Trading & clearing

Listed vs OTC, order types, algos, MX/CDCC/CDS mechanics, special-terms trades, desks and account types, margin maths, and default management.

1. 5.1

   Listed vs OTC

   • Listed futures: tighter spreads, daily margining, CCP, more liquidity.
   • OTC: custom terms, lower liquidity, bilateral (or uncleared) counterparty risk, negotiated margin.

2. 5.3

   Algorithmic trading

   • Benefits: speed, consistency, efficiency. Costs: over-optimization to backtests, tech failure, unintended volatility.
   • Risk-control algorithms are the feature that balances benefits against harm in stressed, thin markets.

3. 5.4–5.6

   Execution and OTC docs

   • Block trades: reporting deadlines to the exchange differ from the central limit order book.
   • No ISDA in place: enter into an ISDA-recognized agreement before executing an OTC swap.
   • OTC fair value: use a pricing model with market inputs (e.g. the forward curve for a commodity swap).

4. 5.7–5.8

   Desks and accounts

   • Buy-side desk: execute the firm’s investment strategy (hedge fund).
   • Sell-side: provide pricing, liquidity and tailored hedges using the dealer’s capital.
   • Non-client (NC): an Investment Dealer employee’s personal trading account.

5. 5.12–5.15

   Clearing and margin

   • Variation-margin fail at CDCC: first action is to declare default, notify regulators and suspend access — before tapping the guaranty fund.
   • Naked option margin (exchange example): 20% of underlying − OTM amount + premium.
   • Hedge margin: only the unhedged portion is charged full rate (e.g. 8,000 of 10,000 bushels hedged → 20% of $5,000 = $1,000).
   • Once equity is below maintenance, restoring a futures account typically means posting back to initial, or reducing the position so remaining equity covers maintenance.
   • CDS: fractional shares after a split are ineligible — cash in lieu. Buy-in notices are filed by the receiving participant.