Contracts with standardized provisions, leaving variable only price and delivery month, dealt in on the contract markets, COMMODITY EXCHANGES licensed by the COMMODITY FUTURES TRADING COMMISSION (CFTC) pursuant to the Commodity Futures Trading Commission Act of 1974 to conduct trading in COMMODITIES for future delivery, and other commodity exchanges not so regulated. By such contracts, the seller agrees to deliver the standard unit quantity of the specific commodity, operating under definitions of the exchange as to basis grade, delivery points, deliverable grades at premiums or discounts relative to basis grade, method of adjustment of premiums and discounts, settlement and delivery procedure, etc.
While most futures contracts are settled by offset prior to delivery, it is the right of a person long to stand for delivery of the physical commodity and of a person short to make such delivery if he so elects. The delivery procedure includes the issuance of a delivery notice, which is a document prepared by the seller notifying the buyer that he intends to deliver on a specified day the commodity specified in the futures contract. The original or a copy of each delivery notice tendered by a clearing member of a contract market is furnished to the Commodity Futures Trading Commission. From these notices and from reports of deliveries made by clearing members data on deliveries are compiled by the commission.
A futures contract is said to be open when it has been entered into and not yet liquidated by an offsetting transaction nor fulfilled by delivery. The amount of open contracts for each commodity and contract market is obtained each day by the Commodity Futures Trading Commission by a tabulation of reports made by exchange clearing members. The aggregate of all long open contracts reported by clearing members equals the aggregate of all short open contracts reported. The daily report of the CFTC, however, shows the figures for one side only, not the long and short sides combined.
Licensed contract markets are subject to limits on traders' position. Any trader whose position in one future of any commodity reaches a specified amount is required to report daily to the CFTC all his trades and positions in that commodity. In making this report, the trader also reports the classification of his position as speculative (including spreading or straddling) or hedging. Use of the futures contract for hedging purposes, described in HEDGING, is not speculation. As explained by Boyle (Speculation and the Chicago Board of Trade):
Besides futures trading, most futures markets also provide separate facilities for spot (cash) trading in commodities. Although the primary function of commodity exchanges is to register existing values for commodities (whether on a spot or futures basis) as the result of interaction of buyers and sellers (whether speculators or hedgers), the notable economic function consists in furnishing manufacturers, processors, and merchants handling the commodity a mechanism for insuring themselves against losses through price fluctuations during the period when their holding of the raw commodity is in the process of fabrication and sale to the ultimate consumer. That is, the commodity exchange is a means by which cash holdings may be hedged against by sale of futures, or vice versa.
After long years of struggle against uninformed hostility and prejudice, futures trading in staple commodities has come into public acceptance and recognition of its functions. For years, the commodity exchanges had to fight a continual battle for existence against disgruntled farmers and business people only too willing, after a sharp commodity price deflation such as in 1920-1921, to blame the commodity exchanges and operations they did not fully understand for the decline in prices. In modern times, futures contract markets have come to be recognized as essential cogs in the distribution system for commodities, and farmers and businesspeople have come to look upon them as organizations to be used rather than abused.
This is particularly true since the Grain Futures Act and most recently the Commodity Futures Trading Commission Act of 1974 placed all futures trading in designated commodity exchanges under statutory and administrative regulation and control by the Commodity Futures Trading Commission. Principal protective features of regulation include the abolition of manipulative practices such as wash sales, cross trades, puts and calls, etc.; prevention of excessive speculation, both by setting daily trading limits to price and by imposing limitations on the daily amount of speculative account; segregation of customers' funds from commission merchant's funds, registration of all commission merchants and floor brokers; prevention of any cheating or defrauding of the public; etc.
Bankers have long looked with favor upon borrowers who hedge inventory positions, where the commodity involved is required in large amounts by the borrowers, as in such cases even mild price decline in the commodity might mean substantial inventory losses, unless appropriately hedged through futures contracts.
The most dynamically growing sector of the futures markets have been the financial futures, including interest-rate futures and currency futures. Among the financial instruments futures actively traded are Government National Mortgage Association (GNMAs) (Chicago Board of Trade); Treasury bonds (Chicago Board of Trade); Treasury bonds (New York Futures Exchange); Treasury bills (International Monetary Market); and bank CDs, both on the Chicago Board of Trade and the International Monetary Market as well as the New York Futures Exchange. Submitted for approval to the COMMODITY FUTURES TRADING COMMISSION were proposals to trade in Treasury note futures, prime rate futures, and options on treasury bond futures. Among the active foreign currency futures traded on the International Monetary Exchange are British pounds, Canadian dollars, Japanese yen, Swiss francs, West German marks, and eurodollar time deposit futures.
Futures can also be traded on markets such as the Chicago Mercantile Exchange, the AMEX, NYSE, and COMEX. Not all financial instruments are handled on each market.
Option volume for exchanges is appended.
Standardized futures contracts are shown in the appended table.
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