How It Works

Overview

Trading on ICE Futures is fully electronic.
All matched ICE Futures transactions are processed and ‘presented’ through TRS/CPS (Trade Registration System/Clearing Processing System) to LCH.Clearnet Limited.

The following functions are performed within TRS:

• trade matching
• presentation of particulars to LCH for registration

• allocation and designation of trades to a position-keeping account.

Recorded trades flow into CPS throughout the trading day. Any correction to trade data is performed within TRS and results in the automatic amendment of the trade in CPS. Trade details can be disseminated to Clearing Members via the Trade Status Change Stream (TSCS).

Clearing Members should refer to ICE Futures for further details of TRS facilities and to the appropriate TRS User Guide.

The following functions are performed within CPS:

• settlement
• position keeping
• account transfers
• calculation of margin
• option exercise
• tender notification and delivery/option allocation.

Novation

When LCH.Clearnet has accepted a contract for registration it is replaced, by   novation, with two new, separate contracts involving LCH.Clearnet as both buyer and seller respectively. It is the latter contracts that remain on the register. As soon as novation occurs, the original contracting parties no longer have a contractual relationship with each other. Each now has a contract with LCH.Clearnet.

LCH’s obligations as central counterparty continue until final settlement as defined in the contractual terms of each contract. There are two types of settlement.

• Cash settlement organised by LCH.Clearnet (most financial futures and options on futures)

• Delivery versus payment organised by LCH.Clearnet (physical-deliverable commodity futures and options on futures)

Variation Margin

All open contracts are marked to market daily by LCH.Clearnet in accordance with the Exchange Rules. The official quotation is used as the market price. Profits or losses are either credited to or debited from Members’ financial accounts (realised margin) or they form non-realised contingent liabilities or credits.

Realised Margin

Realised margin is the calculated profit or loss arising from a comparison between the value of open positions at the relevant official quotations with the value of positions recorded in CPS - i.e. the trade price for new trades and the previous day’s official quotation for other positions. Variation margin for futures and certain options contracts is realised into postings to Clearing Members’ financial accounts:

Non-Realised Variation Margin

Non-realised variation margin is calculated with reference to the original trade price and the relevant official quotation. Non-realised variation margin is applicable to Gas Oil during the delivery cycle.

Contingent Variation Margin

Contingent variation margin is calculated with reference to the official quotation at which a contract went to delivery and the underlying asset value or the next nearest futures delivery month official quotation, dependent on the terms of the Contract. Contingent variation margin is calculated for all ICE Futures contracts which are subject to delivery of an underlying asset.

Option Variation Margin (ECX CFI Emission Options)

As premium is paid upfront, option variation margin is the value of unexpired options, calculated with reference to the official quotation. Bought and sold options generate credit and debit option variation margin respectively.

Calculation of Initial Margin

London SPAN

Initial margins are re-calculated at the close of each business day using the London SPAN algorithm, which is an adaptation of the SPAN method developed by the Chicago Mercantile Exchange.

Settlement

Cash Settlement

Cash settlement is a final settlement derived from the difference between the expiry price or Exchange Delivery Settlement Price (EDSP) and the previous business day’s official quotation. This is debited from or credited to Clearing Members’ financial account.

Delivery

Contracts remaining open at expiry are settled by physical delivery of the underlying at the official settlement price, EDSP as determined by the relevant Contract Terms.

Option Exercise and Expiry

Option contracts are exercised either manually or automatically through CPS in accordance with the relevant CPS User Guide and Exchange Rules. Exchange Contracts, Rules or Regulations determine times at which notification of exercise must be given. On expiry an automatic exercise facility is available. CPS manages the facility to exercise by the use of deadlines. Once a deadline is met, the ability to exercise is withdrawn. Once the CPS deadline has passed, it will not be possible to input any exercise instructions, or alter the automatic exercise settings. When an option other than an equity option is exercised, an open futures contract (delivery or cash settlement) will arise. Options which are not exercised by the time of expiry will expire worthless.