Futures Mechanics: Specifications, Margins, Daily Settlement, and the Clearing House

The forward contract is simple to describe but operationally fragile — it requires each party to bear the credit risk of the other until settlement. Exchange-traded futures solve this through a disciplined institutional infrastructure: standardised contracts, a clearing house that becomes the universal counterparty, margin accounts that mark positions to market daily, and delivery procedures that enforce convergence of futures to spot prices.

This lesson maps the futures contract infrastructure precisely, using the gold futures example from Hull as the backbone. The margin mechanics — initial margin, maintenance margin, variation margin (margin calls) — are the mechanism through which futures exchanges eliminate counterparty risk. Understanding these mechanics is essential for anyone computing the P&L or funding requirements of a futures position.

• identify the key provisions of a futures contract specification: asset, contract size, delivery month, delivery arrangements;
• explain how the clearing house functions as the universal counterparty;
• trace through a full margin account evolution including margin calls and variation margin payments;
• describe the convergence property: why the futures price must equal the spot price at delivery;
• distinguish a futures position from a forward in terms of cash-flow timing (marking to market vs. terminal settlement);
• list the standard order types used in futures markets.

1. Contract specification
2. Convergence of futures to spot
3. The margin system and daily settlement
4. The clearing house as central counterparty
5. Order types