Margin requirements, price limits and capital requirements of futures clearinghouses

Abstract

A futures clearinghouse guarantees derivative positions of its clearing members. It limits the risk from this guarantee by imposing margin requirements and settling contracts daily. Since margin requirements cover most but not all losses, the clearinghouse requires capital to support residual risk. We model the clearinghouse capital requirement as a function of margin requirements, daily price limits and futures market volatility, using an option pricing model, which accounts for truncation in observed futures returns caused by daily price limits, as well as their non- norrnality. We empirically apply the model to estimate capital requirements of the Winnipeg Commodity Exchange Clearing Corporation.