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Please also see the separate page for the Directory of U.S. and International Commodities and Futures Market Exchanges
CFTC Commitments of Traders (COT) Reports (Current & Historical)
The Futures Market is a predictive market: it consists of many participants (Producers, Suppliers, Distributors, Traders, Brokers, Investors, Investment Funds and Consumers) trying to lock in pricing for a particular commodity (from financial products to physical commodities) on a future date. The futures price is always based on the underlying commodity and it is an educated estimate, based on both public and proprietary information, on just what the cash price for a particular commodity may be at some point in the future.
A Futures contract is considered a derivative product as the contract has no intrinsic value other than that which can be derived from the cash value or income stream value of an underlying asset.
A Futures contract is an agreement reached at one point in time calling for the delivery of some commodity (food stuffs, fibers, metals, energy products / Commodity Futures Contract) or currencies, securities and other financial instruments, and indices (Financial Futures Contract) at a later date at a fixed price (Strike Price) established at the time of contracting, in a stipulated quantity and grade. Financial futures are futures on contracts based upon financial instruments. In addition, financial futures (foreign exchange, interest rate and stock indices) are based on financial indices (with trades settled in cash). Futures also allows one to avoid the high costs, custody, settlement and currency conversion hassles of investing in a foreign market by trading exchange offered stock indexes. Futures that are exclusively exchange traded have terms and conditions (size, quality, grade and trading months) that are standardized and the financial integrity of futures contracts is guaranteed by a clearinghouse that collects and distributes margin payments every day. An over-the-counter (OTC) futures contract may have any characteristics that both parties agree to as it is an unregulated market (there is a substantial OTC futures market but it is referred to as a Forward Contract).
Both the Buyer and Seller of the futures contract are legally obligated to fulfill the terms of the contract (either take delivery or deliver).
In order to manage credit / counterparty risk, futures contracts are exchange traded and the exchange functions as the counterparty on both the but and sell sides of the transaction. Thus, the credit risk is the exchange itself. Credit risk is further managed through the use of margin accounts and margin deposits / payments. When one party enters into the futures contract there is an automatic requirement for cash or negotiable securities to be deposited into a margin account either maintained with the exchange (or with a broker who maintains an account with the exchange). The margin amount is a percentage of the current market price of the contract. If at some point during the duration of the contract that the daily current market price of the underlying contract flutuates in value, then there may be a requirement for an additional amount of margin to be deposited into the account (Margin Call). If the margin call is not complied with then the position is closed out to first satisfy the margin requirement and any expenses due to the exchange or the broker.
Security Futures
Security Futures are futures contracts on either an individual equity / stock or on an equity indices. This is a legally binding obligation for one party to sell (deliver) and one party to purchase (receive) a specific amount of equity shares at a certain price on a future date. The contract is usually at a minimum of a round lot (100 shares). The index futures contract is on a group of equities that are recognized within the industry as making up an industry sector index on a specific exchange (stock index). Stock index futures contracts are based on the value of an underlying stock index, such as the S&P 500 Index. Traders settle their accounts by making cash payments that are consistent with the movements of the index.
Commodity Futures
Commodity futures are futures contracts on the underlying value of a commodity for delivery in the future. This is a legally binding obligation for one party to sell (deliver) and one party to purchase (receive) a specific amount of the commodity at a certain price on a future date. The contract is usually at a minimum weight of the specified commodity.
Currency Futures
Currency futures: futures contracts calling for the delivery of a specified amount of a foreign currency at a specified future date in return for payment in another currency. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by marking-to-market such contract on a daily basis to reflect the market value of the contract at the end of each day's trading.
Eurodollar futures: the interest rate paid on U.S. dollars on deposit in London banks.
Interest Rate Futures
Interest rate futures: on a debt instrument such as a Treasury bill or bond. A trader must deliver a certain type of debt instrument to fulfill the contract. Used as a risk management tool and allows the investor to bet on the direction of interest rates.
The recent development of shipping futures (Forward Freight Agreements / FFA, which is an agreement to deliver freight on a specific sea route at some point in the future) are an attempt to diversify shipping / freight rate risk.
Please also see the separate page for the Directory of U.S. and International Commodities and Futures Market Exchanges
Only a licensed member of a specific futures exchange, or a person with trading privileges on a specific futures exchange, can trade on that exchange. An exchange provides an organized and regulated forum for participants (Producers, Suppliers, Distributors, Traders, Brokers, Investors, Investment Funds) to interact and also provides standardized futures contracts and standardized traded options contracts for those participants to lock-in pricing. These exchanges may also have some oversight for the warehousing of a physical commodity and the approval process of commodities for "good delivery" against contracts.
Some exchanges still have trading pits where licensed members physically interact with each other in order to consummate a transaction. These are the individuals who wear the distinctive colored or patterned jackets and also wear a badge with a two- to four-letter identifier name.
A floor broker is not an employee of an exchange. Rather, either he or she is individually licensed or is employed by a company that is licensed to conduct trading on the exchange. The floor broker receives and accepts buy or sell orders from clients that he or she must fill to the best of his or her ability. The auction process is still anonymous because while all of the brokers may know each other intimately, they do not know which client another broker is representing at any given time.
