Funding Rate Payments
What is the Funding Rate Payment?
To keep the Perpetual Futures contract price in line with the underlying spot market price, the exchange will apply a Funding Rate Payment. This occurs periodically, typically daily, where two prices are computed: the settlement Mark Price and the benchmark Underlying Price. These two together are used to compute the Funding Rate Payment.
What is the Mark Price?
The Mark Price will be determined from publicly available orderbook data for each Perpetual Future contract. The specific computation methodology will be shown on each Perpetual Future’s page, and will include details such as the time of day (e.g. 3:45PM-4PM London Time) and the calculation method (e.g. the 15-minute VWAP).
What is the Underlying Price?
The Underlying Price will be determined from reputable, independent benchmark providers and publicly disseminated data sources. The specific computation methodology will be shown on each Perpetual Future’s page, and will include details such as the time of day (e.g. 3:45PM-4PM London Time) and the data source (e.g., LSEG, S&P, ICE, NASDAQ).
What is the frequency of the Funding Rate payments?
The funding process will be conducted regularly on a published schedule. Typically this will be once per business day, and shall generally take holidays and exchange closures into consideration.
When is the Funding Rate payment processed?
At each product’s published settlement time, the Funding Rate payments will be credited and debited. All open positions at this time will be subject to the Funding Rate; positions closed before this time will not pay or receive the Funding Rate.
How does the Funding Rate ensure the Perpetual Futures tracks the Underlying Index?
The Funding Rate incentivizes market participants (e.g. arbitrageurs). If the Mark Price is greater than Underlying Price, long contract holders will be debited the Funding Rate amount and short contract holders will be credited the amount. If Mark Price is less than Underlying Price, long contract holders will be credited the amount and short contract holders will be debited the amount. Because the Funding Rate is proportional to the size of the premium/discount, this mechanism creates a strong market-based financial incentive for the Perpetual Future to track the Underlying Index.
Is there an example for how Funding works?
Consider a perpetual futures contract for EUR/USD with the following details:
Benchmark/Index Underlying Price: The underlying benchmark price for EUR/USD is obtained from a reputable source, such as the European Central Bank (ECB) closing rate. Assume the ECB closing rate is 1.2000 USD per EUR.
Contract Mark Price: The mark price of the perpetual futures contract is 1.2015 USD.
Funding Mechanism: At the daily settlement, the funding rate is calculated based on the difference between the perpetual futures contract mark price and the underlying benchmark price.
If the perpetual futures price is higher than the underlying benchmark price, long positions pay the funding rate to short positions. Conversely, if the perpetual futures price is lower, short positions pay the funding rate to long positions.
In this example, the difference is 1.2015 - 1.2000 = 0.0015 USD.
If a trader holds a long position of 100,000 contracts, they would owe 100,000 * 0.0015 = 150 USD to short positions at settlement.
Settlement: In this example, the funding payment is debited from long accounts and credited to short accounts daily. This continuous settlement mechanism provides economic incentive so that the perpetual futures price stays close to the underlying benchmark price.
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