Statistical Methods in Risk Management by Futures Clearinghouses

Abstract

Abstract Futures clearinghouses guarantee the open futures positions of their clearing members. The risk that clearinghouses face as a consequence is managed by the following five tools‐margin requirements, daily settlement, capital requirements, daily price limits and position limits. Clearing members deposit margin with the clearinghouse to support their open futures positions. Under the system of daily settlement of profits and losses, the clearinghouse transfers funds from the margin accounts of clearing members who have incurred losses to the accounts of members who have incurred profits. The margin requirement is usually set to cover the loss expected in a normal trading day. Losses of clearing members in excess of their margin are supported by requiring each member to contribute to the capital requirements of the clearinghouse. The daily price limit specifies the daily trading range for the futures price. A properly chosen price limit can reduce the margin and capital requirement below the levels required in its absence. The position limit constrains the net speculative futures position of one individual to reduce the possibility of clearinghouse failure due to default by one speculator. The optimal values for the tools of risk management depend on the statistical distribution of futures price changes. Moreover, the tools have to be carefully chosen so as to protect the clearinghouse without driving traders away from the market. Evaluation of the different systems for setting the optimal values of these tools and their effects upon the volatility and trading activity in futures markets also depends on the application of statistical tests. This article therefore reviews the statistical methodology used by previous research on risk management by futures clearinghouses.