Futures market explained

Futures are a sufficiently liquid and convenient financial tool. All the parameters and characteristics of the underlying asset, which is the basis of any futures contract, are strictly regulated by the exchange. Futures contracts on any futures asset are standardized, due to which they are interchangeable and easily pass from hand to hand in the trading process.
Group of characteristics for the underlying asset and the futures itself, which is regulated and defined by the specific exchange is called specification of futures. Usually it is available on the websites of specific exchanges in a tabular form. Understanding of the specification is essential for correct and safe process of trading, so pay attention to the detailed description of the key parameters of specifications:
  • The underlying asset. Commodity or a financial instrument, forming the basis of the futures. Such as oil, gold, the British pound, the index S & P500, corn, government bonds, and so on;
  • The quality of the asset. All the possible features are taken into account. If it is oil, it specifies the brand, the allowable levels of impurities, and places of shipment. If it is gold the bullion fineness and weight, the presence of serial numbers and stamps of repositories are stipulated;
  • The volume of the contract. The quantity of the underlying asset in a futures contract is defined - 500 barrels of oil, 100 ounces of gold, 62,500 British pounds;
  • Months of supply. In parallel, several futures are traded on one underlying asset, they differ only in the delivery dates. For example, corn has the following delivery months - March, May, July, September and December;
  • Type of delivery. What happens upon expiry of a futures contract - purely financial calculations (calculated futures) or the physical delivery of the underlying asset (the deliverable futures);
  • The delivery period. The time interval of possible supply is defined in advance. For example, from the first to the last working day of the month deliverable;
  • Hours of bidding. For example, the British pound: bid in an open auction - from 7:20 to 14:00 Chicago time, electronic trading - from 17:00 to 16:00 the next day (day and night with an hour break);
  • Currency of the contract. Typically, the U.S. futures are traded in dollars, but there are rare exceptions: the euro, the Yen;
  • Quotation of the contract. What exactly the current price of the futures shows is the number of cents per bushel of wheat, the number of dollars per ounce of palladium and so on;
  • The minimum price change. With which tick the price of the asset will change. For example, 0.01 per cent (the Swiss franc) or 10 cents (per ounce of platinum);
  • The maximum price change. As an example - when the price of oil changes for $ 10 a day during the day session, trading is suspended for five minutes. If the price has changed significantly, biddings on certain contracts may be closed before the next trading session;
  • The limits on open positions. In order to protect the market from the effects of major players, the exchange limits the number of contracts that may be in the hands of one player. For example, no more than 1,500 platinum contracts on any of the months of delivery and not more than 150 contracts at the approach to the first day of taking delivery;
  • The last trading day. The exchange fixes a day of the delivery month, after which trading on the contract expires. Usually it is written in the form: Copper futures - the auction ends at the end of the third business day after the end of the month preceding the delivery;
  • Ticker. Designation of futures on exchange. Usually it is 1-3 letters - CL (oil), W (wheat), JY (Yen), DJ (index Dow Jones).

The Exchange was founded in 1919 as a national market for trading of spot commodity and futures contracts on a number of products such as butter, eggs, potatoes, pork, pork offal, cattle, sorghum, turkey meat and wood. Currently, the Chicago Mercantile Exchange is the largest stock exchange in the United States on trade in currency futures and options. GLOBEX (division of the Chicago Stock Exchange) is electronic trading system that operates outside of working hours of the exchange and is known as post market trade system. CME (IMM) & GLOBEX – during work of exchange trading of futures contracts is made in the IMM (International Monetary Market) -division of the Chicago Mercantile Exchange (CME) in the OTC time - on GLOBEX.

  • Exchange CME and its electronic version Globex offer a lot of futures contracts, and not only in the foreign exchange (FOREX). Consider the most popular and marketable ones:
  1. What we call a commodity futures are collected on this page: Commodity Products Homepage: Commodity Products Homepage
  2. Petrol, oil, gas, refined products and electricity are available at the linkEnergy Products
  3. Large contracts on indices S & P, Dow Jones, Nasdaq and their mini derivatives are collected on the page Equity Index Homepage
  4. FX (currency pairs and cross rates), mini-and micro-contracts can be viewed at FX Products Homepage
  5. U.S. bonds and some of the tools on rates can be seen on page Interest Rate Products Homepage
  6. Gold, silver, platinum and copper, you will find by visiting Metals Products Homepage Homepage
  • On the home page of the СМЕ exchanges you can find the definitions and convenient summary table: сводная таблица
  • In addition to the easy access to these sections, the organizers have provided a website Featured Links section for quick access to the most sought-after information points of the site: Featured Links
  • We draw your attention first to the Advisory Notices - notification of events occurring on the exchange. This includes changes regarding margin security, the exchange's regulations, changes in specifications and other assets of CME's "inner life". It is possible to search for information on pre-criteria and categories: Advisory Notices
  • On the webpage of Rulebooks you can find the links to all regulatory documents by departments of CME (CME, CBOT, COMEX & NYMEX). It is important to remember that despite the union of all these sites in the CME Group, each of these exchanges has its own rules governing their work.
