0 Index,long-term
Denmark
Gov’t Bond, 9%1995Danish Gov’tBond 9%, 2000
Switzerland
SF
DAX
Europe
ECU, 3-month
Spain
SP/US$
France
Germany
DAX, optionson futures
ECU, Bond
SP/DM
Hong Kong
Hang SengIndex
Eurodollar
United Kingdom
BP
Japan
Nikkei StockAverage
Euromark
United States
DollarUS$Index
Nikkei 225TOPIX StockIndexTSE 35 Index
Euroswiss,EuroyenFrance
Netherlands Dutch StockIndex OptionsDutch Top 5 Index GermanyDutch Top 5 IndexNewZealand
Forty Index
Ireland
PIBOR, 3-monthGov’t Bond
Gov’t BondNational Bond,BoblDIBOR
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Historical Development of Commodity Futures Trading
CurrenciesCountry
IndicesName
Country
Index
Spain
IBEX 35
Italy
Gov’t Bond
Sweden
Interest RatesCountry
Instrument
OMX Index
Japan
Gov’t Bond
UnitedKingdom
FTSE 100
Netherlands
Gov’t Bond
UnitedStates
S&P 500
NewZealand
Bank Bill,90-dayGov’t Stock, 5-yearMIBOR, 90-dayNational Bond,10-year
S&P 400Value LineSpainMini Value LineNASDAQ 100Nikkei 225NYSE Composite Sweden
Interest Rate
Major MarketIndex
Switzerland
Interest Rate,5-year
XMI Index
UnitedKingdom
LIBOR, 1-monthSterling, 3-monthLong Gilt
UnitedStates
Interest Rate,30-day
Russell 2000U.S. Dollar IndexGSCI
Treasury Bill,90-dayTreasury Note,2-yearTreasury Note,5-yearTreasury Note,10-yearTreasury BondU.S. MuniBond Index
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Table 28.3 CommoditiesENERGY
METALS
CrudeCrude, BrentCrude, Sour
AluminumCopperDiammoniumPhosphateGoldGold, options on actualsGold, 5-day optionsLead, standardNickel, primaryPalladiumPlatinumSilverSilver, 5-day optionsTinZinc
GasoilGasoline, unleadedHeating OilHeavy FuelHigh Sulphur Fuel OilNatural GasPropane
SOFTSFoods, Grains,Meats & Misc.Barley, EECBarley, Thunder BayBarley, WesternBroilersCanola/Rape SeedCocoaCoffee, ArabicaCoffee CCoffee, RobustaCornCottonFeeder CattleFlax SeedLive CattleLive HogsLivestockLumberOatsOrange JuicePigsPork BelliesPotatoesRough RiceRubberSoybeansSoybean, MealSoybean, OilSugarSugar, WhiteWheatSugarSugar, WhiteWheat
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The most recent major amendment occurred with the passage of the CommodityFutures Trading Commission Act of 1974. What is also notable is that virtually everyother country is copying the U.S. regulatory and legal framework for enabling,monitoring, and regulating the exchange activity.
THE COMMODITY FUTURES TRADING COMMISSIONThe Commodity Futures Trading Commission Act was passed in October of 1974,largely as a result of high price levels reached in 1972 and 1973 when so many rawmaterials were in short supply. The furor that grew out of Russian grain deals andthe scandals that enveloped commodity options trading in the United States during the early 1970s also caused Congress to determine that the operation of thefutures markets had become a matter of great public importance.The CFTC Act amended the Commodity Exchange Act and established federal regulation over all commodities, rights, and services traded on futures contracts.Basically, the CFTC Act recognizes that properly functioning futures markets are in the best interest of the United States. The objectives of the CFTC Actare: (1) to foster competition in the marketplace; and (b) to protect people whoparticipate in the markets from fraud, deceit, and abusive practices.To administer the newly amended Commodity Exchange Act, an independent regulatory commission called the Commodity Futures Trading Commissionwas created. The commission consists of a chairperson and four other commissioners, each appointed by the president with the advice and consent of the Senate,and each serving five-year terms. The commission is headquartered in Washington,D.C., and has branch offices in New York, Chicago, Kansas City, Minneapolis,and Los Angeles.The new act strengthened the exchanges’ role as quasi-public institutionsand brings almost all of their activities under regulation of the federal government.Every contracts market (exchange) has to be specifically approved by the commission. Everybody involved in execution of futures contracts and in dealing withthe public has to be registered with the commission and has to pass examinationand fitness requirements established by the commission. The new act extends materially the concept of the public interest to be protected by including not only farmerinterests but the interests of all people—producers, processors, merchants, othermarket users, and consumers.All contract markets must demonstrate that the futures contracts for whichthey seek designation for trading are not contrary to the national public interest andserve an economic function. All bylaws, rules, regulations, and resolutions thatrelate to the terms and conditions of the contracts and other trading requirementsmust be submitted by the contract market to the CFTC for approval. In addition,
