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A Guide to the Language of the Futures Industry

The CFTC Glossary is intended to assist the public in understanding some of the specialized words and phrases used in the futures industry since many of these terms are not found in standard reference works. The CFTC Glossary is not inclusive, and if you cannot find the term you are looking for or have any other comments, please let us know.

Definitions are not intended to state or suggest the views of the Commission concerning the legal significance or meaning of any word or term and no definition is intended to state or suggest the Commission’s views concerning any trading strategy or economic theory.

To elect not to exercise or offset a long option position.
Non-competitive trading entered into by a trader, usually to assist another with illegal trades, such as a sale at a below market price intended to create a short-term trading loss for tax purposes that is later reversed.
A contract in which the seller agrees to deliver a specified quantity of a commodity or other asset to the buyer at a pre-determined price on a series of specified accumulation dates over a specified period of time. The contract typically has a “knock-out” price, which, if reached, will trigger the cancellation of all remaining accumulations. Moreover, the amount of the commodity to be delivered may be doubled or otherwise adjusted on those accumulation dates when the price of the asset reaches a specified price different from the knockout price.
A private fund as defined in section 202(a) of the Investment Advisers Act of 1940, that is not a third-party subaccount and that executes 200 or more swaps per month.
The physical or cash commodity, as distinguished from a futures contract. See Cash and Spot Commodity.
The principle under which all futures positions owned or controlled by one trader (or group of traders acting in concert) are combined to determine reporting status and compliance with speculative position limits.
An agricultural commodity is defined in Commission regulation 1.3(zz) as a commodity in one of four categories: (1) the enumerated commodities listed in section 1a of the Commodity Exchange Act, including such things as wheat, cotton, corn, the soybean complex, livestock, etc.; (2) a general operational definition that covers: “All other commodities that are, or once were, or are derived from, living organisms, including plant, animal and aquatic life, which are generally fungible, within their respective classes, and are used primarily for human food, shelter, animal feed, or natural fiber;” (3) a catch-all category for commodities that would generally be recognized as agricultural in nature, but which don’t fit within the general operational definition: “Tobacco, products of horticulture, and such other commodities used or consumed by animals or humans as the Commission may by rule, regulation, or order designate after notice and opportunity for hearing;” and (4) “Commodity-based indexes based wholly or principally on underlying agricultural commodities.”
Off-exchange options on agricultural commodities that are transacted directly between commercial market participants for hedging or risk management purposes.
Any person that is in the business of soliciting or entering option transactions involving an enumerated agricultural commodity that are not conducted or executed on or subject to the rules of an exchange.
The discounts (premiums) allowed for grades or locations of a commodity lower (higher) than the par (or basis) grade or location specified in the futures contract. See Differentials.
An option that can be exercised at any time prior to or on the expiration date. See European Option.
Refers to any market structure in which the identity of the parties placing bids and asks is not disclosed, making it more difficult for one trader to effectively discriminate against another. An order book generally uses anonymous bidding.
Any bank, stockyard, mill, storehouse, plant, elevator, or other depository that is authorized by an exchange for the delivery of commodities tendered on futures contracts.
A strategy involving the simultaneous purchase and sale of identical or equivalent commodity futures contracts or other instruments across two or more markets in order to benefit from a discrepancy in their price relationship. In a theoretical efficient market, there is a lack of opportunity for profitable arbitrage. See Spread.
A process for settling disputes between parties that is less structured than court proceedings. The National Futures Association arbitration program provides a forum for resolving futures-related disputes between NFA members or between NFA members and customers. Other forums for customer complaints include the American Arbitration Association.
A futures price that has been affected by a manipulation and is thus higher or lower than it would have been if it reflected the forces of supply and demand.
An exotic option whose payoff depends on the average price of the underlying asset during some portion of the life of the option.
The price level of an offer, as in bid-ask spread.
A contract that allows the holder to convey his rights to a third party. Exchange-traded contracts are not assignable.
Designation by a clearing organization of an option writer who will be required to buy (in the case of a put) or sell (in the case of a call) the underlying futures contract or security when an option has been exercised, especially if it has been exercised early.
An individual who solicits or accepts (other than in a clerical capacity) orders, discretionary accounts, or participation in a commodity pool, or supervises any individual so engaged, on behalf of a futures commission merchant, an introducing broker, a commodity trading advisor, a commodity pool operator, or an agricultural trade option merchant.
An order to buy or sell a futures contract at whatever price is obtainable when the order reaches the trading facility. See Market Order.
When an option's strike price is the same as the current trading price of the underlying commodity, the option is at-the-money.
The record of trading information identifying, for example, the brokers participating in each transaction, the firms clearing the trade, the terms and time or sequence of the trade, the order receipt and execution time, and, ultimately, and when applicable, the customers involved.
A provision in an option contract specifying that it will be exercised automatically on the expiration date if it is in-the-money by a specified amount, absent instructions to the contrary.