  • One of the most popular links on the CME is the Performance Bonds/Margins. Here you can filter the set of assets in such a way that you can quickly and easily find relevant information for yourself:
  • Option "DownLoad Data" allows you to save the table with a pre-search criterion (it is saved to disk in Excel format), then, using filters, pre-arranged directly at the table, you can see quite comfortably margin requirements for your chosen asset.
  • And, apart from margin requirements, another important aspect that worries every trader is a transaction fee. On the page Fee Schedule you can find information on all exchange fees (exchange fees), which, together with the commission of broker will make your real costs of the transaction. Note: Your broker may not change the exchange fees; you can negotiate with him only on the amount of your commission.
  • On the Cash Settled Futures page there is a list contracts in the current month with the dates of payment, if you go for a physical delivery of the asset.
  • One of the most useful links can be called a page Events Calendar where in a compact and convenient way you can receive information on important (from the point of view of the exchange) events. It is possible to "open" an event to get more detailed information, it is possible to change the month and year of the calendar to look "into the future" and, also, it is possible to "tune" the indication of the calendar for information only about the release of macroeconomic data only about the release of macroeconomic data.
  • Special attention should be given to a link to information about the First/Last trading days of the current and future contracts, rollover settlement and days of delivery - CME Group Listings/Expirations Calendar.
  • On the Financial Safeguards page you can read the description of financial guarantees of the exchange.
  • The page Free Real-Time Quotes offers you a free registration, after which you can access quotes in real-time.
  • The page Daily Bulletin shows current information about what happens to all assets traded at the CME Group. In order to properly understand all the surveys used in these terms, please use the guide CME Group Daily Bulletin Glossary.
  • Before you start trading in futures on the CME, we recommend that you to read the page Resources, which has very important technical information:
  1. The time at which the asset is traded - Trading Hours
  2. СList of tickers, which are used in the CME Group - Product Codes Listing
  • You can also access the price schedules in a chart of commonly used tools of technical computer analysis: график цен
  • You can see the Last / high / Low / Volume in the summary table of contracts and see which contracts are being traded and which are not, and which contract at this moment has the biggest liquidity: сводная таблица контрактов
  • Those interested in information on trading volumes may see it here: таблица контрактовтаблица контрактов
In order to correctly enter the desired futures in the trading platform, it is necessary to know the name of the futures in the exchange and the designation of the month of delivery. Months are always identified the same way, their characters are listed below.
January F July N
February G August Q
March H September U
April J October V
May K November X
June M December Z
Futures contracts are assembled in such a way that after a certain period of time they end their existence. That is, the date of delivery or calculation comes. Those traders who hold the medium and long term positions on their contracts, of course, have to move from the current futures to the next one, based on expiry date. Various instruments and markets have their own peculiarities. For example, oil futures traders have to move from one contract to another every month, and traders who trade currencies - once a quarter. This is called a "roll over" and is done in order not to meet the delivery date with the open positions on expired contracts on hand. Working with fixed-term contracts, they definitely need to know the delivery date (the expiration date), which is fixed in the exchange specifications and is different for each commodity or asset.
In order to understand the mechanism of settlement of futures contracts, you need to take realistic examples of three trading instruments popular among traders: futures on crude oil WTI, traded on NYMEX under ticker symbol CL (Light Sweet Crude Oil WTI Futures); gold futures, trading in which takes place in the section COMEX under the ticker GC (Gold Futures); euro futures traded at CME, under the ticker 6E (EUR / USD Futures).
  • The volume of the Contract (or Contract Size, Contract Unit) is the quantity of the underlying asset in a single contract. The value is stated in the specification.
Crude oil: 1,000 barrels
Gold: 100 troy ounces
Euro 125,000 euro
  • Minimum pitch (or Min. Fluctuation, Min. Increment, Tick) is the minimum possible change in quotes. The values are stated in the specification.
Crude Oil: $ 0.01 per barrel
Gold: $ 0.10 per ounce
Euro $ 0.0001 per euro
  • Min. Step of Cost (or Tick Value) is a change in the trading account, which occurs at the minimum step of the contract. Sometimes it is stated in the specification.
MSC = Min. Step * Contract Volume
Crude Oil: $ 0.01 * 1000 = $ 10
Gold: $ 0.10 * 100 = $ 10
Euro: $ 0.0001* 125,000 = $ 12.50
  • Full cost (or Contract Value) is the total price of the underlying asset of the contract.
