A settlement price, in the derivatives markets, is the price used for determining profit or loss for the day, as well as margin requirements. The settlement price is the average price at which a contract trades, calculated at both the open and close of each trading day, and it is important because it determines whether a trader is required to post additional margins. It is generally set by defined procedures that differ slightly depending on the exchange and the instrument traded.
Typically, the settlement price is set by determining the weighted average price over a certain period of trading, typically shortly before the close of the market. On the Chicago Mercantile Exchange, the settlement prices of certain equity futures were determined by a volume-weighted average of pit trading activity in the 30 seconds between 3:14:30 p.m. and 3:15:00 p.m. CDT. Beginning in December of 2014, the time was shifted to 12:59:30 p.m. and 1:00:00 p.m. CDT, respectively, maintaining the previous 30-second window but basing it on a different time period.
