How to Read Futures Margin and Mark-to-Market: One Sheet, Seven Steps

Read the sheet in a fixed order, seven steps, and never out of order. The contract and the date first. Then the side and the size. Then the day's change. Then the running total. Then the collateral and its movement. Then the cash and the date it was applied. Last, the numbers that were never on the sheet at all. Each step hands the next one what it needs.

A margin and settlement statement prints two completely different kinds of thing in one table, and it prints them in the same typeface, in the same column, one under the other. Some rows describe a position as it stands at the close of a named date. Other rows describe something that happened during that date. Almost every misreading of a statement is a figure belonging to one of those two kinds being used as though it belonged to the other, and a fixed order of reading is the cheapest defence anybody has against it. The routine below is that order. Why collateral is demanded at all, and what settling every evening is for, are covered separately.

What is in hand before a single number is read?

The two things at the top are words rather than figures, so nobody bothers to copy them down: what the contract is, and which date the sheet covers. The routine starts with both. Both go into the note before anything else does. The contract description names what the position references and, with luck, how much of it one contract stands on. The date fixes which single evening produced every figure below it.

The date carries the whole routine. A statement covers one date, and every figure printed under that date is either a position as it stood when the date closed, or a movement that happened during the date. There is no third kind. The closing collateral balance is a position: it is what sat there at the end. The amount credited during the day is a movement: it happened, once, and it is over. The running total since the position opened describes a stretch of time, but it is measured at the close, so it is a position again. Sorting each figure into one of those two boxes before it is used keeps most of the trouble from ever arising.

A bank passbook prints a closing balance, and it prints the individual credits and debits that produced it. A passbook puts them in separate columns with headings, and everybody has read one, so nobody confuses the two. A settlement statement runs the same two kinds of row without that help: the headings are terse, the columns are shared, and the sorting nobody has done is left where it falls. So a reader does it by hand, and doing it by hand is step one.

Which line is the position, and how big is it?

Three readings, in this order: the side, the number of contracts, and the quantity of reference asset a single contract carries. The side is printed as long or short and is copied exactly as printed. The count is printed. On most statements the third one is not there at all, and the absence is what makes it the interesting reading.

The quantity one contract carries is the first figure a reader has to go and fetch from somewhere else, and until it is fetched, nothing on the sheet can be multiplied by anything. It sits in the exchange's own specification for that contract, and the Securities and Exchange Board of India, or SEBIThe authority that writes the framework exchange traded contracts run under. Its address is sebi.gov.in., settles the framework that specification is written under. It moves. A reader supplying it from recollection has begun the whole routine on a guess.

The statement used here, an invented one, declares on its first line that a contract carries a single unit, so nobody has to assume it. Real contract sizeEvery contract is written over some quantity of the referenced thing, and this word names that quantity. SEBI settles it, it differs between contracts, and statements rarely print it. is decided elsewhere and is checked at sebi.gov.in each time it matters. With that one simplification stated, forty contracts on one unit each gives forty units of the reference asset, and forty is the number every multiplication further down the sheet uses.

The sheet says forty contracts. What are they standing on?

Two quantities come out of that count, they are not the same quantity, and neither of them is printed on the sheet. Both are multiplications the reader performs.

Multiply the agreed price of Rs 2,130.00/- across all forty contracts and Rs 85,200.00/- appears. Rs 85,200.00/- is the notional, and not one rupee of it has changed hands. Now multiply forty units by the price for immediate delivery of Rs 2,000.00/- instead. Rs 80,000.00/- appears, and that one is exposure, being the value of reference asset the position is standing on. A reader who reports either figure without saying which of the two words it is has told somebody the position is a size it is not.

Both figures matter and they matter for different reasons. The face amount is what the contracts are written on. The exposure is what a movement in the reference asset actually bites into. There is no rule of thumb converting one to the other, and on this sheet they happen to be within a few per cent of each other only because the agreed price and the price for immediate delivery are close. On a longer dated arrangement they would sit further apart.

Which line moved during this one day?

Find the row that measures the movement between the previous settlement priceA single price struck at the close of a trading day and used to revalue every position still running that evening. How it is arrived at belongs to the exchange rather than to this routine. and today's, multiplied by the units. Three things go into the note from that row: the price it came from, the price it went to, and the amount. Then write the date beside the amount. An amount from this row that travels without its date will eventually be read as something else.

On the invented sheet the previous settlement price was Rs 2,110.00/- and day 12 settled at Rs 2,150.00/-. Subtract yesterday's close from today's and the movement stands at Rs 40.00/- a unit. Across forty units that is plus Rs 1,600.00/-, and the sheet prints it as a credit. Note what the arithmetic did not use: the price the position was agreed at never entered it. The day's change does not know or care what the position opened at. The row knows only what the reference asset settled at yesterday and what it settled at today.