FC =Quote * Contract Volume
Crude Oil: $ 102.24 * 1,000 = $ 102.240
Gold: $ 1630.8 * 100 = $ 163.080
Euro: $ 1.3123 * 125.000 = $ 164,037.50
  • Margin Deposit (or the Initial Margin, initial margin, security, guarantee obligations) is the money locked in your account after the opening of the position. The value specified for one contract is determined by the exchange and varies quite rare.
MD = Constant value, constant
(Pledges are subject to change by the exchange itself, and their relevance should be specified on the corresponding website)
Crude Oil: $ 6,885
Gold: $ 10,125
Euro: $ 4,725
  • Leverage is the ratio of money available to those used in the transaction, or the enlargement of equity. The value is individual for each futures.
LV = Total Cost: Marg. Pledge
Crude Oil: $ 102.240 $ 6,885, or 15 :1
Gold: $ 163.080 $ 10.125 or 16: 1
Euro: $ 164,037.5 $ 4,725 or 35: 1
  • Variation margin (or P & L, Profit / Loss) is money earned or lost as a result of the transaction. It is calculated at the completion of the transaction or at the end of the trading session.
Option 1. VM = (Quotation of output - Quotation of input) * Value of Contract
Option 2. VM = Number of Min. Ticks* Value of Min. Ticks
(In the examples both versions of calculation are used)
Oil: Buying a Contract for $ 102.24 and $ 103.12 for sale
($ 103.12 - $ 102.24) * 1000 = 88 * $ 10 = $ 880
Gold: Buying a Contract at $ 1630.8 and $ 1626.5 for sale
($ 1626.5 - $ 1630.8)*100 = -43 * $ 10 = - $ 430
Euro: Selling the contract at $ 1.3123 and $ 1.3095 for purchase
($ 1.3123 - $ 1.3095) * 125,000 = 28 * $ 12.50 = $ 350
The prices of futures, though running synchronously with the prices for spot, but rarely completely repeat them. The fact is that the spot price is the price of the product, existing in the market at the moment (on the spot market delivery of goods is immediate) and the futures price is the estimated price of the product over a period of time ranging from a few days to a couple of years.
Factors influencing the formation of these prices are different. If the spot price is influenced by the current demand and supply, the futures price depends not so much on the fluctuations of the price of the product, but on the expectations of the speculators about the prospects of this product in the nearest future.
Since a few futures contracts with different expiration dates are traded on the exchange, the price of futures is usually built in ascending or descending order. The longer the period before the futures trading expires is, the greater is the deviation from the spot price. Conversely, the closer the futures expiry date is to the current date, the closer is the price to the spot, since upon expiration of futures trading period its price automatically becomes a spot price.
Futures markets are on-going auction markets and clearing houses, where there is the most recent information on supply and demand. They are a place where buyers and sellers of an ever-expanding list of products meet. Nowadays this list includes: agricultural products, metals, oil products, financial instruments, foreign currencies and stock indices. Also trading of options on futures contracts is performed, which gives an opportunity to the option buyers to participate in futures markets with limited (previously known) risk. Despite the rapid growth and diversification of futures markets, their main objective remains the same as it has been for nearly one and a half century - to provide an effective mechanism of management of price risks. Futures contracts are the contracts in which the price level is set now for the product that will be delivered in the future. Buying or selling futures, individuals and businesses insure themselves against sudden price changes. This is called hedging. Other participants of futures markets are investors-speculators, who take risks from which hedges protect themselves. Most speculators are not going to make or take delivery of the goods, and try to profit from price changes. This means that they buy, when they expect increase of prices, and sell when they expect price reduction. The interaction of hedgers and speculators helps to create active, highly liquid and competitive markets. Participation in futures trading for speculation has become particularly attractive due to availability of alternative methods of participation. At the same time, many futures traders prefer to make their own decisions in trade (what and when buy and sell), while others use the services of professional trading consultants or shift to others the necessity to engage in trading each day, setting up accounts with trust management, or participating in "commodity pool" on the principle of mutual fund. For individuals who fully understand the risks involved and can take those, placing a part of their capital in futures trading opens the possibility of greater diversification and a potentially higher overall profitability of their investments. There are also many ways to combine futures with stocks, bonds and other investments. Yet it is obvious that speculation in futures contracts is not for everyone. While it is possible to obtain significant gains in a short period of time, it is also quite possible to incur substantial losses in a short time. The possibility of big profits or losses versus initial capital investment lies primarily in the fact that futures trading is a form of speculation with a lot of leverage. Only a relatively small amount of money is required to manage assets with a much higher cost. With respect to any investment that you are considering, in order to collect the necessary information you need to find answers to the following questions:
  1. Information about the investment itself and the associated risks.
  2. How fast it is possible to liquidate your investments or (trade) position if necessary / desired.
  3. What other participants there are in the market.
  4. Alternative methods of participation (in the market).
  5. How the pricing comes out.
  6. Overhead costs of trading.
  7. How the calculation of profits and losses is made.
  8. What the different forms of regulatory control and protection are.
  9. Experience, "purity" (honesty, reputation, "transparency") and "track record" (achievements) of your broker or advisor.