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the commission has the authority to go directly into court to enjoin any contractmarket or any person from violating the act or restraining trade in a commodity forfuture delivery. The commission has the authority, in emergency situations, todirect contract markets to take such actions as are necessary to maintain or restoreorderly trading. Substantial monetary penalties can be assessed.The commission has established a number of operating programs to achievethe objectives of the act. These include:a. Market Surveillance This refers to the continual monitoring and analy-
sis of the people who trade the various markets, the prices generated bythe trading, and the supply/demand elements affecting the prices. The purpose of the surveillance is to maintain orderly markets that are free ofmanipulation.b. Rule Reviews The act requires the CFTC to approve all rules, regula-
tions, procedures, and bylaws of the exchanges. Basically, they arereviewed for their equitability, their effect on competition, the extent towhich they further the objectives of the act, and the degree to which theyreflect normal commercial practices.c. Registration and Audit All persons acting as futures commission mer-
chants, floor brokers, associated persons, pool operators, trading advisors, and options dealers must register with the commission. Each of themis subject to independent financial audits conducted by the CFTC or itslegal designate.d. Research The commission has established a research program designed
to assess the status and role of competition in the industry and to seek outways of improving it. In addition, the research effort serves to systematically investigate the functioning of the market and market users.e. Education The act authorized the commission to establish an education
program to inform people about the important functions performed byfutures trading and the role of the CFTC in overseeing trading to ensurethat it furthers the objectives of the act.f. Enforcement The enforcement program is designed to secure compli-
ance with the law by conducting investigations to uncover violations ofthe act and the prosecution of wrongdoers. In addition, the enforcementprogram administers the reparations program of the commission.g. Reparations The act authorized the commission to establish a procedure
for receiving and reviewing claims for damages that arise from various violations of the act by any person or firm registered with the CFTC.Reparation requests may be filed for any amount, but the claim must be312
Historical Development of Commodity Futures Trading
filed within two years after the alleged violation occurs. Reparations procedures are intended as an alternative to arbitration or court proceedingsand not as an additional procedure if others are in the process of being completed. The CFTC encourages arbitration between the disputing parties.This complaint-handling process, along with many other regulatory functions, has been delegated by the CFTC to the National Futures Association (NFA).(More about it in the next section.)When the complaint is filed, it should include the name and address of eachperson alleged to have violated the act; the specific violations claimed; all relevantfacts concerning the alleged violation, including dates, places and circumstances;and any documentation that supports the amount and manner of damage sufferedby the claimant. The complaint should be notarized and should include a statement that no arbitration proceeding or civil court proceeding is underway.The CFTC will review the complaint, if appropriate, or refer it to the NFA.If CFTC action is warranted, each person complained against will receive a copyof the complaint. Such persons have 45 days to answer it. Counterclaims areallowed. Mediation and alternative means to settle disputes outside of court areactively encouraged.If the parties do not settle their differences, formal proceedings will begin,and the case will be assigned to an administrative law judge for oral hearings.After the administrative law judge rules on the case, either side may appeal the verdict to the commission for review. The commission decision also may be appealedto the U.S. Court of Appeals.Although less government intervention in the marketplace is a desirable goal,the existence of a governmental agency to oversee exchange activities and to ensurethe enforcement of exchange rules is certainly healthy. In addition, such an agency,particularly if it is a strong one using its power wisely, aids in establishing thecredibility of the exchanges and the valuable economic functions they perform. Italso assures the public that an independent entity is mindful of their interests.