The type of buy and sell orders for exchange traded futures contracts that brokers may perfom include:
A floor trader is not an employee of an exchange. Rather, either he or she is individually licensed or is employed by a company that is licensed to conduct trading on the exchange. The floor trader buys and sells futures (and options) contracts for their, or their company's, account only (does not accept orders from third party clients).
When two members have agreed on a contract, the Seller of the contract is usually responsible for submitting the ticket (indicates commodity, quantity, delivery month, price, selling broker’s badge name, and that of the purchasing broker) to the exchange representative (an employee of the exchange responsible for the pit trading for that specific commodity or product) to have it time stamped. At some exchanges, this function may be completed by handheld, wireless PDAs that are connected to the exchange computer network. In either manner, the price for the specific commodity / product contract is reported to the exchange who, in turn, report it publicly to all participants.
In the United States, a futures commission merchant (FCM) or an introducing broker (IB) has to be a member of an exchange and are also required to be members of the National Futures Association (NFA).
As per the CFTC, a futures commission merchant (FCM) are individuals, associations, partnerships, corporations, and trusts that solicit or accept orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any exchange and that accept payment from or extend credit to those whose orders are accepted. Individual, retail traders can open a self-directed account / non-discretionary individual account with an FCM. The self-directed account means that the individual depoists cash (there is usually a minimum amount to open an account) with the FCM, downloads that company's respective direct access trading platform and then makes their own trading decisions (there are usually account maintenance fees and commission fees).
An Introducing Broker (IB) is a person (other than a person registered as an associated person of a futures commission merchant) who is engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on an exchange who does not accept any money, securities, or property to margin, guarantee, or secure any trades or contracts that result therefrom.
The National Futures Association (NFA) is a self-regulatory organization whose members include futures commission merchants, commodity pool operators, commodity trading advisors, introducing brokers, commodity exchanges, commercial firms, and banks, that is responsible, under CFTC oversight, for certain aspects of the regulation of FCMs, CPOs, CTAs, IBs, and their associated persons, focusing primarily on the qualifications and proficiency, financial condition, retail sales practices, and business conduct of these futures professionals. NFA also performs arbitration and dispute resolution functions for industry participants.
A commodity trading advisor (CTA) is a person who, for a fee, regularly engages in the business of advising others as to the value of commodity futures or options or the advisability of trading in commodity futures or options, or issues analyses or reports concerning commodity futures or options. This is also known as a managed account and in most individual investment accounts the investor must sign a power of attorney authorizing the CTA to make the trading decisions.
A commodity pool operator (CPO) is a person engaged in a business similar to an investment trust or a syndicate and who solicits or accepts funds, securities, or property for the purpose of trading commodity futures contracts or commodity options. The commodity pool operator either itself makes trading decisions on behalf of the pool or engages a commodity trading advisor (CTA) to do so. This means that the funds of several investors are combined into a single investment fund.
A clearing firm is an organization that is affiliated with the exchanges and is used to not only complete the transaction but also attempt to eliminate credit risk for market participants by serving as the counterparty to every transaction (counterparty credit risk is shared among clearing members).
CME Clearing utilizes the proprietary SPAN (Standard Portfolio Analysis of Risk) margin system, which utilizes a VAR
(value-at-risk) methodology to determine initial performance bond / initial margin. Performance bonds/margins vary
according to product and market volatility. CME Clearing also performs a twice daily mark-to-market of open positions.
www.cmegroup.com/wrappedpages/clearing/pbrates/performancebond.html
www.cmegroup.com/clearing/financial-and-collateral-management/collateral-types-accepted.html
LCH.Clearnet Group was formed following the merger of the London Clearing House and Clearnet SA in 2003. The London Clearing House clears contracts for the IPE (International Petroleum Exchange, now known as IntercontinentalExchange / ICE Futures), LIFFE (now know as NYSE Liffe) and the LME (London Metals Exchange). Banque Centrale de Compensation SA, which traded as Clearnet, was formed in 1969 to clear contracts traded in Paris commodity markets. LCH.Clearnet also clears for ICAP Electronic Brokering Services (EBS), eSpeed, SwapsWire, EDX London.
In the United States, Crude Oil (Light Sweet) futures contracts are quoted and traded on the CME Group's member exchange
New York Mercantile Exchange / NYMEX) by open outcry / pit trading; CME Globex (electronic trading platform); CME ClearPort.
This is a benchmark contract (sets the price for this specific resource worldwide) and is the world's largest-volume futures
contract on a physical commodity (approximately 600,000 contract per day worldwide). WTI means West Texas Intermediate, a
naturally low sulfur crude petroleum (maximum sulfur is 0.42% or less by weight as determined by A.S.T.M. Standard D-4294, or its latest revision)
A typical order on December 7, 2009, could have been: BUY 100 January 2010 NYMEX CL at 74.00 Limit Day Order.
The trader who purchased the contract must post a exchange specified margin or a performance bond. If between the close of trade and the delivery date the market price of oil (futures contracts and spot price) is above USD $74.00 per barrel then the contract is "in the money".
The Commodity Research Bureau Futures Index (CRB, introduced in 1956) is comprised of 17 weighted active commodity prices (a contract on the CRB is traded on the NYFE division of the New York Board of Trade / NYBOT):