  10. The financial stability of the company you are working with.
Answers to these questions will help you to become an aware investor.
  • Risk Disclosure
The risk of loss in futures trading can be very high. You have to decide based on your financial capacity, whether such trading is acceptable to you. Before undertaking an independent trade or authorize someone to trade on your account, you need to familiarize yourself with the following:
  • If you buy an option, you may lose total bonus and commission paid in respect of a transaction.
  • Selling uncovered options involves a great and theoretically unlimited risk (in the case of options Call). Due to the strong price movements, the option premium may increase significantly, and the broker can increase the size of margin calls in excess of what SPAN requires, a procedure that determines the minimum level of security funds.
  • If you buy / sell a futures contract or sell an option, you can completely lose the value of the original security, and all additional funds that your broker will require to maintain the position. In an unfavourable market movement is possible that your broker will urgently request from you additional funds to maintain your positions. If you find yourself unable to find and transfer the appropriate amount in the time prescribed, your position may be liquidated and you will be financially responsible for any deficiency, which is thus formed.
  • Under certain conditions, the elimination of your positions may be difficult or impossible (for example, in the case of Limit-Move or Open Gap).
  • Statement of orders such as Stop-loss or Stop-limit does not guarantee the limit of your losses by calculated value, because market conditions may make accurate execution of the warrants impossible.
  • Spreading position may be not less risky than the usual 'long' or 'short' position.
  • The presence of "leverage" in futures trading can equally lead to big losses as well as to big profits.
  • Investing in Managed Futures involve risk of partial or complete loss of invested funds. You are strongly advised to carefully read the principles of program trading, the major provisions of the applicable risk management procedures, structure and size of payment manager of the manager, before making a decision on practicability of investment in the futures and options market instruments or adding Managed Futures program to your investment portfolio.
It is expressly prohibited by regulatory bodies of the industry to guarantee any future profitability or size of potential losses. However, involvement of a professional manager can significantly reduce the risk of unplanned losses and make investment activity more predictable. Bear in mind, however, that no historical results (real or simulated) guarantee their reproduction in the future.
In this document we refer to the example of the Chicago Mercantile Exchange (CME), but almost all of the methods of insurance and removal of financial risks also apply to other U.S. exchanges.The purpose of the whole system of financial control is to avoid default (nonfulfillment of financial liabilities) by any of the participants throughout the payment chain.The role of the clearing and settlement firms (FCM) As known, the stock trading counterparty of each buyer or seller of futures contracts is the clearing house. It consists of clearing and settlement brokerage firms (FCM), i.e. namely those firms that enter into brokerage services agreement with clients, accumulate their funds and are accredited as full members of the exchange. The clearing house requires that each transaction is guaranteed by the relevant FCM. Only FCMs are representatives of clearing house in the current trade. The clearing house will never examine or monitor the sufficiency of funds of the non-clearing broker (not entitled to keep the funds of a client) or client. FCM will in any case be responsible and will pay for all transactions of its customers. FCM is not entitled to combine the customer funds with their own funds. In addition, the Commodity Futures Trading Commission (CFTC) and exchanges themselves require FCM to have a certain minimum of owned net capital, namely in the amount of 4% of all client funds deposited in segregated accounts (as below). The minimum amount is $ 2 million. Moreover, if the net capital is close to 6% of segregated funds, the FCM becomes subject to litigation, so usually FCMs keep the level of their own net capital much higher. In addition, accounts receivable are not included into assets in calculation of this capital, which considerably enhances the value of net capital. Financial guarantees The insurance risk system is aimed at: - preventing accumulation of losses and defaults, - providing sufficient resources to cover all futures (future) commitments, - timely identification of financial and operational weaknesses, - ensuring rapid elimination of financial problems and protection of the clearing system.
