Futures Clearing firm pay interest?

[blueraincap]

thanks.

From the prospectus of a chinese futures broker, it says it earns interest from "settlement reserve fund", which is defined as

unrestricted and unutilized cash balances reserved for the settlement and clearing of the futures trading, which are deposited with the futures exchanges and commercial banks.

If a client deposits X + Y with the broker, X is the required margins (ie collateral) and Y is extra. I believe in the US, futures broker only earns interest from Y by investing it in money market fund. In china, is it correct from that definition that a broker earns interest on X paid by the clearing firm and on Y paid by money market fund/bank?

 

[blueraincap]

In the USA:
Since the broker, if not the same as the custodian, does not touch your cash, securities or futures positions, the broker can't earn interest without them.

The custodian of your funds can and does earn a profit from free cash. Interest earned from free balances and lending at one time was up to 1/3 of profits at most clearing firms. Not so anymore.

I think in China, there is usually no custodian between broker and the clearing firm, so the interest accrues to the broker. Could you please define "free cash"?

 

[rmorse]

"free cash" is normally defined as the cash in your account not required to meet margin.

 

[blueraincap]

"free cash" is normally defined as the cash in your account not required to meet margin.

So if the initial margin is 100 and I deposit that, free cash for t=0 is nil. If the position goes in my direction and position worth 110, @t=1 $10 is free cash?

 

[blueraincap]

"free cash" is normally defined as the cash in your account not required to meet margin.

have you ever seen any industry-wide estimate for average futures commission rate? Or out of your mind, what do you guess it is about? relative to notional amount traded, something like 0.3bps?

 

[rmorse]

I can't imagine that FCMs share that number. For the most part, commission at most firms are negotiated and based on volume, risk, amount of time and effort the account will require and overnight positions(which require capital from the FCM). The highest I've heard of is $15/side for a manager that trades an account but does not get part of the profits(Not sure what the FCM got out of that) to $0.04/side for a daytrading group that averaged 5M-10M RT per month.

 

[blueraincap]

overnight positions(which require capital from the FCM).

I am learning to analyse some futures brokers, thats why the questions. Why would a FCM have to finance overnight positions? doesnt the client himself deposit the extra margin for overnight? I believe FCMs dont provide financing

 

[rmorse]

The CME require an FCM to put up 8% of your margin with their own capital. EG:
Client Margin: $100,000

Client puts up $100,000
FCM: $8000
-------------
Some FCMs will finance margin for hedgers, not for speculators.

 

[blueraincap]

The CME require an FCM to put up 8% of your margin with their own capital. EG:
Client Margin: $100,000

Client puts up $100,000
FCM: $8000
-------------
Some FCMs will finance margin for hedgers, not for speculators.

what would a CME require that? I don't see the logic. what benefit would that 8% give

 

[rmorse]

Extra cash for counter party risk. With equity options, clearing firms have large deposits with the OCC for counter party risk. Your margin deposit is not enough to protect the system.