Contents
Preface ix
Acknowledgements xv
Disclaimer xvii
1 THE DEVELOPMENT OF FUTURES AND OPTIONS
AND OTC DERIVATIVES 1
The first futures market 2
The emergence of financial futures and options markets 3
The first options markets 6
Summary 12
2 DERIVATIVE PRODUCTS 15
Over-the-counter derivatives 31
3 THE ROLE OF THE CLEARING HOUSE 35
Eurex AG 38
The Options Clearing Corporation (OCC) 40
LCH.Clearnet 40
Risk management 43
Summary 43
4 FUTURES PROCESSING 45
Futures trading 49
Clearing process 50
Use of futures 52
Futures clearing and settlement 54
Variation margin 55
Initial margin 55
Futures delivery 57
The delivery process 59
LCH.Clearnet.Clearnet delivery procedures 62
The process of delivery 63
The delivery process of Gilts through CREST 68
Commodity futures delivery 68
Physical delivery of LME contracts 70
The SWORD system 73
Soft commodities 73
Workflow road map 75
Summary 81
5 OPTIONS PROCESSING 83
Workflow road map 86
Option exercise and assignment 91
Exercise and assignment procedures 95
Delivery 96
Summary 96
6 OTC PRODUCTS 97
Forward rate agreements 97
Swaps 98
Equity swap cash flow 102
Over-the-counter options 103
Settlement of OTC products 104
The post-trade environment 106
Event calendar 107
Communication/Information 108
Other settlement issues 109
Accounting and regulatory issues 110
SwapClear 110
Benefits of netting 111
SwapsWire 113
Summary 114
7 USING DERIVATIVES IN INVESTMENT MANAGEMENT 115
Introduction 115
Basic illustration of derivatives use in asset allocation 115
Income enhancement 116
Hedging 118
vi Contents
Speculation and exposure taking 120
Use of OTC derivatives 121
Regulation and compliance 122
Summary 123
8 MARGIN AND COLLATERAL 125
Initial margin 125
An explanation of delta 126
Intra-day margin 127
Spot month margin 128
Margin methods 128
Margin offsets 128
Variation margin 129
Tick size 131
Option margin 131
Settlement of option margin 133
Collateral 134
Acceptable collateral 135
Margining to a client 139
Single currency margining and settlement 140
Margining OTC positions 141
Summary 141
9 IMPACT OF CORPORATE ACTIONS 143
Introduction 143
OTC derivatives 153
Summary 154
10 OPERATIONAL RISK 157
Identifying and managing specific risks 158
Mapping operational risk in a derivatives operations
environment 159
Specific operational risks 161
Recognising, measuring and managing operational risk 162
Summary 164
Glossary of derivatives terms 167
Appendix 1: Euronext.liffe equity index future contract
specification 203
Contents vii
Appendix 2: Euronext.liffe listed option contracts 211
Appendix 3: IPE exchange for physicals 215
Appendix 4: IPE expiry dates 221
Appendix 5: LME copper brands 233
Appendix 6: FSA derivatives and warrants risk warning 237
Appendix 7: Useful websites and suggested further reading 245
Appendix 8: Euronext.liffe corporate action policy 249
Appendix 9: SPAN 257
Appendix 10: TIMS 261
Index 265
viii Contents
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