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Futures Market Mechanics

Futures markets are engineered to remove credit risk from trading, and the mechanics all serve that goal.

Standardisation

Every contract on a given future is identical: same size, same grade, same delivery terms, same expiry dates. That uniformity makes contracts fungible, so a contract bought from one party can be closed by selling to any other.

This is what enables anonymous trading. You need not know or assess your counterparty, because you are not really facing them.

The clearing house

When a trade executes, the clearing house steps between the two sides through novation: one trade becomes two, each facing the clearing house.

Buyer⟷Clearing house⟷Seller\text{Buyer} \longleftrightarrow \text{Clearing house} \longleftrightarrow \text{Seller}

Everyone now faces one highly capitalised, heavily regulated entity instead of an unknown firm. The clearing house protects itself with a layered defence: margin from each participant, a default fund contributed by members, and its own capital.

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