Daily margin as a leverage filter

Bound the loss before entry and after the close

TradersWeek editorial reading. Most leverage debates start with ticket size and stop once the trade is open. The archive describes a different sequence: treat prescribed margin and mark-to-market settlement as the primary filter that is supposed to bound a loss before a position is taken and again after every close.

That reading does not treat broker-collapse anxiety as a substitute for the filter. The secondary question is whether customer balances are held as required. The primary question is whether posted collateral still covers the next mark-to-market move.

Mark-to-market settlement realizes the loss

Open futures positions are revalued each day after the close. Resulting gains and losses are credited or charged to the customer account so losses are not left to accumulate.

That process is mark-to-market settlement: end-of-day crediting or charging of open-position gains and losses so a loss is realized in the account rather than left to accumulate. Leverage is not finished as a decision once the trade is open. The account is charged again after the close.

Prescribed margin under changing conditions

Each exchange sets a minimum collateral requirement that buyers and sellers must keep in their brokerage accounts to cover possible trading losses. Those minimum collateral levels are adjusted from time to time for factors that include volatility and prevailing or expected market conditions.

That requirement is prescribed margin: exchange-set collateral that buyers and sellers must keep in the account to cover possible losses, with the requirement adjustable when volatility or conditions change. The presence of that posted collateral is presented as what makes daily cash settlement workable under changing market conditions.

What clearing and segregation do not replace

On a matched exchange trade, the exchange clearing organization is substituted as the counterparty to both sides, so payment of daily gains and collection of daily losses does not depend on the other customer's creditworthiness. That arrangement is clearing substitution.

Futures brokers must hold customer trading funds in a segregated customer account, separate from the firm's own bank accounts, and may not mix those funds with firm or principal money or use them for unintended purposes. That rule is customer fund segregation.

Licensed firms that hold segregated customer funds file financial reports with regulators every morning. In volatile markets a clearing organization can demand additional firm capital with one hour's notice. That demand is an intraday capital call: a clearing organization's ability, in volatile conditions, to demand extra firm capital on very short notice so the margin system remains funded.

TradersWeek editorial reading. Clearing substitution, customer fund segregation, morning reports, and an intradaily capital call address credit and firm funding. They do not replace checking whether posted margin still covers the next mark-to-market move.