Thailand Clearing House Co., Ltd. (TCH), a subsidiary of the Stock Exchange of Thailand, will perform as the clearinghouse for all transactions.
The clearinghouse provides a range of services related to the registering, clearing and settling of transactions executed on the exchange, the guaranteeing of contracts and the managing of risks of its members. The most important role of the clearinghouse is to serve as a counter-party to every transaction. In other words, once the buyers and sellers settle on a transaction price, the clearinghouse will act as a substitute buyer for every seller and a substitute seller for every buyer. Therefore any member, who has bought or sold a futures contract, has an obligation not to the party on the other side of the transaction, but to the clearinghouse, just as the clearinghouse has an obligation to the member. The clearinghouse will service only its members. Brokers who are not clearinghouse members themselves must make the necessary arrangements to clear their transactions via a clearinghouse member.
The clearinghouse rules require its members to segregate funds for house accounts and customer accounts with the usual provision that in the event of a clearinghouse member’s failure, surpluses in the house account shall be applied to any customer account shortfalls but not vice versa.
Under the TCH’s clearing rules, all traded futures contracts must be cleared and settled on the next business day (T+1). Each futures contract traded on the TFEX will be marked to the market daily based on the futures settlement price.
An investor is required to maintain a margin account with a broker and a clearinghouse member is required to maintain a margin account with the clearinghouse. The clearinghouse will stipulate the margin rate and then will re-evaluate the margin requirements for each member’s base on a daily basis.
For a client, when opening an account to trade futures, a broker will ask an investor for an initial deposit to cover the initial margin for each contract to buy or sell. At the end of each day, the broker marks-to-market the investor’s open futures positions. This is the process by which the broker will add and/or deduct gains and losses from the account’s balance. If client’s margin deposit falls below a certain level (as determined by the broker) the broker will then ask the investor to deposit additional money into the account to bring the margin back up to the required minimum. This is called a variation margin. In the event that the client has made a profit from his/her futures position, the client is then able to withdraw the money from the account.
As a mutual agreement between brokers and the Futures Industry Club (FI Club), the initial margin for investors will be based on the margin rate as announced by Thailand Clearing House (TCH). The initial margin is set at 1.9 times the maintenance margin for local investors and 1.35 times the maintenance margin for institutional investors.
Thailand Clearing House (TCH) has in place a margining system that requires each broker to deposit margin with the TCH while investors are required to deposit margin with the brokers. The margin rate set by TCH is to minimize the counterparty risk to traders, trades executed on TFEX are guaranteed by a clearing house. The clearing house becomes the buyer to each seller, and the seller to each buyer, so that in the event of a counterparty default the clearer assumes the risk of loss.
TCH uses the historical data of futures contract dated back 120 days to calculate the volatility of each instrument. The calculation uses a weighted average method where the most recent data are given more weight than the less recent data. This will ensure that the margin rate calculated from the volatility best represents the current market situation.
This is an ongoing process so TCH may announce a change in margin rate when deem necessary.
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