Initial Margin:

This is an amount of cash (or other allowed collateral) that the trader should have in place with their GCM before the clearing house will accept the trade. Since the clearing house is taking on the threat of counterparty risk on their client’s behalf (via the GCM) they require a security deposit calculated as a percentage of the notional value of the trade. It remains in place for the duration of the trade but is returnable once the trade expires or is closed out.

The amount of initial margin required is calculated by the clearing house after determining the volatility of the underlying asset. The percentage amount is published monthly and will be found on that clearing house’s website, usually under the individual FFA contract specifications.

It is important to be aware of the initial margin requirements of any potential trade entered into, and to ensure the funds are in place with the GCM.

Variation Margin:

As explained in the Settlement section, this is the daily mark-to-market calculation between the daily settlement number and the trade rate. In the case of Baltic freight contracts, the end of day Baltic Forward Assessment is used by the clearing houses as the daily settlement rate. The scheduled end of day variation margin call payments are typically paid first thing the next banking day. If the variation margin is favourable to the client, funds will be received by the GCM for that account.

Maintanance Margin:

Throughout the day the clearing house will run real-time profit and loss calculations on each clearing member, assessing their positions and exposure, to ensure there are sufficient funds to cover their risk. A minimum equity level must be maintained in the clearing account known as the Maintenance Margin. Where the clearing house feels there is significant volatility (increased risk), or there is a change in a client’s position, they may require unscheduled intra-day payments. If there is insufficient collateral with the GCM, or payments are unable to be made that day, the GCM will close out some positions.

 

Trade expiry or close:

Please see Settlement

 

Summary of payments to facilitate an FFA trade:

  • Initial Margin
  • Daily Variation Margin
  • Maintenance Margin
  • Unscheduled Margin Calls
  • GCM fees
  • Clearing house fees
  • FFA broker commissions
  • Final Settlement