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What is a position closeout?

A Closeout is a process of terminating or cancelling some or all outstanding transactions under a contract or Terms of Service. 

Financial service providers such as banks or fintechs such as HedgeFlows offer their clients to purchase currencies on future dates (pre-booking on the HedgeFlows platform, also known as forward FX contracts).  In certain circumstances, it may be necessary to close out all outstanding future transactions between counterparties. For instance, a closeout may be triggered if one of the sides fails to meet other obligations under the contract or Terms of Service or is legally obliged to cancel transactions. Similarly, a closeout may be triggered by a regulator or another governing body, such as an administrator.  

Closeouts are usually performed by the financial service provider (or their administrator in case of their own failure). They must be performed in accordance with internal procedures that ensure fair treatment in order to minimise the risks of legal disputes. This usually results in a mark-to-market value of the transaction being crystallised.  The party that administers the closeout then calculates the cancellation value and informs the affected counterparty of the money due to be paid or received.  The payment timelines depend on the circumstances in each particular case.

In some cases, if the contract allows it, it may also be possible to accelerate the outstanding transactions - perform the contractual obligations as soon as possible instead of on the contracted date.

If your transactions are being closed out as a result of a breach of any Terms of Service, you may receive an advance warning from your provider stipulating the breach and ways you can remedy it before a specified deadline.

In the unlikely event that your financial service provider is required to close out transactions without breaches on your part, they will also typically give you an advance warning of such closeout, informing you when it may happen.  They will usually then liquidate all transactions at a market price and perform calculations in a commercially reasonable manner. As long as the financial provider is solvent, they will seek to pay or collect the funds as soon as practically possible. In case of insolvency, the net value of the closed-out transactions that is due by the provider will usually be treated by the administrator as pari passu with senior unsecured debt.