SELF-REGULATION AND THE NFAThe existence of government regulation should not reduce or remove the responsibility for self-regulation. It is clear that when Congress passed the CommodityFutures Trading Commission Act of 1974, it intended that the commodity futuresindustry have a responsibility to itself and to the public to perform certain self-regulatory functions. It is also clear that Congress intended that the commission requirethe exchanges to accept that responsibility. This is good. Self-regulation is moredesirable than government regulation. To ensure that goal, the CFTC Act authorized the creation of the National Futures Association (NFA).313
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The motives behind and the net effect of most government regulations havegenerally been commendable and positive. Unfortunately, sometimes governmentregulations turn out to be incapable of achieving their intended goals. Frequently,they generate greater costs than resulted from the original problem. (And sometimes those costs are considerable.) One commodity exchange that spent $2,500on legal fees to meet Commodity Exchange Authority requirements the year beforethe CFTC came into existence spent $75,000 on legal fees to meet CFTC regulatory requirements the year after, and now spends millions. The long-term impactof these effects needs to be analyzed by regulatory agencies.Frequently, government regulations are too inflexible to accommodate changesin the business environment and the general economy. Thus, they stifle innovation.Sometimes a previously beneficial regulation becomes outdated or even counterproductive and yet remains in effect. This results from the pressure of special interests. Historically, business enterprises have sought to avoid competition and havesometimes been aided in doing so by the government or even self-regulation. Atother times, rules and procedures create vested interests and economic benefits,which reform would endanger. In all of these instances, reform of the regulationswould increase the productive use of government resources and would free privateresources for better and more productive tasks.In short, government regulation is expensive, and many of the costs to society are hidden.Self-regulation also may be expensive, but it is usually more efficient. Thecosts and benefits of self-regulation in commodity futures usually accrue to the proper people—those most directly affected—instead of the general populace. To thiseffect, the CFTC has designated the National Futures Association (the“Association”) as a registered futures association. Among the association’s activities are qualification screening and registration, financial surveillance, enforcementof customer protection rules and uniform business standards, arbitration of disputes, and educational activities. The association is financed through the paymentof assessments and dues by its members and by registration fees. The board ofdirectors represents all aspects of the industry and has three public directors. TheNFA staff has the major responsibility for auditing the members’ financial statusand operating practices. Perhaps its most important function, though, is in disputeresolution. It is the second line of defense (after the brokerage firms and exchangesthemselves) for an individual to get redress of a grievance. The address of the NFAis: 200 W. Madison St., Suite 1600, Chicago, IL 60606.Regulatory agencies, both public and industry, need to do more to identifythe scope and seriousness of the actual problems they are trying to solve and to consider the total cost and total benefits of their actions. Only those regulations forwhich benefits outweigh costs should be instituted.
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Regulators also need to consider the “why” test more often than the “why not”test when reviewing proposed regulations. They should seriously ask “why” particular regulation is needed and whether there are alternative solutions to the problem other than establishing another regulation. Conversely, in order to create an environment conducive to encouraging innovation and experimentation in themarketplace, regulators should consider a “why not” test when reviewing proposals for new contracts and new types of business arrangements at the exchanges.Perhaps most important, regulatory agencies, regulatees, and private citizensneed to pass the message that there is no substitute for self-protection, and that government regulatory agencies cannot protect all people from all things. Citizensought to be expected to put forth a reasonable amount of effort toward self-protection.Perhaps in trying to determine whether a particular regulation is necessary or not,regulatory agencies should apply an “ability to self-protect” test, which would determine whether a reasonable individual exercising prudence and common sense in aparticular situation could be reasonably expected to be able to protect himself without the need for government regulations. Every person has a responsibility to himself and to one’s fellow citizens to protect oneself as much as possible.To facilitate self-protection efforts, the CFTC should continue to emphasizerequiring full disclosure of all relevant aspects of commodity futures and commodity options transactions. In this way, natural forces of competition, which arethe most effective means of regulating, will flourish.
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The Commodity Futures Exchange
It is said that in the early 17th century, when futures trading was just emerging inJapan, traders wore the long, flowing, classic Japanese robes with very wide sleeves.As a trade was consummated, each trader allowed the opposite trader to put anarm up his sleeve. This was a sign of good faith, conveying to the opposite partythat there were no tricks “up his sleeve” in the transaction.As business increased and clothing styles changes, no doubt the Japanesefound this a cumbersome or needless process. At any rate, in modern commodityfutures trading the signs of good faith and contract guarantees are much more tangible. They now take the form of cash, and contract guarantees are provided by aclearinghouse, the heart of any commodity futures exchange.The commodity futures exchange of today is a “meeting place” for buyersand sellers of futures contracts. Its role is to provide the facilities through whichfutures trading can be conducted; to establish trading rules; to supervise businessconduct; and to collect and disseminate information about the market. The exchangeitself never enters into the trading. It does not influence or establish prices. Marketparticipants and economic forces influencing the market do that.
