- Institutional Arrangements for Settlement Guarantee
The most noticeable difference between the derivatives trading and spot trading is that the derivatives trading has a long period of time between the contract execution and the settlement. To cope with the settlement risk incurred by such the structural feature of the futures trading, the futures market has its own settlement mechanism such as daily mark-to-market and offsetting transactions to minimize the risk. In addition, to ensure the stability of settlement, the futures market adopts margins and clearing organization.
- Offsetting Transactions and Daily Mark-to-Market
- Offsetting transactions and daily mark-to-market help to secure settlement stability. The former helps to reduce losses by discharging from the obligation of the original contract before the last trading day while the latter helps to size down the settlement amount through the payment and receipt of profits and losses occurred by the evaluation at the closing price of the futures contract every day.
The margin system is to secure settlement stability by making investors put up with a certain level of loss as the derivatives trading has high-risk, high-return feature. Investors are required to deposit in advance margin amounts equivalent to the risk level inherent to the derivatives trading at the time of order placement.
Also, to prevent settlement default by a member, the Exchange requires the member to always maintain a certain level of margin taking into account the risk level of the open interests.
- Stability of Settlement
- The Exchange acts as the counter-party against the members (CCP) for the settlement stability, which enhances the credit of the members to fulfill the settlement obligation to the level of the clearing organization. Therefore, to participate in the derivatives market, participants don't need to check the counter-party risk of the member and can rely on the Exchange's credit.
- Joint Compensation Fund
- The KRX operates the Joint Compensation Fund to cope with a settlement failure by a member.