IBG 1025
`CBM of U.S. Patent No. 7,412,416 B2
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`0001
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`

`

`StElI'_tilIg
`llut Ill
`Futures
`
`9 M
`
`ARK J. POWERS
`
`0002
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`

`

`StflI‘_tIIIg
`flut III
`Futures
`W9Updated and Expanded
`
`SIXTH EDITION
`
`MARK J. PIJWERS
`
`McGraw-Hill
`
`New York Chicago San Francisco
`Lisbon London Madrid Mexico City
`Milan New Delhi San Iuan Seoul
`Singapore Sydney Toronto
`
`0003
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`

`

`Library of Congress Cataloging-in-Publication Data
`
`Powers, Mark J.
`Starting out in futures trading/by Mark J. Power~th ed.
`p. em.
`ISBN 0-07-136390-4
`1. Futures. 2. Options (Finance). 3. Investment analysis. I. Title
`
`HG6024.A3 P682 2000
`332.64'5-dc21
`
`00-045265
`
`McGraw-Hill
`~
`A Division of~McGraw·HillCcmpanies
`
`Copyright~ 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Printed in the
`United States of America. Except as permitted under the United States Copyright Act of 1976,
`no part of this publication may be reproduced or distributed in any form or by any means, or
`stored in a data base or retrieval system, without the prior written permission of the publisher.
`
`8 9 10 DOH/DOH 0
`
`I
`
`ISBN D-07-136390-4
`
`Printed and bound lly Quebecor/Marlinsburg.
`
`McGraw-Hill books are available at special quantity discounts to use as premiums and sales
`promotions, or for use in corporate training programs. For more information, please write to
`the Director of Special Sales, Professional Publishing, McGraw-Hill, Two Penn Plaza, New York,
`NY 10121·2298. Or contact your local bookstore.
`
`o recycled, de-inked fiber.
`
`This book is printed on recycled, acid-free paper containing a minimum of 50%
`
`Throughout the book the author is using "he" but it is meant to imply
`a neutrality in the sexual context and should be read as "he or she."
`
`0004
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`

`

`Chapter 29
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`directly. Instead, they each deal exclusively with the clearinghouse. In effect, they
`are now long or short to the clearinghouse, because it has assumed the position of
`second party to each member's transaction. The liquidation of contracts is facili(cid:173)
`tated through this system, because a trader can now offset his contract without the
`necessity 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 con(cid:173)
`tract with the clearinghouse, not the individual customer. The customer's respon(cid:173)
`sibility lies solely with his broker. The brokerage firm, after executing the trade,
`then deals exclusively with the clearinghouse.
`
`FINANCE
`
`Whenever a transaction is made in the market, both parties to the trade are asked
`to post a "good faith" bond in the form of cash, Treasury bills, listed securities, or
`letters of credit. This "good faith" money is usually referred to as margin, although
`on some markets it is called a "security deposit," a term which more accurately
`describes it and distinguishes it from margin in the securities market.
`The clearinghouse establishes and maintains strict control over these mini(cid:173)
`mum 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 they
`may not collect less. Clearing member firms must, in turn, deposit and maintain a
`specified level of funds in the clearinghouse to back up their aggregate net mar(cid:173)
`ket position.
`The purpose for requiring these funds is to ensure performance under the
`terms of the futures contract. It is a safeguard or surety to both buyer and seller (and
`to the carrying broker) that there will be funds available to make proper settle(cid:173)
`ment when the contract is terminated. When the contracts are offset or delivered
`upon, this money is returned to the trader along with his profit on the transaction,
`or is applied toward his debts if the trader has lost money.
`Traders who have a paper profit on their transactions may withdraw their
`gains over and above the minimum security deposit required at any time before they
`offset their positions. On the other hand, if their transactions show a paper loss, their
`accounts will be debited accordingly, and they may be asked to deposit addition(cid:173)
`al funds in order to maintain the value of their accounts at the required minimum
`amount.
`The clearinghouse requires daily settlement in cash for all price variations in
`every contract traded. This means that each day the clearinghouse credits the
`account of clearing members showing a net gain due to favorable price move-
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`324
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`0005
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`

`

`The Commodity Futures Exchange
`
`ments during that day's trading and requires immediate payment from those mem(cid:173)
`bers showing a net loss on their positions.
`Because there is, of course, a buyer for every seller, the monies paid out
`must be equal to the monies collected, and the clearinghouse must show neither a
`gain nor a loss. It must balance before a new trading day begins.
`Brokers use the cash payments received from the clearinghouse to pay out
`trading profits to customers. Conversely, they have to pay additional money to the
`clearinghouse to cover losses sustained by customers.
`In summary, today's modem commodity futures exchanges have come a
`long way in developing managerial techniques for handling the tremendous explo(cid:173)
`sion in volume of trading seen in recent years. The exchanges themselves are mod(cid:173)
`em structures, which make use of the most modem data-processing technology
`available.
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`325
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`0006
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