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The Clearing House accepts responsibility for settling the deal.
Credit risk for the seller in the trade is reduced to almost zero
In general a trading organization engages a Clearing Broker to act on its behalf
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
A Forward, or Forward Contract, is an agreement to buy or sell a commodity at a fixed time in the future
Forwards may be included in a netting agreement
Forwards may be included in a margining agreement
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: