Performance Bond Requirements
Futures contracts generally require fairly low performance bond requirements, anywhere from 2 percent to 20 percent of the value of the contract. Performance bonds in the futures industry, formerly called the “margin,” are considered “good faith” deposits that guarantee a trader's position holdings amid market swings.
In addition to the initial performance bond deposit, traders are committed to making good on any change in the value of any futures contract they hold. Traders can use this to leverage a position larger than their initial deposit amount.
The leverage that margined FX futures offer can be a double-edged sword. While the high leverage that futures offer can inflate profits, it can do the same with losses. It is prudent for traders to remember that minimum performance bond requirements are only that — a minimum. Disciplined risk control measures, including the implementation of stop-loss points, can help reduce the risk that comes along with the increased margin in futures.
Performance bond requirements can and do change as the price of a contract changes. Chicago Mercantile Exchange® (CME) determines minimum requirements for each of its contracts. But clearing firms and futures commission merchants also set rates for their customers which may be higher than the minimum exchange requirements. CME sets performance bond requirements for all CME-traded contracts for CME clearing firms. They in turn set requirements for affiliated futures brokerage firms and direct end customers. You will need to ask your broker regarding their specific performance bond requirements.
There are two different types of performance bond requirements that potential FX futures traders need to become aware of initial requirements and maintenance requirements. The initial performance bond is the amount a trader must deposit in his or her account before an order is placed. The maintenance performance bond is the set minimum value that the trader must maintain in his account, which can change according to market action. For example, if a position moves against a trader, a margin call may be required, which can also be referenced to as a maintenance payment.
In the futures industry, all open positions are marked-to-market at the end of the trading session. That simply means your account is credited or debited, based on the settlement price of that session’s trading. This method gives futures trading rock-solid credit standing because losses are not allowed to accumulate. If your account falls under the maintenance level (a set minimum performance bond/margin per outstanding futures trade), your broker will contact you for additional funds to replenish it to the initial level. If your position generates a profit, you will be able to withdraw excess funds from your account.
For current minimum performance bond requirements set by CME for FX futures please click here.
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