Future trading

(9)

A．If future contracts are standardized, brokers would not assess contract specifications.

B．As long as future contracts are standardized, floor trading would be made slow accordingly for brokers to evaluate contract specifications.

C．Whether future contracts are standardized or not, floor trading will not be influenced.

D．Futures contracts must be standardized, otherwise, floor trading would be made very slowly since specifications of each contract would be assessed.

A futures market is basically an organized forum for the trading of futures contracts under highly standardized terms. The basic elements that form this market are discussed below :

Future Exchange[1]

Future exchanges have existed in many countries since the mid-nineteenth century. Today, many futures exchanges all over the world are active in trading futures contracts on vanous commodities and financial instruments, such as stock index futures, agricultural commodities futures, metal futures, energy futures. A futures exchange is usually a membership organization whose purpose is to facilitate the trading of futures contracts. It provides the physical facilities and organizational framework make possible the execution and processing of futures transactions.

Every futures exchange may have its own unique structure. But usually, there is a board of directors , elected by exchange members. The rules, regulations and policies set by the board are implemented by an executive committee, control committee, and new products committee, etc.

Each exchange has a fixed number of memberships. Once all the authorized memberships have been sold, prospective new members must purchase a membership from a current member. Only exchange members must enjoy the privileges: access to the trading area and reduce transaction costs. Non-membership must trade by entering orders through members.

The general responsibilities of a futures exchange include providing:

·An adequate physical location for the trading areas in which members execute transactions ;

·Communications capabilities between the exchange floor and the outside world;

·Procedures that ensure the swift and accurate processing of transactions that take place on the trading floor;

·Effective margining and clearing systems to requirements guarantee the financial integrity of the exchange's contracts ;

·Rules and regulations that meet the requirements of regulatory authorities and that ensure the fair treatment of all market participants;

·Viable futures contracts.

Broker

Broker is an agent as a person or a firm that deals with the futures buying and selling in the futures market for and on the behalf of the customers. The broker must be the member of the futures exchange, if not, he cannot enter the floor for such dealings. The non-membership enterprises or persons that have such dealing desires and needs cannot enter the floor for the transaction either, except that they authorize the qualified broker to enter into a futures contract for them. The broker's remuneration consists of a brokerage, usually calculated as a percentage of the sum involved in the contract but sometimes fixed by a tariff. Brokers are used because they have specialized knowledge of certain markets.

The Clearing House[2]

Clearing house is a centralized system for settling indebtedness between members. Every futures exchange has a clearing house, in which sales and purchases are registered with the clearing house for settlement at the end of the accounting period. The structure of a clearing house varies from exchange to exchange. A clearing house may be a distinct entity with its own staffs and boards that do not overlap with its related exchange. For instance, the London International Financial Futures and Options uses the London Clearing House. Some clearing houses are part of the exchanges. For example, the clearing entity is a department within Chicago Mercantile Exchange and New York Mercantile Exchange.

Membership in a clearing house is available only to members of the related exchange and only to those who can meet strict financial requirements. These stringent financial requirements are necessary because it is the collective strength of the clearing house members that ultimately guarantees the financial integrity of all the trades carried out on the affiliated exchange. A member of exchange may transact business on the floor of that exchange for himself and for others. However, if the exchange member is not a member of the clearing house, all transactions must be cleared through a clearing member by paying certain fee. That is to say, the non-clearing member maintains an account with the clearing member and all trades of non-clearing member are held in that account. The clearing member should be responsible for the performance of these trades. The clearing house interposes itself between the buyer and the seller: the buyer has a contract with the clearing house and not directly with the seller, and the seller now has a contract with the clearing house and not with the buyer. The clearing house is not only the buyer of all the contracts, but also the seller of all the contracts. In consequence, futures traders do not need to worry about the credit risk of the other party with whom they are dealing. This greatly simplifies the administration of futures contracts, as every contract is with the clearing house. It also has the major benefit of standardizing and reducing the default risk of a futures contract.

The function of the clearing house is realized only by the guarantee of the margin system. Futures margin is a faith deposit regulated by the clearing house. It is intended to protect the seller against the buyer's default if prices fall and the buyer against the seller's default if prices rise.

Two kinds of margin are commonly used by clearing houses:

·Original Margin or Initial Margin.[3] Original margin is the deposit that must be made when a futures position is initiated. It generally ranged from about 2o-/o to lOu/o of the value of the futures contract.

·Variation Margin or Call Margin.[4] To minimize the losses from any default, changes in the price of futures contracts are settled on a daily basis. This is called marking to the market. Each day, at the close of trading, the change in price of a futures contract during that day is calculated. If the price changes should be adverse to the trader's position, then his original margin will be reduced. A1l exchanges require that once a trader's original margin is reduced to a certain level, known as the maintenance margin, additional funds must be paid to the clearing house to keep his original margin at the normal level. This payment is called variation margin.

Participants

According to their location, participants can be divided into those who trade on the floor of the exchange and those who do not. Floor traders can be f'urther divided into those who trade on their own account and those who trade on behalf of others. In the United States, brokers are also called futures commission merchants or FCMs. Some brokers may also trade for their own accounts. According to their motive for futures trading, participants may be split into two kinds: those who use futures market to reduce his exposure to price changes and those who attempts to profit by correctly anticipating price movements and trading accordingly.

[1]期货交易所

[2]清算所

[3]初始保证金

[4]追加保证金

Questions for reading :

year end. Damian personally owns 10% of the ordinary issued share capital of Linden Limited, for which he paid

￡10,000 in June 1998. He estimates that the current market value of Linden Limited is ￡9 million and that the

company will make taxable profits of ￡1·4 million in the forthcoming year to 31 July 2007.

(a) Damian believes that Linden Limited should conduct its activities in a socially responsible manner and to this

end has proposed that in future all cars purchased by the company should be low emission vehicles. The sales

director has stated that several of his staff, who are the main recipients of company cars, other than the directors,

are extremely unhappy with this proposal, perceiving it as downgrading their value and status.

The cars currently provided to the sales staff have a list price of ￡19,600, on which Linden Limited receives a

bulk purchase discount of 6% from the dealer, and a CO2 emission rate of 168 grams/kilometre. The company

pays for up to ￡400 of accessories, of the salesmen’s own choice to be fitted to the cars and all of the running

costs, including private petrol. The cars are replaced every three years and the ‘old’ cars are sold at auction,

because they are high mileage vehicles.

The low emission cars it is proposed to purchase will have the same list price as the current cars, but the dealer

is only prepared to offer a bulk discount of 5% on these vehicles. Damian does not propose to make any other

changes to Linden Limited’s company car policy or practice.

Required:

(i) Explain the tax consequences of the proposed move to low emission vehicles for both the individual

salesmen and Linden Limited, illustrating your answer by means of relevant calculations of the tax and

national insurance (NIC) savings arising. (9 marks)

TPN refers to()

A. Trading Process Network Post

B. Trading Price Network Post

C. Trading Price Net Position

D. Trading Process Nigation Post

参考答案：错误

(b) The tax relief available in respect of the anticipated trading losses, together with supporting calculations and

a recommended structure for the business. (16 marks)

A.trading

B.financial

C.transport

D.medical