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NATURE OF THE ORGANIZATIONThe Chicago exchanges are the only major futures markets of the world that arestill largely “floor traded” or non-electronic. However, the U.S. exchanges mustquickly adapt to electronic trading or they will be at a more serious disadvantage.London, Paris, Frankfurt, Hong Kong and Singapore are the other very activefutures markets. However, with the advent of electronic trading, it will soon bepossible to trade futures or many different items, including individual securityfutures, at any time of the day or night. Furthermore, it is likely that they will allbe obtainable through your home computer with, nowadays, a single settlementthrough a single system.This section describes the U.S.-based futures markets as they are today. In afew years they will be all electronic and the “trading floor” will disappear. All ofthe trading will be done electronically. The nature of the exchanges will change also.Many of them will be corporations, perhaps possibly owned. Their boards of directors will be different as well. Although the ownership and trading changes will beimportant, the fundamentals of price analysis and the pricing of the products willremain the same.The internal structure of all exchanges is basically similar. Therefore, thefollowing discussion of exchange organization and operations, although primarily descriptive of the Chicago Mercantile Exchange, adequately describes virtually all commodity futures exchanges.Most commodity exchanges are not-for-profit organizations, though this toois changing. The shares in the corporations are called memberships. The total number of memberships varies from exchange to exchange and is generally fixed bythe exchange governing board.Membership on an exchange, which is an individual privilege, allows members to, among other things, pay reduced commissions on their trades, and to participate in the management of the exchange.Changes in membership occur only as privately held exchange seats becomeavailable for purchase on a bid-and-offer basis. The actual price for a membership may fluctuate considerably from time to time. For example, in 1982 a seat onthe Chicago Mercantile Exchange sold for a high of $160,000. These same memberships were being bid and offered in the $60,000–$70,000 range through 1971.Applications for membership are submitted to the exchange, which then conducts a thorough investigation of the applicant’s financial background and character. An applicant who meets financial and other requirements must then receivethe approval of the board of governors.
Exchange AdministrationThe exchange is governed by a board of governors elected from a slate of nominees selected from its membership and, on most exchanges, from several non318
The Commodity Futures Exchange
member candidates who represent the public at large or the various commodity interests affected by the contracts traded on the exchange, e.g., banking, farming, etc.The board is responsible for establishing major policies and making and amending exchange rules. In addition, it may act in a judicial capacity in conductinghearings involving member misconduct. The responsibilities and broad powers ofan exchange governing board may differ slightly from one exchange to another,but they are generally pretty much alike.
Exchange StaffDaily administration of the exchange is in the hands of an appointed and salariedpresident, employed with the approval of the exchange board. The president, as chiefexecutive officer of the exchange, is assisted by such other officers and staff as hedeems necessary. Generally, the major departments are: audits and investigations,education, public relations, quotations, research, and statistical.The most important functions of these departments include:Audits and Investigations This department (a) monitors the financial status ofmember firms and uncovers financial weaknesses early enough to enable corrective action to be taken; (b) undertakes market surveillance, including the reviewof all discretionary and omnibus accounts, which must be registered with theexchange; (c) aids the clearinghouse committee by providing information gleanedfrom its review of all applications for clearinghouse privileges, broker applications, and solicitor applications; and (d) screens applicants for membership andreviews applications from member firms to open branch offices.Statistical Department Maintained by all major commodity futures exchanges, itreports and disseminates daily market price data and such information as maybecome available from governmental and other sources about supply and demandfactors.Quotations Department The department is responsible for supervising the instantaneous release of market price quotations over national and international wireservices, as well as supervision of all price data posted on the exchange floor.Research Department The research department conducts or assists in makingfeasibility studies with respect to new contracts that might be traded and also aidsin the analysis and implementation of changes to be made in existing contracts.Education Department This department is charged with the responsibility of providing educational materials and services to various segments of the public concerned with or interested in the function and operation of the markets. The groupsthe department attempts to reach include commercial hedgers, bankers, speculators, the commodity brokerage industry, and the academic community.319
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Public Relations Department Charged with supervising all matters concerning thepublic relations function of the exchange, the department’s primary responsibility is to promote public awareness of the vital economic role fulfilled by the modern commodity futures exchange, and its place in our society as a financial institution of integrity and responsibility.
