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0003-MTMK-mark_to_market_settlement.md

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Mark-to-market settlement

Acceptance Criteria

  1. For a position with a negative settlement amount:
    1. If settlement amount <= the trader’s margin account balance (0003-MTMK-001):
      1. entire settlement amount is transferred from trader’s margin account to the market’s temporary settlement account
    2. If settlement amount > trader’s margin account balance and <= trader's margin account balance + general account balance for the asset (0003-MTMK-002):
      1. the full balance of the trader’s margin account is transferred to the market’s temporary settlement account
    3. the remainder, i.e. difference between the amount transferred from the margin account and the settlement amount, is transferred from the trader’s general account for the asset to the market’s temporary settlement account
    4. If settlement amount > trader’s margin account balance + trader’s general account balance for the asset (0003-MTMK-003):
      1. the full balance of the trader’s margin account is transferred to the market’s temporary settlement account
      2. the full balance of the trader’s general account for the assets are transferred to the market’s temporary settlement account
      3. the minimum insurance pool account balance for the market & asset, and the remainder, i.e. the difference between the total amount transferred from the trader’s margin + general accounts and the settlement amount, is transferred from the insurance pool account for the market to the temporary settlement account for the market.
  2. The total market's positive mark-to-market moves are equal in size to the negative mark-to-market moves. (0003-MTMK-005) 1.The total amount collected by the network should be less than or equal to the sum of all of the negative settlement amounts (in absolute size)(0003-MTMK-006)
  3. If a trader's settlement amount is positive and the amount collected, i.e. the balance of the temporary settlement account, equals the sum of all negative settlement amounts (in absolute size), every trader with a positive settlement amount receives that amount transferred to their margin account from the temporary settlement account.(0003-MTMK-007)
  4. If the total amount collected by the network, as determined by the balance of the market’s margin account, is less than the sum of all of the negative settlement amount amounts (in absolute size), for all traders with a positive settlement amount, an amount is transferred from the market’s margin account to each trader’s margin account that is less than or equal to their settlement amount amount.(0003-MTMK-008)
  5. The total amount of collected collateral equals the total amount of distributed collateral. (0003-MTMK-009)
  6. The market's settlement account balance is zero at the start of the market-to-market settlement process (0003-MTMK-010)
  7. After completing the mark-to-market settlement process, the market’s settlement account balance is zero (0003-MTMK-011)
  8. If the mark price hasn't changed:
    1. A trader with no change in open position size has no transfers in or out of their margin account (0003-MTMK-012)
  9. An aggressive order to buy 2 units at 1010 which matches with two passive orders each of size one resting on the book with prices of 1000 and 1010 results in a transfer of 10 flowing from the party with order priced at 1000 to the aggressive party during the next MTM settlement 0003-MTMK-013)
  10. If the network party has a non-zero position and the mark-price moves in favour of the network's position gains from mark-to-market settlement should be paid into the market insurance pool. (0003-MTMK-015)
  11. If the network party has a non-zero position and the mark-price moves against the network's position, losses from mark-to-market settlement should be paid from the market insurance pool. (0003-MTMK-016)
  12. If the network does not have enough funds in the market insurance pool to cover its mark-to-market losses, loss-socialisation occurs. (0003-MTMK-017)

Market with position decimal places > 0 scenario

  1. Set up a market with PDP > 0, say PDP = 2
  2. Set up party1 long position 0.02 and party2 short position 0.02; and the trade which created these positions being at price 100.
  3. Set up party3 and party4 which trade volume 0.12 at price 120.
  4. Observe the following mark-to-market cash-flows: party1 receives 0.02 x (120-100) = 0.4. Party2 pays 0.4.

Market with position decimal places < 0 scenario

In a market with negative PDP, the mark-to-market cash-flows are correct. (0003-MTMK-014):

  1. Set up a market with PDP > 0, say PDP = -3
  2. Set up party1 long position 2000 and party2 short position 2000; and the trade which created these positions being at price 0.10.
  3. Set up party3 and party4 which trade volume 1000 at price 0.12.
  4. Observe the following mark-to-market cash-flows: party1 receives 2000 x (0.12-0.10) = 40. Party2 pays 40.

Summary

The network calculates the change in mark to market valuation and generates settlement cash flows for each party's gains/losses every time the mark price of the market changes.

Guide-level explanation

Reference-level explanation

Settlement instructions are generated based on the change in market value of the open positions of a party.

The steps followed are:

  1. When the mark price changes, the network calculates settlement cash flows for each party according to the following formula.
SETTLEMENT_AMT( party ) =  PDPscaling x party.PREV_OPEN_VOLUME x (product.value(current_price) - product.value(prev_mark_price)) + SUM(from i=1 to new_trades.length)( PDPscaling x new_trade(i).volume(party) x (product.value(current_price) - new_trade(i).price ) )

where PDPscaling := 10^(-PDP) with PDPbeing the number decimals we support for position / order. So if PDP = 2 then smallest volume is 0.01.product.value(current_price) uses for current_price the latest calculation of the mark price party.PREV_OPEN_VOLUME refers to the party's open volume at the last MTM calculation (NB: this may be less than 1 is the Position Decimal Places specified in the Market Framework are greater than 0, i.e. fractional positions are allowed on the market). new_trades refers to any trades that the party has been involved in since the last MTM calculation. volume(party) is the (signed) volume of the trade i.e. +ve if the party was a buyer and -ve if a seller (NB: this may be less than 1 is the Position Decimal Places specified in the Market Framework are greater than 0, i.e. fractional positions are allowed on the market).

SETTLEMENT_AMT < 0 , means the party will have collateral deducted from their accounts to cover their position. Conversely, if SETTLEMENT_AMT > 0 the trader will receive collateral into their account.

  1. The settlement function calculates how much to collect from the margin accounts of those whose change in mark to market has been negative / incurred loss. This will be collected into the market's margin account via a set of transfer requests. The collection instruction should first collect from a trader's margin account for the market and then the trader's general account and then the market's insurance pool.
  2. This will result in ledger entries being formulated ( see settlement ) which adhere to double entry accounting and record the actual transfers that occurred on the ledger.
  3. If the net amounts are what was requested, the settlement function will formulate instructions to distribute to the margin accounts of those whose moves have been positive according to the amount they are owed. These transfers will be requested to debit from the market's margin account and credit the traders who have a positive mark-to-market.
  4. If there's not enough money for the reallocation due to some traders having insufficient money in their margin account and general account to handle the price / position move, and if the market's insurance pool can't cover the full distribute requirements, the settlement function will need to alter the "distribute" amounts accordingly. The amounts are altered using a formula which is out of scope for this ticket. As a stub implementation distribution can pro-rata the amount in the settlement account between positions by relative position size.

Note: a close out profit / loss is automatically captured in trader margin accounts via mark-to-market reallocation described above. The reduction in open volume will be used when risk margins are next calculated.

Note: successive mark-to-market settlement transfer requests can be netted.

Pseudo-code / Examples

Test cases

See here for examples / scenarios.