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Basket | ||
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Clearing | ||
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A form of settlement where responsibility for payment is passed to a third party: a Clearing House or Clearing Broker The Clearing House accepts responsibility for settling the deal. Credit risk for the seller in the trade is reduced to almost zero The Clearing House minimizes its Credit Risk by daily margining Detail An organization may trade on an Exchange either by becoming a member of the Exchange, or trading through an Exchange Broker. The clearing principles are similar in either case In general a trading organization engages a Clearing Broker to act on its behalf The trading organization is required to open a margin account with the Clearing Broker, which in turn maintains a margin account with the Exchange's Clearing Bank As the organization enters into a trading position the Exchange marks the trades to market on a daily basis, and transfers cash into or out of margin accounts based on the change of the value of the trading position since the previous day. The Clearing Broker mirrors this operation to its clients' margin accounts Every trading organization is required to maintain an amount of cash in the margin account to cover a substantial short term loss in the value of its position. If the trading organization does not maintain this margin then the Exchange closes out the position immediately, using the margin account cash to cover any losses as a result of the close out Payments into the margin account as a result of new trades that cause an increased open position are called Initial Margin payments Payments into the margin account as a result of the value of trades falling are called Variation Margin payments | ||
Forward | ||
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A Forward, or Forward Contract, is an agreement to buy or sell a commodity at a fixed time in the future Details A Forward Contract involves two trading parties: a buyer and a seller. Our organization is one party, the other is the counterparty A Forward Contract can involve almost any terms for quantity (Volume), quality, commodity, delivery period, delivery location, pricing and settlement A Forward Contract may be executed directly with a counterparty, or through an intermediary (a broker) Whether brokered or not, responsibility for delivery and settlement of a Forward Contract is usually directly with the counterparty (see Clearing for an exception) Forward Contracts may be executed at a fixed price, or at a floating price:
Forward contracts may be physically or financially settled:
A financially settled Forward is often referred to as a swap A Forward is usually settled bilaterally between parties. Forwards may be included in a netting agreement Forwards may be included in a margining agreement A Forward may be given up for clearing
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Swap | ||
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An Energy Swap is generally a swap of two different prices on an identical, or similar, Energy underlier Detail While financial market swaps may involve swapping almost any cash flow for any other cash flow, an Energy Swap involves the swap of two different prices on an identical, or similar energy product or underlier. The two types of Energy Swap are:
By definition, Energy Swaps are always financially settled Energy swaps may be traded OTC or on an Exchange An Energy Swap is very similar to a a financially settled Futures or Forward Contract Exchange traded swaps are generally settled through non-daily margining - and therefore have credit risk Financially settled futures, like all futures, are settled through daily margining - and have minimal credit risk | ||