Which line has been running since the position opened?

The running total row measures from a different starting point, and that is its whole character. Today's settlement price of Rs 2,150.00/- less the agreed price of Rs 2,130.00/- is Rs 20.00/- a unit. Across forty units that is plus Rs 800.00/-. The agreed price goes into the note beside it. Without Rs 2,130.00/- sitting next to the figure, plus Rs 800.00/- cannot be rebuilt by anybody a week later, including whoever wrote it down.

So the sheet carries plus Rs 1,600.00/- on one row and plus Rs 800.00/- on the row underneath. Both are correct. The first answers what happened during day 12. The second answers where the position stands relative to where it started. The day's figure is exactly twice the running total here. Day 11 went the other way by Rs 800.00/-, and that is the whole reason. The two rows are printed adjacent on most sheets, and that adjacency is the whole reason they get swapped.

Where Rs 2,130.00/- came from, said once

A reader who cannot place the agreed price will read it as somebody's view. The agreed price is a cost, and one pass through the arithmetic settles it. The reference asset changes hands for Rs 2,000.00/- today. Financing at 6.50 per cent a year, applied to Rs 2,000.00/- across twelve months, accumulates Rs 130.00/-. The accumulated cost added to the price for immediate delivery lands on Rs 2,130.00/-. Nothing is collected from this reference asset in the stretch between those two dates, so the financing has nothing to be set against, and the whole Rs 130.00/- stands.

Rs 2,130.00/- goes into the note as a cost, never as a view. If it were a view, the position would be settling each evening against somebody's opinion. It settles against the day's settlement price instead, and the sheet has no column anywhere for what anybody thinks. A reference asset that did hand its holder something during the wait would produce a smaller cost, and could put an agreed price below Rs 2,000.00/- altogether. This reference asset hands over nothing, so that case belongs with a reference asset that pays. How the agreed price is arrived at properly is covered separately.

Four words do four separate jobs here, and a figure wearing none of them is a figure a reader can misuse. Rs 2,000.00/- and Rs 2,130.00/- are prices. Neither side handed anything over to take its position on, so a premium appears nowhere on this sheet. A payoff is the amount the obligation itself delivers at its end date, counted before anything spent reaching it. A profit takes that same amount and nets off whatever was spent.

What was posted, what moved, and what is left?

Three readings again: the opening balance of collateral, the amount added or taken during the day, and the closing balance. Copy all three, then do the addition yourself. Rs 5,600.00/- plus a credit of Rs 1,600.00/- is Rs 7,200.00/-. If that addition does not close, at least one of the three numbers has come off the wrong row, and no later step will rescue it.

The opening balance arrives looking unexplained, so it is worth a moment. The opening balance is not the initial margin. The initial margin on this position, at an 8.0 per cent rate invented for teaching and never a real requirement, is Rs 160.00/- a unit, and across forty units that is Rs 6,400.00/-. Day 11 then settled at Rs 2,110.00/-, Rs 20.00/- a unit below the agreed price, so Rs 800.00/- left the balance that evening. Rs 6,400.00/- less Rs 800.00/- is the Rs 5,600.00/- this sheet opens with, and no balance on the sheet turns up from nowhere.

Now the harder half of this step, and it is the one that spoils reports. The closing balance is a balance of collateral. A balance of collateral is not the value of the position, and it is not the size of the position either. Rs 7,200.00/- is the running account of what has been lodged behind an obligation and what has come back out of it. The position stands on Rs 80,000.00/- of exposure. A collateral balance and an exposure are not two versions of one number, they are not comparable, and a reader who has quietly merged them will not be saved by anything further down the sheet.

Which amount actually moved, and on what date?

Find the amount debited or credited, and find the date it was applied. Both go in the note, and the date is the half people leave out. Money moving and a position changing are separate events, they sit on separate rows, and they can carry separate dates.

The sheet shows Rs 1,600.00/- credited during day 12 and applied on day 13, and the gap of a day is what makes the two dates visibly different. Clearing corporationOnce a trade is done, this body becomes the counterpart of each side, so neither side is left holding a promise from anybody else. Where its resources come from, and who governs it, are covered separately. arrangements are what carry money between the parties, the timetable they run to is settled by SEBI at sebi.gov.in, it differs, and it moves. No figure for how long it takes is stated here, and a reader who assumes one has read a real statement against a rule that may have changed.

Exposure to the other side of this agreement rests with the clearing corporation rather than with the party on the other side of the trade. The clearing corporation comes between the long position and the short position the moment the trade is done, and a participant reaches that body only through a clearing memberA participant reaches the clearing corporation only through this firm, which answers for whatever that participant is carrying.. Both show up in the timetable.

