Clearing collateral to support growth in the maritime sector
When acting as a central counter party between buyer and seller, the clearing house initially takes on a credit risk in connection with both the buyer and the seller concerning their ability to fulfil their obligations.
In order to cover this risk, the clearing house collects collateral from the participants.
The collateral must be sufficient to liquidate the positions of a participant guilty of breach of contract.
The participants are therefore required to post sufficient collateral to cover the worst possible development in the market value of their contracts.
The amount of collateral required depends on the price volatility of the underlying instrument for the derivatives contract as well as the liquidity in the market.
A contract based on an underlying instrument with substantial price fluctuations from day to day, will require a higher margin than a contract based on an underlying instrument with low volatility.
The margin is also affected by the liquidity of the derivatives contracts. Low liquidity results in a longer closing period, and consequently a higher margin is required.