  • Mark-to-market
Debt elimination between the parties of exchange trade as they arise plays a huge role in the financial stability of exchanges. It is achieved by establishing of official stock quotes for all traded instruments at the end of the trading day, and by bringing all accounts with open positions to that price. For example, if you bought gold at $ 370/XAU (XAU - troy ounce), and the trading closed at $ 380, then the amount of $ 1,000 will be credited to your account immediately after the trade ends (the amount of the contract is 100XAU). From that account, which sold gold at $ 370, on the contrary, the same amount will be debited. Until closing of the position, this reduction of accounts to the market price will happen every day. This happens without participation or permission of the client which is envisaged by the client's contract. If the amount on any account falls below a certain value (maintenance margin), the client will be required to deposit additional funds, or its position will be forcibly closed. Thus, the participant is deprived of the opportunity to delay payments "until later", accumulate debts and create the risk of non-payment. Each day, by the opening of trading the clearing house, on the basis of bringing of all the accounts to the market, the clearing house pays or withdraws money from FCM. In addition, at 11.30 there is another session for intraday price calculation among FCM (but not on customer accounts), and if the market is very active and there are significant price fluctuations ("volatile" market), there may be another additional session of calculations. Only on CME the total from $ 2 to 7 billion pass through these payments daily. This system differs from other markets, including the interbank forex market, stock market, and others. Their participants regularly take on credit risk against other participants. At that, the insolvency of one can cause a chain of defaults.
  • A security deposit (margin)
CME sets the minimum initial and maintenance margin level of guarantee for all traded instruments. The basis for calculation of value of such securities is a historical volatility of prices, the current and expected market conditions, and other relevant information. From time to time the margin changes to meet the changing conditions. Margin in futures trading is a deposit guaranteeing fulfilment of commitments. At disappearance of liabilities (closing of the position) the margin will be unlocked and can be withdrawn from an account, or used for other open positions. Maintenance Margin is a minimum of funds that should be on the client's account in order to maintain an open position for the instrument. For a variety of instruments the margin is different in absolute value, sometimes considerably, but it is always 5-15% of the nominal value of the specific futures contract. FCM may, at their discretion, increase (or decrease, but only within the day) margin requirements for their customers. The value of the margin is set by means of mathematical modelling so as to cover the maximum daily fluctuation of prices for the contract (we will omit the details of such fluctuations here). Often, the value of margin is set with reserve, especially for those markets that react nervously to political news (e.g. crude oil). Pledges for options reflect price movements of corresponding futures underlying the options, volatility, time to expiration, and other risk factors. In addition, the premium on long positions is paid by the buyer in full all at once, and on short positions of sellers strict standards of securing are set.
  • Segregation (separation) of customers' funds
U.S. legislation on futures and options requires that client funds and positions are held separately from the assets and positions of the clearing brokerage firm. This protects the customer from insolvency or financial instability of the broker. This applies also to the clearing house - on the basis of specific written instructions from the brokerage firm it keeps the positions and funds of clients separately from the funds of the firm. Integrity and efficiency of this system depends on timely delivery of instructions by the broker. Audit Department of CME (as well as other stock exchanges) regularly checks the timing of such orders. Violations of these rules are considered serious and lead to the serious sanctions.
  • Financial supervision.
Reporting: All FCMs submit the full balance to the exchange on the monthly basis, and once a year - the balance, certified by an independent auditor. Checks: All FCMs are subject to unexpected financial inspections at least once a year. Inspections focus on the specific risks of futures and options trading. Exchange of information: Almost all the futures markets are now members of the network on exchange of information in relation to their brokerage firms. As a rule, the same brokers work on many platforms, so this system allows you to quickly find out about the problems of FCM, before they affect all categories of customers. Intraday monitoring: During the day, the risk management department several times checks the balance of FCM for the purpose of reduction to the market (see above) of their aggregate positions. Large loss-making positions are immediately taken under control. Experts of exchange can even visit the office of the relevant FCM and check whether these positions are secured by deposits, and how this loss will affect the state of the firm. For this purpose there are numerous mathematical modelling techniques of "stressful" situations and their impact on the balance of the brokerage firm. As a result of these inspections additional margin may be required or some positions may be closed.
  • Market regulation.
Risk Management Department has access (on a confidential basis) to information on all client and broker accounts. It constantly monitors the accumulation of loss-making positions, particularly in terms of their belonging to related, affiliated customers or brokers. In addition, experts trace the state of affairs on other markets as well, including the position of participants under suspicion. This allows taking timely measures aimed at elimination of the risk for the clearing system and its individual members.
  • Checking the risk management procedures
The exchange regularly checks how the work on the identification of risks is organised in the brokerage firms accredited to this exchange. Defaulting of clearing brokerage firm (FCM) Although exchanges (in this case, CME) supervise their brokers very closely in terms of financial risk, there are special programs in case FCM fails to fulfil its obligations.
