4. Accounting Model

#### Mark to market calculations

ACT dynamically calculates mark-to-market values of cash and securities positions, and provides this data both through the GUI and through the trading API, in real time.

ACT dynamically determines a system price for all currencies (assets) relative to the denomination currency of the account (e.g. EUR). This price is based on the relevant currency pairs needed to produce such value, and uses a materiality threshold level to minimize irrelevant changes in price. Based on these asset prices, ACT provides the value of each cash position in all accounting units and in the overall trading account, expressed in the denomination currency.

Example: if the accounting unit holds a cash position of USD 500, and the current system price for USD is 0.91584 (determined by a current exchange rate for EUR/USD of 1.09189), the mark-to-market value of this position is EUR 457.92

Conversely, ACT uses these system prices to dynamically evaluate the mark-to-market value of open positions (in securities) as well. To do so, it converts the open positions to equivalent asset risk and evaluates the mark-to-market value of each risk component. A position in a given security is specified by i) an amount expressed in units of the base asset, and ii) an average price at which the position was open. In risk accounting terms, owning the position is equivalent to i) owning the amount denominated in the "base" currency, and ii) owing the amount multiplied by the average position price denominated in the "term" currency. The mark-to-market value of the position is the net market value of these two amounts at the current market rate.

Example: the accounting unit holds a position in EUR/USD of 100.000 opened at an average price of 1.09123, and the current exchange rate for EUR/USD is 1.09189 (which entails a USD system price of 0.91584). The equivalent risk is then +100.000 EUR and -100.000 * 1.09123 = -109.123 USD, i.e. 100.000 * 1.09189 = 109.189 USD minus 109.123 USD, or a total of 109.189 - 109.123 = 66 USD, which has a mark-to-market value of 66 * 0.91584 = 60.44 EUR

#### Margin and leverage

ACT supports margin trading, i.e. the type of trading where a broker grants the trader leverage allowing him or her to trade larger amounts than the ones he or she has deposited on his or her trading account.

Available margin (also called free margin) is defined as the total collateral available to open new positions. It equals the mark-to-market value of the whole trading account (called the total equity of the trading account), minus the margin used by the positions currently open.

Used margin is calculated as the mark-to-market value of the negative leg of the position divided by the leverage granted to the trader by the broker.

Example: consider the position of the previous example (a position in EUR/USD of 100.000 opened at an average price of 1.09123, with a current exchange rate for EUR/USD of 1.09189), and consider a leverage of 40:1 granted by the broker. The margin used by this position would be 100.000 * 109.123 / 40 = 272.80 USD, or 249.84 EUR

ACT typically works on a "treasury style" basis. This means that margin calculations are performed in terms of total equivalent risk, instead of being calculated on each security position and then added. Therefore, if a trader has three positions say in EUR/USD, GBP/USD and EUR/GBP for equivalent amounts with zero equivalent exposure to EUR, GBP and USD, then no margin would be used.

ACT checks whether a trader has enough margin to open a new position, and rejects trades when not enough margin is available.

Also, free margin can become negative when the mark-to-market value of an account decreases due to trading losses on open positions. This situation is termed a margin call, and needs to be resolved either closing existing positions or adding more cash to the trading account

#### Settlement of positions

When positions are opened there is no change in cash, except for trading commissions being charged. But when positions are reduced or closed altogether, a difference in cash in the term currency is produced, and is accounted for as increment or decrement in the corresponding cash account of the accounting unit.

Furthermore, when positions are incremented the amounts are added and the resulting prices are compounded as weighed averages

Consider the following example to illustrate:

Step 1: BUY 100.000 EUR/USD @ 1.09178 => No cash settlement (except for commissions charged on trading order), resulting position is 100.000 EUR/USD @ 1.09178

Step 2: BUY 200.000 EUR/USD @ 1.09184 => No cash settlement, resulting position is 300.000 EUR/USD @ 1.09182 (i.e. a weighted average)

Step 3: SELL 100.000 EUR/USD @ 1.09188 => Cash settlement produces 100.000 * (1.09188-1.09182) = USD 6, resulting position is 200.000 @ 1.09182 (i.e. remaining from the previous position)

Step 4: SELL 50.000 EUR/USD @ 1.09202 => Cash settlement produces 50.000 * (1.09202-1.09182) = USD 10, resulting position is 150.000 @ 1.09182 (same)

Step 5: SELL 250.000 EUR/USD @ 1.09202 => Cash settlement produces 150.000 * (1.09202-1.09182) = USD 30 (i.e. for the whole 150.000 remaining), resulting position is -100.000 @ 1.09202 (i.e. a new short position for the remainder of the trade)