Exchange CommitteesThe exchange members themselves play an important role in the functioning of themarket through a member committee system employed by most commodity futuresexchanges. During his term in office, the board chairperson, with the approval of theboard, usually selects the members who will serve on the various committees.Certain committees are common to most major exchanges; though they maygo by different titles, their functions are almost identical. These include an arbitration committee, a membership committee, a rules committee, a business conductcommittee, a public relations committee, a floor practices committee, a clearinghouse committee, a pit committee, a floor brokers qualification committee, and acontract specifications committee.Arbitration Committee Reconciles controversies arising between two or moremembers through arbitration proceedings.Membership Committee Reviews all applications of prospective members, investigates their qualifications, and makes reports and recommendations on their findings to the board.Rules Committee Drafts new rules or changes to rules passed by the board and may
also refer or offer suggestions for new rule changes to the board.Business Conduct Committee Supervises the business conduct of members. It
also conducts investigations and may take action against member firms to ensurethat contract integrity and orderliness of trading are maintained.Clearinghouse Committee Has sole discretion in determining qualifications ofclearinghouse member applicants and in adopting those regulations setting forth whatqualifications must be met. This committee also reviews applications of clearingmembers, associate brokers, and registered representatives, as well as applicationsfor assignment of member rates. Some exchanges maintain their clearinghouse as aseparate corporation. In such instances these duties are performed by that corporation.Floor Practices Committee Supervises all matters relating to floor practices and
trading ethics, conducts investigations and hearings, and resolves any errors orprice discrepancies discovered either during or after a trading session.Public Relations Committee Supervises the public relations department in theimplementation of advertising and publicity activities; investigates, at the request320
The Commodity Futures Exchange
of the board, activities related to publicity; and advises or makes recommendations to the board concerning publicity.Contract Specifications Committee Reviews existing contracts and makes rec-
ommendations to the board regarding contract changes.Floor Brokers Qualification Committee Supervises all matters pertaining to qualifications of brokers and traders.Pit Committee Supervises the opening and closing of trading and immediatelyresolves grievances arising from price infractions during trading.
THE TRADING FLOORThe central point of a trading floor is the trading pit or ring—a specified area inwhich the floor brokers do their buying and selling. All bids and offers are madeby open outcry and by hand signals in the trading pits. Computerized exchangessubstitute for the floor execution process, but the rest of the procedures for clearing, settlement, margining, and delivery are the same as for pit trading.As bids and offers are made and trades are consummated, prices are recorded by an observing reporter (an employee of the market) and reported on the quotation boards adjoining the pits. This information is also wired instantaneously toother markets and trading centers throughout the country and abroad.Most floor brokers have telephone, facsimile, and other communication linesadjacent to the trading area from which they receive customer orders for trades andconfirm executed trades. Also on the floor, adjacent to the trading pits, are a bankof electronic monitors providing access to important information, news, and pricesof other markets. The latter carry the most up-to-date information and commentary from financial centers all over the world.
EXECUTION OF TRADESWhen someone decides to trade on the exchange (having first opened an accountwith a member firm—a simple procedure explained in Chapter 7) he places his orderwith a registered representative of the member firm. A proper order should specify whether to buy or sell, the commodity, the number of contracts, the price, andthe length of time the order is to run. When the account representative accepts theorder, he confirms it orally and also in writing through the mail. This enables thecustomer to double-check the accuracy of the order and also signifies that the representative has accepted responsibility for it.
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The order is immediately recorded and time-stamped upon receipt. (Theorder is electronically time-stamped at each relay point except at execution so thata full record can be kept of its progress.) Then it is sent to the exchange floor,where it is relayed in written form, via a runner, to the floor broker in the pit. Uponexecution, the floor broker endorses the price on the order form, returns it via runner to the floor phone-man, who in turn relays it to the office. As soon as the registered representative is informed of the trade execution, he provides the customerwith verbal confirmation and later confirms it in writing. If the order is a marketorder, this entire process—from the time the customer enters the order until it isexecuted in the pit and confirmation is relayed back to the customer—can takeless than one minute.During the day and at the end of each trading day, member firms report alltransactions to the clearinghouse, which reconciles (or matches) the trades andassumes the opposite side of the trade for both the original buyer and seller. Thisfacilitates the offsetting of futures positions by the traders and greatly simplifiesthe settlement and delivery process.
