Futures contracts follow a practice known as mark-to-market. This means that at the end of each day, each futures trading account is credited or debited based on that day's profits or losses and checked to ensure that the trading account maintains the appropriate margin/account balance for all open positions.
There may be situations when you are trading in futures where you encounter unfavourable price movements that cause your account balance to fall under the appropriate margin level. As a result, additional funds are required to cover any day-to-day losses.
When you first set up your futures trading account with a brokerage firm that you have other investment accounts, such as a securities account, with unused cash, you may have given your broker authorisation to transfer cash between your accounts, or to liquidate your position, without giving you advanced notice. Therefore, it is important for you to be clear on how your broker manages and maintains your trading account, especially in the event of a margin shortfall.
Note the setting-off arrangement
Funds may be transferred between your accounts to set-off the debit balance of your futures account against the credit balance of your other trading accounts held with your futures broker or its affiliated companies. Be sure to understand how your futures broker or its affiliates handle the assets in your various trading accounts, and what is your exposure to the risks associated with such setting-off arrangements.
First of all, you should check with your broker the circumstances under which transfer of funds can be effected. Key questions to be asked include:
- what the terms in the authorisation are;
- whether your consent will be obtained before each fund transfer;
- how you will be contacted and the action taken if you are not contactable;
- whether only excess funds, i.e. idle funds which are not invested in your other accounts would be transferred to the your futures trading account;
- whether sales of collateral in your other accounts may be used to fund a shortfall in your futures trading account; and
- whether the transfer will cover the margin shortfall only or be a higher amount to establish or replenish any buffer.
Furthermore, you should find out from your broker the market risks involved in holding open positions, such as the potential continuing losses as well as any additional charges that may be borne by you as a client.
Futures trading risks
Futures trading is highly leveraged and very risky. With the ability to leverage and invest only a portion of the total value in a futures contract, the investor is subject to unlimited liability. The leverage magnifies the effect of any price changes which can translate into both substantial profits or losses. Amidst a volatile market, it is possible for Hong Kong Futures Exchange Limited or the overseas exchange and/or your broker to raise the margin requirement. If you have to authorise your broker to move assets between your accounts, you should closely monitor the requirements and keep sufficient funds in your trading accounts.
25 October 2017