Learn about regulated futures contracts, their structure, significance, historical context, and how marking to market operates within these financial instruments.
A regulated futures contract is a legally binding contract to buy or sell a particular financial instrument or commodity at a predetermined price at a specified time in the future. These contracts have two essential features:
Margin Accounts: In regulated futures contracts, both parties must deposit and withdraw amounts from a margin account according to daily market conditions. This process is known as marking to market.
Qualified Exchange: The contracts must be traded on a qualified board of exchange, adhering to its rules and regulations.
A margin account is an account where traders deposit collateral. The primary purpose is to manage the risk associated with futures trading. Here, the initial margin is a deposit required by an exchange, while the maintenance margin is the minimum balance that must be maintained.
Marking to market involves adjusting the value of an account based on daily market price movements. If the market moves against the position, additional funds (margin) must be deposited to meet the maintenance margin requirements. Conversely, if the market moves favorably, funds may be withdrawn.
Regulated futures contracts are strictly overseen by regulatory bodies such as the Commodity Futures Trading Commission (CFTC) in the United States. These contracts are traded on exchanges like the Chicago Mercantile Exchange (CME) or the Intercontinental Exchange (ICE), which ensure transparency, fairness, and efficiency.
The CME offers a variety of futures contracts ranging from agricultural commodities to financial instruments. Traders must follow specific rules and regulations set by the CME to engage in futures trading.
Regulated futures contracts are widely used by: