Gross margin

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In futures markets, gross margin refers to the submission of customer margin to a derivatives clearing organization (DCO) in an amount equal to the sum of the initial margin amounts that "would be required by the for each individual customer within that account if each individual customer were a clearing member."[1]

Under the traditional "net margin system," when calculating the amount of funds required by the DCO, a futures commission merchant (FCM) is allowed to offset the positions of each customer with those of its other customers and submit enough margin to cover the "netted" amount.

For example, suppose an FCM's customers hold, in aggregate, long positions of 1000 contracts of certain commodity and specific delivery date, and short positions totaling 800 contracts, under a net margining system, the FCM would send to the DCO enough margin to cover 200 contracts.

Under a gross customer margin ("GCM")system, the FCM would be required to submit to the DCO enough margin to cover 1800 contracts.

Gross Margin in the Restoring Customer Confidence Video Series

Regulatory Changes: A Pretty Picture For Gross Margining The Dodd-Frank Act has addressed numerous risks in the financial markets. In this video, Ron Filler, a Professor at New York Law School, says one provision, called gross margining, could alleviate segregated customer account risk, starting in January 2013.[2]

CFTC Final Rules, DCO General Provisions and Core Principles, October 2011

On October 18, 2011, the CFTC issued a final rulemaking on DCO provisions related to Title VII of the Dodd-Frank Act. Among the risk management provisions (Reg. 39.13) is a move toward the collection of margin by DCOs on a gross basis, rather than a net basis.

The compliance date for the gross margin rule was initially set for November 8, 2012. In October 2012, however, the CFTC issued no-action relief until January 14, 2013 in order to "provide firms with more time to implement their CGM processes and to assess the impact on margin requirements." [3]

References

  1. Final Rule on Derivatives Clearing Organization General Provisions and Core Principles. CFTC.
  2. Regulatory Changes: A Pretty Picture For Gross Margining. John Lothian News: Restoring Customer Confidence.
  3. New dates for Customer Gross Margining and LSOC. CME Group.