| Feb 9 2012, 10:05:20 GMT | Sydney: | 20:05 | Tokyo: | 19:05 | Barcelona: | 11:05 | London: | 10:05 | New York: | 05:05 | San Francisco: | 02:05 |
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A major difference between futures and stocks involves the concept of the performance bond.
1. Stock trading: a partial deposit on a transaction, borrowing the remaining from your broker
2. Futures trading: good faith deposit indicating your ability to fulfill the contract
In stock trading, margin refers to a partial deposit you put up with your broker to purchase securities, while borrowing the remaining amount from the broker. With futures, this “down payment” is actually a good faith deposit you pay to indicate your ability to ensure fulfillment of the contract. It is a guarantee that both buyers and sellers will respectively take or make delivery of the commodity represented by
the contract, unless they offset that obligation via an opposite and equal transaction.
This distinction is important since it affects both the amount of leverage and the overall trading costs since there is interest charges on the stock margin because you are borrowing from your broker.
A performance bond consists of funds that must be deposited by a customer with his or her broker, by a broker with a clearing member, or by a clearing member with the Clearing House. The performance bond helps to ensure the financial integrity of brokers, clearing members, and the Exchange as a whole.
Initial Level
Futures contracts require an initial performance bond in an amount determined by the exchange itself. Rather than being set as a percentage of contract value, this amount is a function of the price volatility of the underlying commodity. Brokerage firms are permitted to request higher amounts from their customers, but never less than the minimum set by the exchange. When you trade futures, property rights don’t change hands; instead, you enter into a legally binding commitment that, at some later point in time, could become a transaction involving the property rights to the actual commodity.
Maintenance Level
If you trade futures at CME, you’ll be required to post an initial performance bond to cover any loss you may incur. If at any time your account dips below a specified maintenance level, you’ll be asked to add money to keep your account up to the initial performance bond amount.