  • Defaulting on account of brokerage firm
If FCM fails to fulfil its obligations to the clearing house not in connection with the trading activity of customers, the clearinghouse can immediately do the following: - transfer all the segregated funds and positions of clients to another clearing firm, - transfer management to itself, or even eliminate own positions of FCM, - use a pledge of the firm and its additional insurance premiums to satisfy default obligations - use all the other assets of this FCM (e.g. shares) - use the guarantee issued by the founders of FCM. The customers’ funds and their positions cannot be used to cover default obligations which arose as a result of the brokerage firm activity itself.
  • Default on the client's account
If FCM is unable to fulfil its obligations to the clearing house due to a default arising on the account of a client, the clearing house can immediately do the following: - transfer the positions and funds of other clients to another broker, - take control or liquidate positions on the client's account as well as the broker's own positions, - use the pledge of this brokerage firm and its additional insurance premiums to satisfy the default obligations - use all other assets of this FCM (e.g. shares). Despite the fact that clearing house separates (segregates) customer funds from brokerage firms, the client funds of one brokerage firm are kept together on the same account. Therefore, in case of default of one client other customers of this brokerage firm can potentially suffer. The positions of other clients at the same time can also be forced to close.
  • Additional Resources.
To cover the risk of default for customers and clearing firms not involved in default, CME has a constant credit line of 500 million dollars, the access to which is provided in full on the day of appeal. The line is provided by a consortium of U.S. and foreign banks. The next source of financial security - excess funds of the exchange itself - is about $ 100 million. After this, exchange may resort to the use of the security deposit, made up of contributions from all accredited FCMs. If that is not enough, the exchange will appeal directly to FCM and request from them to make an emergency deposit to 10% of the total amount of all margin deposited with the clearing house, each in proportion to its share of the security deposit.
  • Measures of customer protection in case of bankruptcy of a broker.
In the case of bankruptcy of FCM, U.S. law provides for the satisfaction of firm clients’ claims (with the exception of its affiliates) in the first place. Clients’ security deposits, as well as the variation margin on open positions that are in the clearing house of the exchange shall not be included in the bankruptcy estate and are returned to customers directly. Customers working with other brokers (not with those who themselves or whose client got into a situation of default) are fully protected, since their funds in the clearing house under no circumstances can be used to fulfil the contractual obligations of default accounts. Clients' protection As mentioned above, the customers bear the risk of loss in a single case if there was a default on the client’s account, which is served in the same brokerage company, and the brokerage company’s financial condition is in such a state, that it cannot make up for these losses. Protection from such default in the first place consists in monitoring of the level of financial control in FCM. Exchange, above all, controls the fact that all have made deposits according to their positions, constantly monitors the financial condition of FCM, and if necessary, takes the necessary measures to prevent the crisis. However, in exchange, there is usually a "second level of client protection," and namely, the reserve fund. It is used to compensate customers' losses if the financial condition of the broker does not allow it to do it on its own, on condition that the losses of the client were caused by this default. Physical closing of exchange in case of disaster At the stock exchange (e.g. CME) there is a comprehensive and constantly checked backup system of all transactions and financial information for protection from long-term failure / termination of the clearing system work in case of some catastrophic phenomena. The reserve system fully ensures uninterrupted operation of the exchange. It includes: - the main backup server located at a different physical address. Clearing system of exchange may at any time be switched to this backup server, - the system of price quotation runs on a twin Tandem Computers server, besides, there is also a physically remote backup server, - all entries of clearing and trading operations are duplicated, and copies are stored in a physically remote location, - back-up systems of telecommunications, telephone, - backup uninterruptible power supply - for cases of failure in the urban scale, as well as back-up in case of urban local substations for cases of local failure.
Unlike Forex, there is no direct concept of "leverage” in the futures market. Since all futures contracts have the fixed price of the item, as reflected in the specification and margin requirements defined by the exchange, leverage becomes a floating (or estimated) value. Traders, who came to the futures markets from FOREX, often have questions how to calculate the leverage they are going to work with. It is quite easy to calculate leverage for futures. Take, for example, the Swiss franc. Open the contract specifications for Swiss franc on the CME exchange website. The size of the standard contract equals to 125K Swiss francs. стандартный контракт Then check the closing price (e.g., yesterday) - 1.0970 (note that all quotes at the stock exchange are against the U.S. dollar, there is no "direct" and "reverse"). Accordingly, in dollar terms, the minimum contract value on the Swiss franc will amount to 125000 * 1,0970 = 137125 U.S. dollars. Now check the established exchange margin requirements to trade in futures contracts on the Swiss franc. маржинальные требования
In our case, for franc they equal to 7290 usd. That is, for purchase / sale of one contract there must be 7290 usd of margin security. But here we are talking about the exchange initialization (initial) margin. For comparison of leverages let’s take also intraday, reduced margin (for example, 1000 usd).
