Calculations of initial margins

Initial margins are monies paid to SFE Clearing by Clearing Participants as security for the performance of positions held.

The collection of initial margins is fundamental to the operation of SFE Clearing and provides protection for SFE Clearing and its non defaulting Participants in the event that a Participant defaults on their financial obligations.

Although the basis used for determining initial margins will vary depending upon the pricing characteristics of the contract concerned, SFE Clearing will typically make its calculations based on the level of protection it requires for a large single day price move. In making these calculations and establishing the size and likelihood of these movements, SFE Clearing utilises a range of distribution, and live price calculations. Generally, 'benchmark' initial margin levels are based on long term historical data and are set so as to cover SFE Clearing from daily price movements with a confidence factor of 99%. In addition to this benchmark calculation, a number of other factors are also taken into consideration some of which include:

  • Recent price volatility
  • Market liquidity
  • Historical and implied volatility divergence.
  • The extent of divergence between the futures and the underlying market price
  • The potential for any market participant to unduly influence the market price

Upon analysis of these factors an appropriate initial margin figure is then determined. This figure is then carefully monitored and will be revised should market conditions change.

It is important to note that unlike some offshore Clearing Houses where initial margin rates will vary depending upon the type of participant concerned (ie. speculator/hedger) the initial margins calculated by SFE Clearing are identical for all market users. SFE Participants may, at their discretion, charge their clients more than the minimum specified by SFE Clearing but never less.

The collection and payment of daily settlement margins

In addition to the setting of initial margin rates, SFE Clearing further reduces its risk through the payment and receipt of daily variation margins. This process, which involves revaluing Clearing Participant positions against end of day settlement prices, reduces SFE Clearing's risk by preventing market participants from accumulating losses over a period greater than a single business day.

In calculating settlement prices for futures contracts, SFE uses the midpoint between the closing bid and offer prices rounded upwards. For example, if March 3-Year bond futures were to close at 93.05 bid (buying price), 93.07 offered (selling price), the final settlement price would be 93.06.

In determining closing prices for options, SFE uses an option pricing model which is based on the internationally respected Black and Scholes pricing formula. In making its calculations, SFE uses implied volatilities provided by market representatives of SFE Participants at the close of trading each day. These volatilities are then input into the pricing model and final settlement prices are generated. Should it be required, the system can create a volatility skew by allowing different volatilities to be entered for different strike prices.

Once all trades have been confirmed by Clearing Participants using the Exchange's Trade Allocation and Confirmation System (STACS), SFE Clearing then uses its Clearing Processing System (CPS), to calculate Participant margin requirements. Settlement advices are issued to Clearing Participants by 7.00am on the morning following the day of trade and payment of all margin monies must be effected by 10.30am.

Intra-day margin calls

During periods of extreme market volatility, (ie. during periods when price movements are close to or exceed initial margin levels), SFE Clearing may conduct an intra-day margin call. Such a call can be effected at any point during the trading day and reduces SFE Clearing's risk by allowing it to call margins from its Participants based upon current market prices. For example, should a large price variation be experienced in the market following the release of a major economic figure at 11.30 am, SFE Clearing may conduct an intra-day margin call at say 12.30pm, with all margins being payable by 3.00pm on the same day. By having the capacity to conduct intra-day margin calls, SFE Clearing is not forced to wait until the close of the market and is therefore protected against any further movements in market prices.