Cross-Market Futures Position Offset Mechanism
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Solution Overview
Problem
Futures contracts with different specifications, such as deliverable and cash settled contracts, cannot be made fungible across separate markets, leading to delivery obligations and risks for traders, especially when positions in one contract cannot be offset against positions in another with identical underlying products but traded in different markets.
Innovation Solution
A method and system that allow traders to request making long and short positions in different futures contracts fungible by querying a database to identify and offset corresponding positions, eliminating delivery obligations and maintaining a balanced net of open positions across markets, even if contracts have different specifications or trade in separate markets.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Adaptability or versatility
If futures contracts with different specifications are traded in separate markets, then each market can maintain its own contract specifications and trading rules, but positions in one contract cannot be offset against positions in another with identical underlying products
Solution Approach 1:
The clearinghouse implements a universal offsetting mechanism that works across multiple separate markets and contract specifications. The system identifies and offsets positions based on underlying product equivalence rather than market or contract specification boundaries, allowing a single clearinghouse to handle diverse futures contracts from different markets with different specifications while enabling cross-market position offsetting.
2Ease of operation
If positions are made fungible across different markets, then traders can offset positions and eliminate delivery obligations, but the system complexity increases to manage cross-market offsetting
Solution Approach 1:
The clearinghouse acts as an intermediary between separate markets, receiving position data from multiple markets and performing automated offsetting operations. This intermediary function shields traders from the complexity of cross-market offsetting while enabling the functionality through centralized processing and matching algorithms that identify equivalent positions across different markets and contract specifications.
Solution Approach 2:
The system creates virtual representations of positions from different markets within the clearinghouse system, allowing offsetting operations to be performed on these copied position data structures rather than requiring direct integration between markets. This copying approach simplifies the technical implementation by working with data representations rather than actual market infrastructure.
3Adaptability or versatility
If separate markets maintain independent contract specifications, then each market can optimize for its specific needs, but traders face delivery obligations and risks when holding positions in contracts that cannot be offset
Solution Approach 1:
The clearinghouse changes the parameter of position offsetting from market-specific to universe-wide by implementing cross-market offsetting capabilities. The system evaluates positions based on underlying product equivalence rather than market boundaries, fundamentally changing how offsetting parameters are applied and enabling traders to eliminate delivery obligations across different markets and contract specifications.
Data Source
AI summary
Positions held by a trader are made fungible by selecting a first position in a first futures contract that is deliverable and selecting a second position in a second futures contract, wherein the first and second futures contracts are traded in a first and second market, respectively. Offsetting the first and the second positions eliminates a delivery obligation of the trader.