Variation 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 SFE Clearing Participants' positions against end of day settlement prices, reduces SFE Clearing's risk by preventing SFE 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 FoX15 futures contract were to close at 5110 bid (buying price), 5112 offered (selling price), the final settlement price would be 5111.

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 calculated from actual trades made during the course 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 SFE clearing participants using the SFE's Trade Allocation and Confirmation System (STACS), SFE Clearing then uses its Clearing Processing System (CPS) to calculate SFE Participant margin requirements. Settlement advice is issued to SFE 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 SFE 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.

Variation margin example

Imagine you sold a June FoX15 futures contract at 4850 on day one, paying an initial margin of $770. If the price of the contract rose on day two to 4856, you will be called on to pay an unrealised loss of six index points or a total of $60. Such payments of calculated losses are known as variation margins. Similarly, if the price on day three fell from 4856 to 4848, you would gain eight index points or a total of $80 and again an additional eight points or $80 on day four. On day five you decide to offset the contract by buying at 4830. The initial margin of $770 is returned to you as you have fulfilled the contract terms. Overall, a profit of $200 is made.

NB: Point value for the FoX15 futures contract = $10