Forex futures are standardized futures contracts to buy or sell currency at a set
date, time, and contract size. These contracts are traded at one of the numerous futures exchanges around
the world. Unlike their forwards counter-parts, futures contracts are publicly traded, non-customizable
(standardized in their specified contract size and settlement procedures) and guaranteed against credit
losses by an intermediary known as a clearing house. (Related Derivatives: Futures vs. Forwards) The
clearing house provides this guarantee through a process in which gains and losses accrued on a daily
basis are converted into actual cash losses and credited or debited to the account holder. This process,
known as mark-to-market, uses the average of the final few trades of the day to calculate a settlement
price. This settlement price is then used to determine whether a gain or loss has been incurred in a
futures account. In the time span between the previous day’s settlement and the current’s, the gains and
losses are based on the last settlement value.
Futures clearing houses require a deposit from
participants known as a margin. Unlike margin in the stock market, which is a loan from a broker to the
client based on the value of their current portfolio, margin in the futures sense refers to the initial
amount of money Depositd to meet a minimum requirement. There is no borrowing involved, and this initial
margin acts as a form of good-faith to ensure both parties involved in a trade will fulfill their side of
the obligation. Furthermore, the futures initial margin requirement is typically lower than the margin
required in a stock market. In fact, futures margins tend to be less than 10 percent or so of the futures
price. Should an account take on losses after daily mark-to-market, the holders of futures positions must
ensure that they maintain their margin levels above a predesignated amount known as the maintenance
margin. If accrued losses lower the balance of the account to below the maintenance margin requirement,
the trader will be given a margin call (no relation to the movie) and must deposit the funds to bring the
margin back up to the initial amount. An example of margin requirements for each type of contract can be
found on the Chicago Mercantile Exchange, or CME's website here (more on the CME,
below).
Forex futures are traded at exchanges around the world, with the most popular being the
Chicago Mercantile Exchange (CME) group, which features the highest volume of outstanding futures
contracts. Forex, much like most futures contracts, can be traded in an open out-cry system via live
traders on a pit floor or entirely through electronic means with a computer and access to the Internet.
Currently, open-outcry is being phased out in Europe and replaced with electronic trading. As mentioned
earlier, in terms of the sheer number of derivatives contracts traded, the CME group leads the pack with
3.16 billion contracts in total for 2013. The Intercontinental Exchange and Eurex follow behind at 2nd and
3rd places, respectively, at 2807.97 and 2190.55 billion contracts traded. The bulk of the FX futures
contracts are traded through the CME group and its intermediaries.