Thus, we have two margin requirements for opening of one standard contract: - 1000 usd during the day, and 7290 usd in case of SWAP. Now divide the sum of our contract by the margin requirements and we will get two credit leverages:137125: 1000 = 137.125 – i.e the leverage will be 1:137 within the day. 137125: 7290 = 18,810 – i.e, the leverage will be 1:31 in case of SWAP. However, these estimates are only a reference and have rather indirect connection to trade futures contracts. Things are much simpler:
  • The standard amount of the contract (lot) indicated in the contract specification.
  • The standard tick price (of minimum price change), with indication of the specific currency in which the price of the asset is nominated.
  • Margin requirements (how much money it is necessary to have on the account to become entitled to trade at least one contract).
Trading futures, the trader does not come into possession of the asset - this is one of the main differences between trading derivatives and, let’s say, stock trading. You are given the right to operate a futures position in exchange for a security deposit (margin). The trader places secured funds on clearing company’s account (or non-clearing FCM) and becomes entitled to trade on the exchange. This deposit is a guarantee that the trader will be able to pay the loss suffered on the market.
There are three types of margin securing: INITIAL margin, MAINTENANCE margin and DAYTRADE margin.
  • INITIAL MARGIN is the initialization (or starting) margin. This is the amount that the exchange wishes to see on your account on the day of position opening (on the first clearing transfer) for each futures contract opened by you. Initial margin is the function of the underlying asset price volatility and the size of the contract, in addition to other factors, and can vary in either direction, depending on the situation on the market of the underlying asset. The exchange usually warns of changes to their margin requirements at least one day prior.
  • MAINTENANCE MARGIN. Maintenance margin is the minimum amount of money on deposit to support open positions for each contract after the first clearing. The maintenance margin is usually a percentage of the primary margin, and, of course, increases or decreases in the corresponding changes of the initial margin. If the value of the customer's account falls below the maintenance margin level due to adverse price movement, the broker shall send a request to the client for restoration the balance of the customer's account to the initialization level.
  • DAYTRADE MARGIN .Given the fact that a lot of traders do not want to take the risk of roll-over through breaks between sessions or the weekend and are content to gamble in a single trading session, brokers offer special conditions of trade for such traders - lower margin, which is valid within only one trading session. This margin is only possible because the modern broker has the technical ability to quickly track positions and control the risk of open positions on its part (read - to eliminate particularly risky ones). Intraday margin can be established by broker in any amount subject to the risks of a negative balance on the customer's accounts. Intraday margin is set based on the assumption that the trader will close all open positions before the end or at the end of the trading session and can be expressed in a much smaller amount than initial or maintenance margin.
All major assets that are traded in the global financial and commodity markets. All existing instruments of the futures market can be nominally divided into the following categories:
  • Stock index futures: U.S. (S & P 500, Nasdaq 100, NYSE Composite, Dow Jones Industrial), European and other regions and countries.
  • Interest Rate Futures: U.S. Treasury bills, or "bonds" (2 -, 5 -, 10 - and 30-year-olds), Eurodollar, U.S. and European bank interest rates, foreign exchange rates, real estate indices, etc.
  • Currency Futures: Euro, British pound, Japanese yen, Swiss franc, Brazilian real, Russian rubble and many others.
  • Energy Futures: multiple brands of petroleum, natural gas, fuel oil, gasoline, ethanol and others.
  • Precious and non-ferrous metals futures: gold, silver, platinum and palladium. Copper and aluminium.
  • Agricultural futures: several varieties of wheat, corn, soybeans and soybean oil, beans, rice, and other products.
  • Animal products futures: cattle, beef, pork, milk and butter.
  • Food and other products futures: coffee, cocoa, sugar, orange juice, as well as cotton and wood.
  • Futures on separate shares of the stock market.
A futures contract is an agreement in relation to purchase or sale of a certain asset of certain quantity at the fixed date in the future at the price agreed today. Both goods and financial instruments may form the basis of the futures contract. Contracts, the basic assets for which are financial instruments, and namely, securities, stock indices, currencies, bank deposits, precious metals, are called financial futures contracts. A futures contract involves two parties - the buyer and the seller.
  • The buyer undertakes to perform a purchase within the term specified in advance.
  • The seller undertakes to perform a sale within the term specified in advance.
These responsibilities are determined by the name of the asset, the asset size, the term of futures and the price agreed today. Futures contracts are entered into on the specialized trading platforms, called "exchanges". Execution of the futures contract is guaranteed by the exchange (clearing house). After the contract is signed, it is registered with the clearing house. Since then, the clearing house becomes the party to the transaction for both the seller and the buyer, i.e. it acts as the seller for the buyer, and as the buyer for the seller.
