Futures
In order to initiate a futures contract, an initial margin deposit of collateral is made and is entered on to the general ledger. On a daily basis the mark to market for variation margin account is adjusted for changes between the market value of the contracts on the current day and the previous day. The offset to the entry for variation margin is an unrealized gain or loss recorded on the funds’ records.
Variation margin is settled each day based upon the mark to market calculated for the prior close of business. When the contract is closed out, a final variation margin payment based upon the TD-1 value, net of fees is recorded and a corresponding amount is recorded as a gain or loss.
Short Sale: When a short contract is sold and a short position is established, collateral is segregated on SMAC. An off-line futures spreadsheet is then set up (unless the Derivative Workstation is utilized). No entry is required to reflect the segregation of collateral on MCH. Accounting entries are as follows:
As an example, if the cost to repurchase exceeds the proceeds, this will result in depreciation in the contract.
DR / CR Unrealized App/Dep on Futures
DR / CR Cash
To reflect unrealized appreciation / depreciation of futures margin variation for the difference between the contract price and the closing price on the trade date.
Subsequently the contract will be re-priced daily by comparing the current contract value to the original proceeds of the contracts, and calculating an unrealized appreciation/ depreciation. An entry will be posted to reflect the change in the unrealized appreciation / depreciation from the prior day.
DR / CR Receivable/ Payable for Margin Variation
DR / CR Unrealized App/Dep on Futures
To reflect daily valuation of future contracts
Changes in the unrealized appreciation / depreciation are paid to or received from the broker.
DR / CR Receivable/ Payable for Margin Variation
DR / CR Cash
To reflect payment to broker for change in daily valuation
When the open contracts are repurchased, the realized gain / loss is calculated using the TD-1 value of the contract. In addition, an entry is made to adjust the variation margin to an amount based upon the TD-1 value. The realized gain / loss is typically split 60% long term and 40% short term as shown below.
DR / CR Unrealized App/Dep on Futures
DR / CR Realized Gain/ Loss on futures LT
DR / CR Realized Gain/ Loss on futures ST
To reflect unrealized gain / loss on futures market value
Long Contracts: The record keeping and accounting for long contracts is very similar to that of other long term securities in a portfolio. When a contract is purchased, a cost is established; if the price goes up there is appreciation , if it goes down there is depreciation. Collateral is segregated on SMAC. An off-line futures spreadsheet is set up (unless the Derivative Workstation is utilized). No entry is required to reflect the segregation of collateral on MCH. Accounting entries are as follows:
As an example, if the value of the contract exceeds the cost, this will result in appreciation in the contract.
DR / CR Unrealized App/Dep on Futures
DR / CR Cash
To reflect unrealized appreciation / depreciation of futures margin variation for the difference between the contract price and the closing price on the trade date.
Subsequently the contract will be re-priced daily by comparing the current contract value to the original cost of the contracts, and calculating an unrealized appreciation/ depreciation. An entry will be posted to reflect the change in the unrealized appreciation / depreciation from the prior day.
DR / CR Receivable/ Payable for Margin Variation
DR / CR Unrealized App/Dep on Futures
To reflect daily valuation of future contracts
Changes in the unrealized appreciation / depreciation are paid to or received from the broker.
DR / CR Receivable/ Payable for Margin Variation
DR / CR Cash
To reflect payment to broker for change in daily valuation
When the open contracts are sold, the realized gain / loss is calculated using the TD-1 value of the contract. In addition, an entry is made to adjust the variation margin to an amount based upon the TD-1 value. The realized gain / loss is typically split 60% long term and 40% short term as shown below.
DR / CR Unrealized App/Dep on Futures
DR / CR Realized Gain/ Loss on futures LT
DR / CR Realized Gain/ Loss on futures ST
To reflect unrealized gain / loss on futures market value
