How does the clearing corporation assure it does not go bankrupt itself?
The futures clearing corporation has to build a sophisticated risk containment system in order to survive. Two key elements of the risk containment system are the ”mark to market margin” and ”initial margin”. These involve taking collateral from traders in such a way as to greatly diminish the incentives for traders to default. Electronic trading has generated a need for online, realtime risk monitoring. In India, trading takes place swiftly and funds move through the banking system slowly. Hence the only meaningful notion of initial margin is one that is paid upfront. This leads to the notion of brokerage firms placing collateral, and obtaining limits upon the risk of their position as a function of the amount of collateral with the clearing corporation.
