What would happen to my futures contracts such as S&P500 futures if the counterparty of my contracts gets liquidated due to a heavy use of leverage? Since futures contracts are made between two parties entirely, if one party gets liquidated, the contracts should be cancelled I guess. However, I have not heard of any investor whose contracts are gone due to the liquidation of the counterparty.
Add a comment
|
1 Answer
The actual counterparty to an exchange-traded futures contract is a clearinghouse. The clearinghouse acts as a intermediary between buyers and sellers in a futures market. This is so that traders do not have to worry about counterparty risk (i.e. you don't have to worry about the bankruptcy of the other party). Clearinghouses have an "insurance" fund to cover losses from counterparties. Sometimes, brokers are members of the clearinghouse and have to financially contribute to a central fund, therefore brokers may also have an incentive to ensure that their clients are actually able to fulfill their end of a futures contract.
What would happen to my futures contracts such as S&P500 futures if the counterparty of my contracts gets liquidated due to a heavy use of leverage?
Nothing would happen. The actual counterparty is a clearinghouse. The clearinghouse would use its own funds to cover the other end of the futures contract.
Note that this answer is only applicable to exchange-traded futures contracts. For over-the-counter futures contracts, both parties to the contract may be subject to counterparty risk.
-
and what if Gamestop happens to gold and threatens to bankrupt the clearing firm? Commented Mar 31, 2021 at 13:37
-
-
@user253751 I'm not familiar with the Gamestop case. Normally, when faced with increased risk, brokers and clearing firms would tighten their margin requirements to reduce risk to themselves.– FluxCommented Apr 1, 2021 at 6:12
-
@Flux There were reports from the financial industry that brokers and clearinghouses could go bankrupt over Gamestop Commented Apr 1, 2021 at 8:44