30 years: Financial markets trader
In the final video, Abdulla discusses a prominent characteristic of exchanges in that they use clearing houses to act as a central counterparty for all transactions. A Clearing House guarantees the performance of futures and options contracts traded on its associated exchange. And secondly, to protect itself from the risk of default it operates a margining system.
In the final video, Abdulla discusses a prominent characteristic of exchanges in that they use clearing houses to act as a central counterparty for all transactions. A Clearing House guarantees the performance of futures and options contracts traded on its associated exchange. And secondly, to protect itself from the risk of default it operates a margining system.
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6 mins 13 secs
Clearing Houses are firms that provide various services to derivatives and stock exchanges. Clearing Houses ‘clear’ trades on exchanges, in other words they handle most of the administrative processes of transactions, including confirmation and matching, post trade position keeping and oversee parts of the delivery and settlement processes.
Key learning objectives:
Describe a clearing house and its main functions
Outline the types of margins applied to contracts
Outline the benefits of posting an initial margin
Understand what happens when a clearing member fails to meet any of its margin obligations
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Futures and options contracts are leveraged instruments and therefore potentially dangerous. By posting initial margin, which is a small fraction of the contract value, participants gain exposure to the returns on the entire contract value. It is possible that small adverse movements in the contract price could result in losses greater than the initial margin – greater than 100% loss.
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