On the adequacy of single-stock futures margining requirements

✍ Scribed by Hans R. Dutt; Ira L. Wein

• Publisher: John Wiley and Sons
• Year: 2003
• Tongue: English
• Weight: 142 KB
• Volume: 23
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.10094

✦ Synopsis

Abstract

Unlike the traditional futures contract risk‐based approach to margining, new security futures
contracts
are margined under a strategy‐based margining system similar to that which applies in the equity options
markets. As a result, these new margin requirements are potentially much less sensitive to changes in market
conditions. This article performs a simulation to evaluate whether these alternative margining methodologies can
be
expected to produce comparable outcomes. The analysis suggests that a 1‐day settlement period will likely
lead to collection of customer margins that are virtually always greater than that which its traditional
risk‐based counterpart would require. A 4‐day settlement period would lead to margin requirements
that both significantly under‐ and overmargin relative to a comparable risk‐based system. This
study
argues that exchanges may approach the preferred probability of customer exhaustion by managing margin
settlement
intervals. Thus, the new strategy‐based rules, in and of themselves, will not necessarily inhibit new
security futures trading activity. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:989–1002, 2003