International Finance: Putting Theory Into Practice

6.2. HOW FUTURES CONTRACTS DIFFER FROM FORWARD MARKETS 231

Table 6.2:Contract sizes at some futures exchanges

Rate at contract size (fc) Other exchanges
usd/gbp IMM 62,500 PBOT, LIFFE, SIMEX, MACE
usd/eur IMM 125,000 LIFFE, PBOT, SIMEX, MACE, FINEX
eur/usd OM-S 50,000 EUREX
usd/chf IMM 125,000 LIFFE, MACE, PBOT
usd/aud IMM 100,000 PBOT, EUREX
nzd/usd NZFE 50,000
usd/nzd NZFE 100,000
usd/jpy IMM 12500,000 LIFFE, TIFFE, MACE, PBOT, SIMEX
usd/cad IMM 100,000 PBOT, MACE
Key
EUREX= European Exchange (comprising the former GermanDTBand the former SwissSFX)
IMM-International Money Market (Merc, Chicago)
LIFFE= London International Financial Futures Exchange
MACE= MidAmerican Commodity Exchange
NZFE= New Zealand Futures Exchange.
OM-S= OptionsMarkned Stockholm
PBOT= Philadelphia Board of Trade
SIMEX= Singapore International Money Exchange
TCBOT= Twin Cities Board of Trade (St Paul / Minneapolis)
TIFFE= Tokyo International Financial Futures Exchange

Source Data from Sercu and Uppal, R., International Financial Markets and the Firm, South-
Western Publishing Company, 1995.

6.2.5 The Clearing Corporation

The clearing corporation serves two purposes: acting as central counterparty (CCP)—
‘novation’—and clearing of an investor’s offsetting trades.

NovationFormally, futures contracts are not initiated directly between individuals
(or corporations) A and B. Rather, each party has a contract with the futures
clearing corporation or clearing house that act asCCP. For instance, a sale from
A to B is structured as a sale by A to theCCP, and then a sale by theCCPto B.
Thus, even if B defaults, A is not concerned (unless the clearing house also goes
bankrupt). The clearing corporation levies a small tax on all transactions, and thus
has reserves that should cover losses from default.

ClearingThe clearing house thus guarantees payment or delivery. In addition, it
effectively “clears” offsetting trades: if A buys from B and then some time later sells
to C, the clearing house cancels out both of A’s contracts, and only the Clearing
House’s contracts with B and C remain outstanding. Player A is effectively exoner-
ated of all obligations. In contrast, as we saw, a forward purchase by A from B and
a forward sale by A to C remain separate contracts that are not cleared: if B fails
to deliver to A, A has to suffer the loss and cannot invoke B’s default to escape its
(A’s) obligations to C.