# Settlement Price of Futures Contracts

While looking at the historical price dataset of a Futures contract, you will see some important columns such as Open, High, Low, Last, Change, Settle, Volume, and Previous Open Day Interest for each trading day.

The Last column is the price of the last trade on the day. The Settle column shows the settlement price for each day. The settlement price is the price that is set by each settlement or pit committee in order to reflect with more accuracy the contract price at the end of the trading session.

The following table shows the Crude Oil Futures historical prices data from Chicago Mercantile Exchange.

In liquid markets, when trading is active there is a slight difference between the last trade price and the settlement price as trades are continuous with little fluctuations in prices.

On the other hand, in illiquid markets, the last trade could occur two or three hours before the market closes, and important events that affect the contract future price might arise between the last trade time and the market closing time. In this situation the settlement committee guard for the price that reflect the current market conditions for that asset. It is common that the committee observes prices for adjacent month’s contracts which have accounted for the available information. The exact procedure for determining the settlement price will depend on the contract as well as on the exchange. However, it will generally be close to the Last price.

As an example, for S&P and NASDAQ, the settlement price of the lead (contract month determined to be the most active or liquid) month contract is the midpoint of the

closing range determined based on pit trading activity between 15:14:30-15:15:00 Central Time (“CT”). For all other equity indices, the Volume Weighted Average Price (VWAP) of trades executed on Globex between 15:14:30-15:15:00 CT is used to determine the settlement prices for the lead month contracts.

The Settlement price is key in the futures market, as it is used to mark trader’s positions to market. This means that the gains and losses are offset and credited or debited to traders' accounts daily. So, the changes in the settlement price imply changes in trader’s equity that could lead to a margin call if the trader equity is lower than the maintenance margin. This of course reduces risk of counterparty default.

To summarize, we can say that the settlement price is used for futures and other derivatives and is generally calculated as the average price over a certain period of time. There is no standard method for determining the settlement price and the  actual calculation of settlement prices various between contracts and exchanges.

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