Prudential margin policy in a futures‐style settlement system

Fenn, George W.; Kupiec, Paul H.

doi:10.1002/fut.3990130406

Cited by 58 publications

(51 citation statements)

References 9 publications

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“…As shown in Table II, the number of big bullish days is roughly the same as that of big bearish days, suggesting that there is a symmetry between significant bullish and bearish events in nature. 20 See Figlewski (1984), Gay, Hunter, and Kolb (1986), Estrella (1988), andFenn andKupiec (1993). 21 To account for the changes in price limit levels, subsamples are created and the same procedure outlined is carried out to identify the event date.…”

Section: Datamentioning

confidence: 99%

Price limits, overreaction, and price resolution in futures markets

Chen

1998

J. Fut. Mark.

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Section: Datamentioning

confidence: 99%

Price limits, overreaction, and price resolution in futures markets

Chen

1998

J. Fut. Mark.

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“…Kupiec (1993) notes that traditional risk-based margining systems that require marking to the market and daily fund collection (as a matter of practice) have consistently been able to avoid clearinghouse default while still allowing for vibrant trading, without the need for Federal mandating of performance margins. In fact, studies analyzing risk management performance suggest that exchanges are overly conservative in their margining requirements (e.g., Fenn & Kupiec, 1993). Further, Gay et al (1986) found that exchange margin setting was conducted in accordance with the exchange's stated objectives.…”

Section: Traditional Margin Requirements and Risk Managementmentioning

confidence: 94%

“…Several authors describe margin setting in relation to the risk management system in futures markets including Gay et al (1986), Fishe et al (1990), Hartzmark (1986), Fenn and Kupiec (1993), Chatrath et al (2001), andCotter (2001). Under this system, although the customer, FCM, and the clearing member are all responsible for fulfilling contract obligations, the risk management system breaks down only if the guarantor of last resort, that is, the clearinghouse, fails to fulfill the financial obligation.…”

Section: Traditional Margin Requirements and Risk Managementmentioning

confidence: 97%

On the adequacy of single‐stock futures margining requirements

Dutt¹,

Wein²

2003

Journal of Futures Markets

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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.

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“…They argue that margins on different commodities contracts should be set so that the probability of futures price moving by an amount equal to or greater than the margin is constant across contracts. Fenn and Kupiec (1993) develop alternative models of an efficient prudential margin management policy using the paradigm of efficient contract design proposed by Brennan (1986). On the other hand, Warshawsky (1989) shows that the normality assumption is inappropriate and, as a result, the margin level is often underestimated.…”

Section: Background Of This Studymentioning

confidence: 99%

A theoretical framework to evaluate different margin‐setting methodologies

Lam

Sin

Leung

2003

Journal of Futures Markets

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The margin system is the first line of defense against the default risk of a clearinghouse. From the perspectives of a clearinghouse, the utmost concern is to have a prudential system to control the default exposure. Once the level of prudentiality is set, the next concern will be the opportunity cost of the investors, because high opportunity cost discourages people from hedging futures, and thus defeats the function of a futures market. In this article, we first develop different measures of prudentiality and opportunity cost. We then formulate a statistical framework to evaluate different margin‐setting methodologies, all of which strike a balance between prudentiality and opportunity cost. Three margin‐setting methodologies, namely, (1) using simple moving averages; (2) using exponentially weighted moving averages; (3) using a GARCH approach, are applied to the Hang Seng Index futures. Keeping the same prudentiality level, it is shown that the one using a GARCH approach by and large gives the lowest average overcharge. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:117–145, 2004

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Prudential margin policy in a futures‐style settlement system

Cited by 58 publications

References 9 publications

Price limits, overreaction, and price resolution in futures markets

Price limits, overreaction, and price resolution in futures markets

On the adequacy of single‐stock futures margining requirements

A theoretical framework to evaluate different margin‐setting methodologies

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