Are futures traders at risk of bailing out exchanges if huge margin losses happen?

H

helpme_please

Can the same thing happen for index futures traders or forex futures traders? Is this a risk that futures traders need to be aware of?

https://www.scmp.com/business/compa...-second-largest-digital-exchange-exposes-soft

In late July, an unidentified trader took up an unusually large position of 4.16 million bitcoin futures listed on Hong Kong-based OKEx, one of the world’s largest cryptocurrency venues.

The position, with a total notional value of US$416 million (HK$3.26 billion), triggered the risk management system at OKEx, setting off a chain of events that ultimately left futures traders with unrealised gains to give up about 18 per cent of their profits, according to calculations by Bloomberg.

The exchange’s team asked the client - who put in the long position order at 2am local time - to liquidate part of his long position to reduce risk. When the client refused to cooperate, the exchange said it froze his account to prevent any further build-up of positions.

Soon after, the price of bitcoin fell, causing the forced liquidation of his account as the required maintenance margin ratio wasn’t met.

As OKEx’s own insurance fund was not enough to cover the losses from the margin call, it utilised its “socialised clawback mechanism,” whereby the exchange would take a portion of the profit in equal percentage from other traders - all of whom had short positions - to cover the shortfall.
 
Don't know about crypto, but the futures exchanges are not "on the hook" for large losses.

The exchanges facilitate trades between customers. Some of us might find ourselves on the hook for some portion of huge, sudden losses*... but that's why FCMs have a capital account... to accommodate uncollectable debits incurred by their customers.

In the crash of '87, Refco had uncollectable debits of $300,000 from customers. But Refco had a capital account of $20 Million, so the hickey was easily absorbed.

*Basically... if customers incur larger losses than they can cover, the FCM is required to settle the losses out of their "capital account**". The FCM then goes after the customer debts to get recovery. If the FCM's capial account is depleted by settling large losses, then the rest of the FCM's customers can be proportionately "bailed in" until the losses are settled. (This is standard policy and spelled out in your customer agreement.) While this is the policy, I've never heard of it occurring. Brokers and FCMs constantly monitor customers' account equity so that they don't get into a debit situation as best they can manage.

** FCMs are required to have a minimum capital account of appropriate size as per their customer base. I believe it's $1 Million, regardless. Reports on the financial condition of the FCMs will also include "capital account in excess of required minimum"... If you're searching for a futures broker, you might want to consider its FCM's "excess capital", as that's additional "shock cushion" for them to handle market adversity.
 
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helpme_please said:
Can the same thing happen for index futures traders or forex futures traders? Is this a risk that futures traders need to be aware of?

https://www.scmp.com/business/compa...-second-largest-digital-exchange-exposes-soft

In late July, an unidentified trader took up an unusually large position of 4.16 million bitcoin futures listed on Hong Kong-based OKEx, one of the world’s largest cryptocurrency venues.

The position, with a total notional value of US$416 million (HK$3.26 billion), triggered the risk management system at OKEx, setting off a chain of events that ultimately left futures traders with unrealised gains to give up about 18 per cent of their profits, according to calculations by Bloomberg.

The exchange’s team asked the client - who put in the long position order at 2am local time - to liquidate part of his long position to reduce risk. When the client refused to cooperate, the exchange said it froze his account to prevent any further build-up of positions.

Soon after, the price of bitcoin fell, causing the forced liquidation of his account as the required maintenance margin ratio wasn’t met.

As OKEx’s own insurance fund was not enough to cover the losses from the margin call, it utilised its “socialised clawback mechanism,” whereby the exchange would take a portion of the profit in equal percentage from other traders - all of whom had short positions - to cover the shortfall.
More...
'Serious' Future Exchanges have position limits. The crypo world is still the far-west.
 
Scataphagos said:
Don't know about crypto, but the futures exchanges are not "on the hook" for large losses.

*Basically... if customers incur larger losses than they can cover, the FCM is required to settle the losses out of their "capital account**". The FCM then goes after the customer debts to get recovery. If the FCM's capial account is depleted by settling large losses, then the rest of the FCM's customers can be proportionately "bailed in" until the losses are settled. (This is standard policy and spelled out in your customer agreement.) While this is the policy, I've never heard of it occurring. Brokers and FCMs constantly monitor customers' account equity so that they don't get into a debit situation as best they can manage.
More...

This sounds like customers on futures exchanges are indeed on the hook except that it has never occurred so far. I wonder if "bail in" by customers trading CHF futures happened during the Swiss Franc disaster in 2015.

https://www.reuters.com/article/us-swiss-snb-brokers-idUSKBN0KP1EH20150116
 
1987 the regulated Hong Kong Futures Exchange need to rescued and the government of HK bailed them out. The they created a "lifeboat" tax on every contract traded subsequent to the event to pay the lifeboat off.
 
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