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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives

Which statement best describes the margin mechanism that protects the clearing corporation against default in futures trading?

Futures margining combines an upfront initial margin from both buyers and sellers with daily mark-to-market settlement of gains and losses. This keeps losses from accumulating unpaid and protects the clearing corporation against counterparty default.

  1. AThe buyer pays the full contract value upfront to the seller
  2. BInitial margin is collected upfront and positions are marked to market daily, with mark-to-market margin settledCorrect
  3. CMargin is collected only at expiry on the net loss
  4. DOnly sellers of futures are required to pay margin

Explanation

Both buyers and sellers of futures pay initial margin at the time of taking the position. Gains and losses are settled daily through mark-to-market, which limits the build-up of unpaid losses. Collecting only at expiry, or from only one side, would leave the clearing corporation exposed.

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