Futures Margin, Daily Settlement, and Clearing

2026-11-02 derivatives hull futures margin clearing

A futures contractIn finance, a futures contract is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The item transacted is usually a commodity or financial instrument. The predetermined price of the contract is known as the forward price or delivery price. The specified time in the future when delivery and payment occur is known as the delivery date. Because it derives its value from the value of the underlying asset, a futures contract is a derivative. Futures contracts are widely used for hedging price risk and for speculative trading in commodities, currencies, and financial instruments.Read on Wikipedia → is a standardised agreement to buy or sell an asset later. The useful lifecycle is:

contract specification → position → settlement event → cash entry → close or delivery

The earlier futures introduction explains the basic long and short positions. Here we follow the data and money after the trade has been accepted.

Start with the contract specification

A futures contract is defined before anyone opens a position. The exchange specifies:

  • the underlying asset;
  • the quantity covered by one contract;
  • the price unit and minimum price movement;
  • the expiry or delivery period;
  • the delivery rules, or the final cash-settlement rule.

Suppose one gold contract covers 100 ounces. A position of two contracts therefore has an exposure of 200 ounces. The contract specification supplies the multiplier that turns a price change into money.

At the end of each trading day, the exchange determines an official settlement price under the contract’s rules. After the first trading day, daily P&L is calculated from consecutive settlement prices; on the first day, the new settlement price is compared with the trade price. The settlement price is not necessarily the last trade of the day.

A useful record might look like this:

contract = gold-december
multiplier = 100 ounces
side = long
quantity = 2
entry_price = 1,750 USD per ounce

The trader does not pay the full market value of 200 ounces to open the position. The trader provides marginIn finance, margin is the collateral that a holder of a financial instrument has to deposit with a counterparty to cover some or all of the credit risk the holder poses for the counterparty. This risk can arise if the holder has done any of the following:Borrowed cash from the counterparty to buy financial instruments, Borrowed financial instruments to sell them short, Entered into a derivative contract.Read on Wikipedia →, which supports the obligation. Margin is not the purchase price and does not cap the possible loss.

A settlement price becomes a cash entry

Assume the two-contract position has $12,000 of initial margin and a $9,000 maintenance level. At the first daily settlement, the settlement price is $1,741, which is $9 below the $1,750 entry price.

For a long position, profit and loss (P&L) is:

daily P&L=N×M×ΔP=2×100 oz×(1,741−1,750)=−$1,800\mathrm{daily\ P\&L} = N \times M \times \Delta P = 2 \times 100\text{ oz} \times (1{,}741 - 1{,}750) = -\$1{,}800

The margin balance becomes $10,200. The loss is transferred through the daily settlement process from the losing side to the winning side. This transfer is variation margin: a cash entry for that day’s price movement.

On the next day, the settlement price falls to $1,734:

additional P&L=2×100 oz×(1,734−1,741)=−$1,400\mathrm{additional\ P\&L} = 2 \times 100\text{ oz} \times (1{,}734 - 1{,}741) = -\$1{,}400

The balance is now $8,800. It is below the $9,000 maintenance level, so the broker issues a margin call. To restore the account to the $12,000 initial-margin level, the trader must provide $3,200.

The $3,200 is not a second market loss. The market loss is the total $3,200 already recorded in the two settlement entries. The call replenishes collateral. If the trader does not provide it, the broker can close the position.

A trading or risk system therefore needs more than the current position. It needs:

  • the previous and current settlement prices;
  • the contract multiplier;
  • daily P&L ledger entries;
  • initial and maintenance requirements;
  • collateral movements and margin calls.

A short position uses the opposite sign. The same price event that loses money for the long position produces a gain for the short position, before fees and other adjustments.

Clearing is part of the lifecycle

An exchange matches the buy and sell orders. After the trade is accepted for clearing, a central counterparty (CCP)A central clearing counterparty (CCP), also referred to as a central counterparty, is a financial market infrastructure organization that takes on counterparty credit risk between parties to a transaction and provides clearing and settlement services for trades in foreign exchange, securities, options, and derivative contracts. CCPs are highly regulated institutions that specialize in managing counterparty credit risk. An extensive overview of the academic literature can be found in Berndsen (2021).Read on Wikipedia → becomes the buyer to every seller and the seller to every buyer.

The practical chain is usually:

client → broker → clearing member → CCP

The client normally posts margin to the broker or clearing member. The clearing member meets its own requirements with the CCP. One firm can perform more than one role.

The CCP calculates obligations and applies default procedures if a clearing participant fails. This reduces direct counterparty exposure. It does not stop the price from moving and does not remove the need to fund a margin call.

The OTC market article explains the related distinction between central and bilateral clearing. An OTC trade can also be sent to a CCP, while a bilateral trade can use collateral without a CCP.

Close, deliver, or settle in cash

A trader who does not want to keep the position enters an opposite trade in the same contract. A long position is closed by selling the same contract; a short position is closed by buying it. Closing changes the position state; it does not book the full P&L a second time. The cumulative daily variation-margin entries already equal the entry-to-exit result, so the close only posts the final daily change and marks the position closed.

If the position remains open, the contract’s final rules apply. In a physically settled commodity contract, the short side submits a delivery notice within the permitted rules. A long position can then be assigned to take delivery. The original buyer and seller do not necessarily meet again because the clearing system nets the open positions.

Some contracts are cash settled. An index cannot normally be delivered as one physical object, so the final settlement event posts the remaining daily change against the contract’s final settlement price and marks the position closed.

The possibility of delivery also links futures and spot prices near the delivery period. If the futures price is far above the asset’s spot price, buying the asset and delivering it through the futures contract may be attractive. If futures are cheaper, a participant that needs the asset may prefer the futures contract. Contract rules, costs, and liquidity determine whether the trade can actually be made.

A physically settled contract can have a first notice day, a last notice day, and a last trading day. A trader that does not want delivery should check these dates rather than waiting for the final trading day.

A futures position is not only a number such as “long two contracts.” It is a contract specification plus a sequence of market events and ledger entries. The price multiplier turns each settlement event into P&L; the margin rules turn losses into funding requirements; the delivery rules determine how the position ends.

Next: Forward and Futures Pricing: Cost of Carry.

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