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How do I use the real-time credit information to predict settlement obligations?

Overview

This article will explain how to use the credit fields available in the web API to calculate upcoming settlement obligations.

Seed CX offers out to clients a full suite of credit-related information to ensure they can appropriately track and manage their exposure, P&L, margin obligations and allowances. The various fields not only provide participants, desks and traders an insight into how much credit they have available to trade with at any point in time, but also what their theoretical settlement obligations will be.

Refer to the article on our real-time credit system for more information on these fields and how they are calculated. For this article, the important fields to note are Position, AvgP, RPL and IMO. For ease, these definitions are:

  • Position is the net current position a desk has in a particular instrument. Positive values indicate a long position, and negative values indicate a short position.
  • Average Price ("AvgP") is the volume-weighted average price that a desk has realized to obtain its current position.
  • Initial Margin ("IM") is the USD-denominated initial margin requirement set per instrument.

Some key items in the web API needed for this article are:

  • Instruments.
  • Instrument Contract Sizes.

For this article, we will introduce the following new definitions:

  • Total Realized P&L ("TRPL") is the USD-denominated sum of all RPL values that a desk has realized in all instruments.
  • Position Payment ("PP") is a desk's payment obligation as a result of its Position and AvgP in an instrument.
  • Total Net Position ("TNP") is the sum of all Positions maintained by all desks under a participant in a particular instrument.
  • Total Net Position Payment ("TNPP") is the net sum of all desks' PPs in all instruments.

Calculating Obligations

Physical Delivery Obligation

For each instrument, the participant must calculate its physical delivery obligation.

Physical Delivery Obligation = TNP x Instrument Contract Size

= (sum of all desk Position values in an instrument) x Instrument Contract Size

Financial Settlement Obligation

A participant can calculate it financial delivery obligation across all desks, instruments and trades in the following way:

Financial Settlement Obligation = TRPL + TNPP

TRPL is found by adding all RPL values across all desks. 

TRPL = sum of all desk RPL values under a participant

Note: Seed CX uses USD as its peg currency for its credit system, and as such all values are USD-denominated. This allows the system to aggregate activity in different instruments. In the case where the instrument is not quoted in USD, the participant would need to convert all RPL values to the appropriate settlement currency of that instrument.

To calculate TNPP, a participant must first calculate what each desk owes or is owed due to the desks' Positions.  

PP = Position x Instrument Contract Size x AvgP

Then the participant must sum all of these desk PP values together across all instruments to calculate the participant's NPP.

TNPP = sum of all desk PP values under a participant 

Initial Margin Obligation

If a participant has a Position in an instrument but cannot fully deliver on T, they must collaterize the Position overnight by depositing the instrument's IM to cover the risk of default. The amount required is calculated in the following way:

Initial Margin Obligation = (sum of all desks' Position values under a participant in a particular instrument x IM for that instrument) summed across all Instruments

Examples

Scenario 1: No Positions

Value Desk 1 Desk 2
Position BTC/USD: 0
ETH/USD: 0
BTC/USD: 0
ETH/USD: 0
AvgP BTC/USD: null
ETH/USD: null
BTC/USD: null
ETH/USD: null
RPL BTC/USD: $15,000
ETH/USD: $0
BTC/USD: -$3,000
ETH/USD: $0
IMO BTC/USD: $0
ETH/USD: $0
BTC/USD: $0
ETH/USD: $0

 

Values Totals
TNP BTC/USD 0
Physical Delivery Obligation for BTC 0
TNP ETH/USD 0
Physical Delivery Obligation for ETH 0
TNPP $0 
TRPL $15,000 - $3,000 = $12,000
Financial Settlement Obligation for USD $12,000 incoming
Initial Margin Obligation (TIMO) $0

 

Scenario 2: Positions and RPL

Value Desk 1 Desk 2
Position BTC/USD: 10
ETH/USD: 0
BTC/USD: 0
ETH/USD: 0
AvgP BTC/USD: $4,000
ETH/USD: null
BTC/USD: null
ETH/USD: null
RPL BTC/USD: $0
ETH/USD: $0
BTC/USD: $0
ETH/USD: $2,000
IMO BTC/USD: $10,000
ETH/USD: $0
BTC/USD: $0
ETH/USD: $0

 

Values Totals
TNP BTC/USD 10 + 0 = 10 Contracts
Physical Delivery Obligation for BTC 10 x 1 = 10 BTC incoming
TNP ETH/USD 0
Physical Delivery Obligation for ETH 0
TRPL $0
TNPP -10 BTC x $4,000 = -$40,000
Financial Settlement Obligation for USD $40,000 outgoing
Initial Margin Obligation $10,000 if the BTC trade is not fully settled

 

Scenario 3: Positions and RPL

Value Desk 1 Desk 2
Position BTC/USD: 10
ETH/USD: 0
BTC/USD: -5
ETH/USD: -6
AvgP BTC/USD: $3,500
ETH/USD: null
BTC/USD: $3,700
ETH/USD: $110
RPL BTC/USD: $1,000
ETH/USD: $0
BTC/USD: $0
ETH/USD: -$5,000
IMO BTC/USD: $10,000
ETH/USD: $0
BTC/USD: $5,000
ETH/USD: $6,000

 

Values Totals
TNP BTC/USD 10 - 5 = 5 Contracts
Physical Delivery Obligation for BTC 5 x 1 = 5 BTC incoming
TNP ETH/USD 0 - 6 = -6 Contracts
Physical Delivery Obligation for ETH -6 x 10 = -60 ETH
60 ETH outgoing
TRPL $1,000 - $5,000 = -$4,000
TNPP (-10 BTC x $3,500 + 5 x $3,700) + 60 x $110
=-$16,500 + $6,600
= -$9,900
Financial Settlement Obligation for USD -$4,000 - $9,900 = -$13,000
$13,000 outgoing
Initial Margin Obligation $15,000 if the BTC trade is not fully settled
$6,000 if the ETH is not fully settled
$21,000 potential liability