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On the adequacy of single‐stock futures margining requirements
Author(s) -
Dutt Hans R.,
Wein Ira L.
Publication year - 2003
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10094
Subject(s) - futures contract , margin (machine learning) , equity (law) , settlement (finance) , futures market , economics , business , actuarial science , financial economics , computer science , finance , machine learning , political science , law , payment
Unlike the traditional futures contract risk‐based approach to margining, new security futurescontractsare margined under a strategy‐based margining system similar to that which applies in the equity optionsmarkets. As a result, these new margin requirements are potentially much less sensitive to changes in marketconditions. This article performs a simulation to evaluate whether these alternative margining methodologies canbeexpected to produce comparable outcomes. The analysis suggests that a 1‐day settlement period will likelylead to collection of customer margins that are virtually always greater than that which its traditionalrisk‐based counterpart would require. A 4‐day settlement period would lead to margin requirementsthat both significantly under‐ and overmargin relative to a comparable risk‐based system. Thisstudyargues that exchanges may approach the preferred probability of customer exhaustion by managing marginsettlementintervals. Thus, the new strategy‐based rules, in and of themselves, will not necessarily inhibit newsecurity futures trading activity. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:989–1002, 2003