settlement risk. They can choose to set lower margin rate for high quality clients, or follow risk management policy defined by the Exchange and stringently apply closed circle mechanism.