How are contractual obligations enforced?
In order to trade futures, buyers and sellers are required to post ‘margin deposits’ with the market intermediary. Margin deposits represent a financial guarantee that buyers and sellers will fulfil their obligations of the futures contract, and therefore build contract integrity. Margin deposits typically range between 5% and 15% of a contract’s face value and are set by the futures exchange where the contracts are traded. The size of the margin deposit depends in part on the likelihood of a price change. A higher margin is required in a more volatile market, indicating a higher degree of risk.
Margin deposits are automatically amended as the market moves. An unfavourable price movement resulting in a financial loss will hence be deducted in real time. If the deposit drops below a minimum threshold, trader accounts will be suspended until they have made the necessary adjustment. This can reduce the appeal to producers of using futures markets directly as cash flow problems may occur in the short term if the market moves against you.