Do You Understand What Your E-mini Futures Clearinghouse Does?

By Author: David Adams
Total Articles: 41
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When you place an e-mini trade, a chain of events initiates from your individual broker to a clearinghouse; the clearinghouse acts as a third party that steps between the buyer and seller (the two original e-mini traders in this transaction) and assumes the legal counterparty risk for the transaction. This process of transferring the trade title (from the brokerage) to the clearinghouse takes place without any trader participation, and is a seamless operation that generally leaves the trader unaware of the actual process that takes place after he or she executes a trade.

A clearinghouse performs a number of important and necessary backroom accounting, risk management, and bookkeeping operations. Some of those operations include functions like:

• Clears all trades from its member clearing firms.
• Provides settlement services in traded markets.
• Provides third party valuation of trades and held margin funds.
• Establishes margin requirements.
• Purpose is the lessen default risk of member firms not honoring their financial arrangements.

As you have probably surmised, ...
... the clearing house is the structural backbone and gate keeper in the e-mini market, and all the other markets the clearinghouse facilitates. While the process above may sound technical in nature, it is a straightforward process with well defined rules and regulations. Think of it this way; the broker (and hence, the broker’s brokerage) solicit securities and place orders via direct orders from brokerage clients, along with orders from the online traders who place trades without direct interaction with their broker or brokerage. Online e-mini traders generally trade on a digital platform that is designed and serviced by the brokerage house, and these platforms are generally powered by a data feed of company origin. There also a handful of third-party platforms that use the same data feed of the brokerage firms. NinjaTrader is currently a popular third party platform for e-mini traders.

If you are an e-mini trader, your trades will likely be cleared and settled through the Chicago Mercantile Exchange which owns and runs its own clearinghouse operations. Across the ocean, a healthy portion of security clearing runs through LCH Clearnet, which is the current version of the old London Clearing House. In short, whenever modern exchanges are trading equities there will be an affiliated clearinghouse doing the heavy lifting behind the scenes. Each exchange has its own clearinghouses.

In actual operation, clearinghouse members submit their trades in aggregate at the end of the trading session and the clearinghouse nets the gains and losses for all the trades originating in the brokerage, or clearinghouse member, and then the brokerage required to deposit cash sufficient to meet the clearinghouse margin requirements.

Whew! That’s a fairly complicated process just to make a futures trade; but computer transmission of trades and automatic calculation of deposits due from the brokerage house make the process transparent and seamless.

In summary, we have covered a little discussed part of the trading process and settlement of trades. Clearinghouses provide a valuable and absolutely necessary accounting of trading results. Trade well, and don’t make the clearinghouse force you into a margin call, another of their functions, and an unpleasant one at that.

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