profit or loss. If a successful closeout takes place it must happen in
the internal records and also in the Client Account of the Firm held
at the clearing house.
If the latter does not take place then there is a risk that an action
such as an assignment of the long futures open position could take
place. The result could be increased settlement costs.
Principal trading accounts are usually settled net, automatically in
both the internal and the clearing house accounts.
Perform margin calculation
If the transaction undertaken is creating a short position then
there will be a margin requirement that needs to be calculated. In
most cases this will be either Standardised Portfolio Analysis of
Risk (SPAN) or Theoretical Intermarket Margin System (TIMS)
depending on the exchange on which the trade has taken place.
Both these margin systems are described more fully in the
Appendices 9 and 10.
The margin call will be covered by collateral in the form of either
cash or collateral or a combination of both. This collateral will be
needed for both the initial and the variation margin call (if the net of
the positions is a loss) made by the exchange clearing house to the
firm and by the firm to its client.
Margin will be posted to a margin account in the ledger.
Charge the relevant commission
For client transactions, there will be a commission payable to the
broker. The commission may be a rate/amount per contract or some
other rate agreed by the sales desk and the client.
This rate can be charged on the opening trade, the closing trade or
split so that both the opening and the closing transactions carry a
commission.
The amount of commission charged on the transaction may include
what is called floor brokerage. This is the fee charged by an execution
broker who is giving up the trade to a clearing broker. The clearing
broker will charge the client or trading book the combined floor bro-
kerage and clearing fee and then settle the floor brokerage with the
execution broker (Figure 4.6).
Commission will be posted to a commission account in the ledger
and floorbrokerage to a brokerage account pending settlement with
the executing brokers.
78 Clearing and settlement of derivatives