What are Futures?

Futures contracts, or simply futures, are exchange traded derivatives. A futures contract is a standardized contract to buy or sell.

A futures contract gives the holder the right and the obligation to buy or sell a certain underlying instrument at a certain date in the future, at a pre-set price. In the case of ICE ECX EUA Futures Contracts, the underlying unit of trading are EU allowances (EUAs) of carbon dioxide (CO²). One ICE ECX EUA Futures Contract (‘lot’) represents 1000 EU allowances. EUA contracts differ from our CER contracts in that the underlying commodity that is delivered are different. Our CER products ensure delivery of Certified Emission Reduction (CERs) units which are credits generated from greenhouse gas emission projects which fall under the Clean Development Mechanism (CDM) of the Kyoto Protocol.
 
Both parties of a "futures contract" must exercise the contract (buy or sell) on the settlement date. To exit the commitment, the holder of a futures position has to sell his long position or buy back his short position, effectively closing out the futures position and its contract obligations.

ECX EUA Futures Contracts allow users to lock-in prices for delivery of carbon emission allowances (EUAs) at set dates in the future, with guaranteed delivery provided by the clearing house ICE Clear Europe.
 

Standardisation

Futures contracts ensure their liquidity by being highly standardised, by amongst others specifying the following:

• The underlying. This can be anything from a barrel of sweet crude oil to a short term interest rate. In the case of ICE ECX EUA Futures Contracts, the underlying are EU allowances (EUAs) issued under the EU ETS.
• The type of settlement, either financial settlement or physical settlement. All ECX Contracts are physically settled.
• The amount and units of the underlying asset per contract. One ICE ECX EUA Futures Contract represents 1000 EUAs i.e. the entitlement to emit 1000 tonnes of CO².
• The currency in which the futures contract is quoted. All ECX Contracts are quoted in Euros and Euro cents.
• The contract months with expiry dates for delivery (the last trading date of each contract).
• Other details such as the minimum price fluctuation (tick size).

Margin

Although the value of a contract at time of trading should be zero, its price constantly fluctuates. This renders the owner liable to adverse changes in value, and creates a credit risk to the exchange and the clearing house, who always acts as counterparty to all trades. To minimise this risk, the clearing house demands that contract owners post a form of collateral, commonly known as margin.

Initial margin is a returnable good faith deposit required whenever a futures position is opened. The cash is returned when the position is closed out or expires (goes to delivery). Initial margin is deposited by both buyer and seller. It represents the loss on that contract, as determined by historical price changes, that is not likely to be exceeded on a usual day's trading.

Because a series of adverse price changes may exhaust the initial margin, a further margin, called variation margin, is required by the exchange. This is calculated by the futures contract, i.e. agreeing on a price at the end of each day, called the "settlement" or mark-to-market price of the contract. In other words, variation margin represents the profit/ loss in a position each day. ICE Clear Europe calculates the profits/ losses sustained on each position at the end of day.
Margin requirements for ECX products are determined by ICE Clear Europe and rates are reviewed on a quarterly basis based on historic price fluctuations of the contract.