Which figures were never on this sheet at all?

The last step is the one readers skip, and skipping it turns a careful reading into a confident wrong one. Three figures the routine has leaned on are not printed anywhere on the statement.

The first is the quantity of reference asset a single contract carries. Step two already had to go looking for it. The second is the method that arrives at the collateral figure, together with the moment in a running day at which a further amount is asked for. The third is the ceiling on what a single participant may hold, and the separate ceiling on what a clearing member may carry once everyone it acts for is added together. All three are set by an authority, all three move, and any one of them supplied from recollection means a statement is being read against a rule that may no longer exist.

SEBI settles the first. SEBI decides the second, and the clearing corporation works within the framework SEBI writes. SEBI rules on the third. The address for all of them is sebi.gov.in, and the address stays true when the figure moves. Where an arrangement is bilateral rather than exchange traded, and is written on currencies or on rates, the Reserve Bank of India at rbi.org.in is the body to go to instead, including for what such an arrangement has to be reported as. Cross-border principles for cleared markets originate with the International Organization of Securities Commissions (IOSCO), iosco.org. India runs on SEBI's rendering of those principles, and the rendering is the part that binds here.

Where does the routine actually get used, box by box?

Somebody, somewhere, has an empty box on a form and this sheet in front of them. Filling that box is what a statement is finally for. Four boxes follow, four different rows feed them, and the fourth is filled by a figure the sheet does not carry.

Notice what the four boxes have in common. Each one is filled by exactly one row, or by one multiplication, and in every case the wrong row is sitting immediately beside the right one. The proximity of the wrong row to the right one is not an accident of layout. A statement groups related figures together because that is how a statement is easiest to produce, and the reader pays for it.

What goes wrong when the order is abandoned?

The same failure has a second half, and it is quieter. A reader takes the closing collateral balance of Rs 7,200.00/- and treats it as the value of the position. Rs 7,200.00/- is a balance of collateral. The position itself stands on Rs 80,000.00/- of exposure, and the two are not the same kind of number at all. A derived version survives longest. Divide Rs 7,200.00/- by Rs 80,000.00/- and 9.00 per cent comes out exactly, which looks like a rate and sounds like a rate and is no such thing. Two evenings of settlement have already moved that balance, and the quantity underneath it was never what the balance was struck against.

What is in hand at the end, and what is still missing?

After the seven steps the note holds six things. The contract and the single date it covers. The side and the unit count the position stands on. The day's change, with its date beside it. The movement since the position opened, with the agreed price beside it. The collateral balance, its movement, and an addition that closed. The cash amount and the date it was applied. Plus the three figures that came from elsewhere, each with an address rather than a value.

A statement cannot say whether the position on it should be there. Reading the sheet well is not the same as knowing whether the position should be held, and no amount of careful reading closes that distance. Four things sit outside the statement altogether: the job the position was put on to do, whatever is held on the other side of it, what has been lodged behind it, and what happens on the date money is applied. The sheet prints none of the four. Whether the collateral behind a position is adequate to anything is a question SEBI answers at sebi.gov.in, not a question a reading routine answers.

A routine is not a relationship: every figure on a statement is read off it rather than driven by anything. The one relationship a reader does want, being what a move in the reference asset does to a collateral balance, is covered under margin and daily settlement, where a control can be dragged.

There is one more thing the sheet will not say, and it is worth naming because readers reach for it hardest. Nothing on a statement says what happens next. The settlement price on day 13 is not on the day 12 sheet, will not be derivable from it, and no arrangement of the rows above will produce it. A statement is a record of an evening that has already closed.

Two words in that answer do work elsewhere. A figure asked for intradayWhile the trading day is still running, rather than after it has closed and been settled. is asked for before the evening's settlement price exists, which is why it sits in a different row of the table above from the collateral posted at the start. And a position limitA ceiling on the holding one participant may build up in a single contract. SEBI writes it, it differs between contracts, and it moves. constrains what may be held rather than what must be posted behind it, which is why the two occupy separate rows and separate readings.

A last practical point about the sheet actually met in life. An open positionA position that has not yet been closed out or run to its end date, so it is still being revalued at the end of every trading day. keeps producing these statements, one for every date, until it stops. When somebody decides to close outTo end a position by taking the opposite side of the same contract, so that nothing is left running., the running total row stops moving and the collateral balance makes its last journey. Until then the seven steps run again every evening, on a new sheet, with one date changed and the same two kinds of figure printed in the same shared column.

The settlement statement worked through above and the reference asset priced at Rs 2,000.00/- are invented.
Educational material. Not advice on any investment, tax, budget or market position.