DUAL TRADINGOne of the issues that Congress discussed extensively in its deliberations over theCFTC Act of 1974 had to do with dual trading, i.e., the practice of a floor broker,FCM, associated person, etc. trading for his own account at the same time that hesolicits and executes orders for customers. Such a practice seemingly has someinherent conflicts of interest. All exchanges have adopted policies governing dualtrading; some prohibit it. All require record-keeping procedures to facilitate regulators’ detection of abusive trading practices such as trading ahead of customerorders. Lastly, the CFTC has issued a rule banning all dual trading for those commodities trading over 8,000 contracts per day.
THE CLEARINGHOUSE1Most of us are familiar with the clearinghouse operations that our nation’s banking system uses to expedite the flow and transfer of funds from one bank to another within the system. In the case of a futures exchange, the clearing operation existsto perform a similar function in that it facilitates the flow and transfer of funds
1.
Exchanges in many other parts of the world do not use clearinghouses. This is risky, and mostsuch exchanges have very little public business.
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resulting from its member firms’ execution of trades. As is true in the case of thebank depositor, the individual commodity trader has no direct contact with theclearing organization; it serves as a central point for depositing and dispensingfunds to be credited or debited to the accounts of member firms.An additional function served by the exchange clearinghouse is as guarantor of contract performance. In other words, the fulfillment of contract obligationsof a clearing member is guaranteed through the collective financial resources ofall clearing members, regardless of what happens to the other clearing-memberparty to the contract. There is no direct comparison here with banks’ clearing operations, as the responsibility of guaranteeing transactions rests solely with the individual bank with regard to each of its customers.The exchange clearinghouse performs a third important function, which is inno way comparable to the banking system’s clearing operations, namely, assigning and overseeing contract deliveries.The formal relationships between the clearinghouse and the exchange maydiffer from one exchange to another. For example, the International CommoditiesClearing House in London is a privately owned clearinghouse, separate from ownership of any exchange. It provides clearing services for a number of independentexchanges in several countries. On both the International Monetary Market and theChicago Mercantile Exchange, the clearinghouse is an integral part of the exchange,operating under the direct jurisdiction of the exchange’s clearinghouse committee.At the Chicago Board of Trade, the clearinghouse is a separate corporate entity withits own board of directors. No matter what formal arrangements exists, all commodity exchange clearinghouses in the U.S. operate in a similar fashion and perform nearly identical functions.Membership in the clearinghouse is normally confined to exchange members,although the majority of exchange members are not clearinghouse members. Thoseexchange members who are not clearinghouse members must still have their tradescleared (verified and guaranteed) by a clearinghouse member. To put it anotherway, each member must either be a clearing member or be affiliated with a clearing member.Clearing members do not pay commissions for trades executed, but do payclearance fees and floor brokerage fees if an independent floor broker is used fortrade executions. They also collect a fee from exchange members who clear tradesthrough them.The function of the clearinghouse begins as trading closes for the day.Clearinghouse members submit a trade confirmation card for each trade executed.Customers’ names do not actually appear on these cards as buyer or seller, but onlythe name of the clearinghouse member in whose name the trade is executed for thecustomer and other information matching the trade to original order tickets.Once these confirmation cards have been matched or verified, the original parties to the transactions—the member brokers—cease to deal with one another323
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directly. Instead, they each deal exclusively with the clearinghouse. In effect, theyare now long or short to the clearinghouse, because it has assumed the position ofsecond party to each member’s transaction. The liquidation of contracts is facilitated through this system, because a trader can now offset his contract without thenecessity of obtaining the agreement of the original second party to the contract.The clearinghouse then merely notes that the original trader’s obligation is canceled.The clearing member firm is ultimately responsible for fulfillment of a contract with the clearinghouse, not the individual customer. The customer’s responsibility lies solely with his broker. The brokerage firm, after executing the trade,then deals exclusively with the clearinghouse.
FINANCEWhenever a transaction is made in the market, both parties to the trade are askedto post a “good faith” bond in the form of cash, Treasury bills, listed securities, orletters of credit. This “good faith” money is usually referred to as margin, althoughon some markets it is called a “security deposit,” a term which more accuratelydescribes it and distinguishes it from margin in the securities market.The clearinghouse establishes and maintains strict control over these minimum security deposits (margins), both for initiating and for maintaining positions.Member firms are required to collect these minimum amounts from customers.Brokers may, and frequently do, charge customers more than the minimum, but theymay not collect less. Clearing member firms must, in turn, deposit and maintain aspecified level of funds in the clearinghouse to back up their aggregate net market position.The purpose for requiring these funds is to ensure performance under theterms of the futures contract. It is a safeguard or surety to both buyer and seller (andto the carrying broker) that there will be funds available