  • Standard quantity.Futures usually have a certain standard size or quantity, which is called a contract. For example, the oil futures contract (Light Sweet Crude Oil Futures) amounts to 1,000 barrels, while Eurocurrency futures contract equals to 125,000 euro. Due to such standardization, the buyer and the seller know exactly the amount of goods to be delivered. If you sell one oil futures, then you know you have to sell exactly 1,000 barrels. Only whole number of futures contracts participates in exchange trades. Since the futures contracts are standard and are guaranteed by the clearing house, they are highly liquid. This means that the participant of the transaction can easily close the open position (in the other words, to sell the contract) with the Offset transaction i.e. the transaction that covers the open position. As a result of such operation you win or lose, depending on what price the position is opened and closed.
  • An asset agreed in advance. Imagine that you are the owner of a futures contract for bunt wheat. Let's say you buy one contract for wheat, which entitles you to purchase wheat at the fixed price of $ 640 with delivery in December. It is obvious that something important is missing in this contract and it is: what kind of wheat are you buying? I suppose you wouldn’t want instead of bunt wheat to receive… feed grain. Therefore, all futures contracts envisage: the size of each contract, the delivery date and the specific type of product. It is not enough just to know that one wheat futures contract corresponds to 136 metric tons (or 5k bushels). It is important to have information on the quality, quantity and delivery conditions of the specific asset.
  • Futures maturity. Delivery under futures contracts is performed on the within strictly defined dates, on the so-called "delivery date". The delivery date is a definite period of time when the buyers purchase the goods, and sellers collect money for it. Futures are only valid within the periods fixed in advance. At the end of this period it becomes impossible to make a transaction on a previously specified time periods. Futures deliveries are made within specified periods, upon expiration of which a new delivery date comes into force. If you do not need a delivery, you must close the open position in the futures by offset (reverse) transaction before expiration of the period specified in the contract in the Last Trading Day Specifications.
  • Tick - is the minimum price step at the futures market. Bids in amounts less than the minimum tick are not implemented. Due to the fact that each futures contract has a fixed size, for each contract the minimum price of the tick is calculated. Knowing the tick and the tick price, you can calculate the final profit or loss in the futures market.
  • The use of futures. Futures can be used in a variety of situations: to avoid the risk (hedging) or for high income with the high percentage of risk (speculation). Remember! Futures markets are largely considered to be risky, because the high level of leverage not only provides the opportunity to receive high income, but also, consequently, increases the level of risk. There are three types of participants in futures trading: hedgers, speculators and arbitrageurs:
- The main purpose of the hedger is to reduce the percentage of risk.
- Speculator is looking for the high returns by taking "over" the hedger's risk.
- The purpose of arbitrageur is the income without risk through market mismatches
  • Execution of the futures contract. If the contract participant wishes to perform or accept the delivery, he does not close his position until the day of delivery. In this case, the supplier delivers the goods to the warehouse stipulated in the specifications. The warehouse issues a warrant, which the seller of the futures contract sends to the broker. The futures contract buyer shall pay the full amount of the contract, brokers exchange assets and transfer them to their customers. The actual delivery of goods is carried out from any stock exchange warehouse, which has the right to initiate the delivery. Terms of certain futures contracts can envisage the settlements between the parties in monetary form instead of delivery of the underlying asset.
The specifics of future contract trading:
The futures contract may be conducted only with the mediation of the broker firm that is a member of the exchange. When opening a position according to the contract, its party shall make a down payment (deposit), which is called primary, or deposit, margin. The margin amount is usually from 2 to 10% of the contract value. These funds shall be made into the client account opened in the clearing house for each bidder. Terms of the contracts may permit the initial margin both in cash and securities.
According to the results of the futures trading the clearing house sets daily gains and losses of participants and, consequently, withdraws money from the account of the losing side and transfers it to the account of the winning side.
The contract party can keep its position open for a long time, for example, several days. In this case, the clearing house will still define his winnings or losses for each day.
RISK WARNING: Trading of complex financial products, such as Stocks, Futures, Foreign Exchange ("Forex"), Contracts for Difference ("CFDs"), Indices, Options, or other financial derivatives, on "margin" carries a high level of risk, and may not be suitable for all investors. The possibility exists that you could sustain a loss of some or all of your initial investment and, therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading these markets, and seek advice from an independent financial advisor if you have any questions or doubts. Please carefully read our full "Risk Disclosure" and "Risk Disclosures for Financial Instruments & Investment Services". FXFINPRO Capital is the trading name of PFX Financial Professionals Limited, a limited liability company formed under the laws of Cyprus, registered with the Registrar of Companies in Nicosia, Cyprus, under nr. HE 237840 and regulated by the Cyprus Securities and Exchange Commission with license number 193/13.