Futures delivery months other than the spot or front month (also called deferred months ).
The department in a financial institution that processes and deals and handles delivery, settlement, and regulatory procedures.
Fixing the price of a commodity for which the commitment to purchase has been made in advance. The buyer can fix the price relative to any monthly or periodic delivery using the futures markets.
A delta-neutral ratio spread in which more options are bought than sold. A back spread will be profitable if volatility increases. See Delta.
Market situation in which futures prices are progressively lower in the distant delivery months. For instance, if the gold quotation for January is $360.00 per ounce and that for June is $355.00 per ounce, the backwardation for five months against January is $5.00 per ounce. (Backwardation is the opposite of contango). See Inverted Market.
See Marking the Close.
A draft or bill of exchange accepted by a bank where the accepting institution guarantees payment. Used extensively in foreign trade transactions.
The difference between the spot or cash price of a commodity and the price of the nearest futures contract for the same or a related commodity (typically calculated as cash minus futures). Basis is usually computed in relation to the futures contract next to expire and may reflect different time periods, product forms, grades, or locations.
The grade of a commodity used as the standard or par grade of a futures contract.
The measurement of a change in the yield of a debt security. One basis point equals 1/100 of one percent.
Offer or sale of a cash commodity in terms of the difference above or below a futures price (e.g., 10 cents over December corn).
The risk associated with an unexpected widening or narrowing of the basis between the time a hedge position is established and the time that it is lifted.
A swap whose cash settlement price is calculated based on the basis between a futures contract (e.g., natural gas) and the spot price of the underlying commodity or a closely related commodity (e.g., natural gas at a location other than the futures delivery location) on a specified date.
One who expects a decline in prices. The opposite of a bull. A news item is considered bearish if it is expected to result in lower prices.
A market in which prices generally are declining over a period of months or years. Opposite of bull market.
A temporary rise in prices during a bear market. See Correction.
(1) A strategy involving the simultaneous purchase and sale of options of the same class and expiration date, but different strike prices. In a bear spread, the option that is purchased has a lower delta than the option that is bought. For example, in a call bear spread, the purchased option has a higher exercise price than the option that is sold. Also called bear vertical spread. (2) The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a decline in prices but at the same time limiting the potential loss if this expectation does not materialize. In agricultural products, this is accomplished by selling a nearby delivery and buying a deferred delivery.
See Bear Spread.
An exotic option which can be exercised on a specified set of predetermined dates during the life of the option
A highly customized swap , usually constructed around the needs of a sophisticated customer with specialized risk exposure.
A measure of the variability of rate of return or value of a stock or portfolio compared to that of the overall market, typically used as a measure of riskiness.
An offer to buy a specific quantity of a commodity at a stated price.
The difference between the bid price and the ask or offer price..
A type of option whose payoff is either a fixed amount or zero. For example, there could be a binary option that pays $100 if a hurricane makes landfall in Florida before a specified date and zero otherwise. Also called a digital option.
An option pricing model initially developed by Fischer Black and Myron Scholes for securities options and later refined by Black for options on futures.
A blind auction, also called a sealed bid auction, is a market structure in which the traders place offers to buy or sell without seeing current bids and offers, as opposed to an order book format where standing bid and offer prices are continuously visible to all market participants.
(1) A large transaction that is negotiated off an exchange’s centralized trading facility and then executed on the trading facility, as permitted under exchange rules. (2) A large notional swap transaction that is exempt from real-time reporting requirements but must be reported to swap data repositories on a delayed basis.
Any organized exchange or other trading facility for the trading of futures, swap and/or option contracts. See 7 USC 1a(6).
An enterprise that often is operated out of inexpensive, low-rent quarters (hence the term 'boiler room'), that uses high pressure sales tactics (generally over the telephone), and possibly false or misleading information to solicit generally unsophisticated investors.
Transactions on a designated contract market or swap execution facility that serve as a substitute for transactions in physical marketing channel and reduce actual risks that a business would otherwise face (without the bona fide hedging transaction) related to the change in value of assets, liabilities, and services.
A series of accounting or bookkeeping entries used to settle a series of cash market transactions.
A forward pricing sales arrangement in which the cash price is determined either by the buyer or seller within a specified time. At that time, the previously-agreed basis is applied to the then-current futures quotation.
An option position in which the owner establishes a long call and a short put at one strike price and a short call and a long put at another strike price, all of which are in the same contract month in the same commodity.
A rapid and sharp price decline.
Any index of securities that does not meet the legal definition of narrow-based security index.
A person paid a fee or commission for executing buy or sell orders for a customer. In commodity futures trading, the term may refer to: (1) Floor broker, a person who actually executes orders on the trading floor of an exchange; (2) Account executive or associated person, the person who deals with customers in the offices of futures commission merchants; or (3) the futures commission merchant.
Two or more persons with exchange trading privileges who (1) share responsibility for executing customer orders; (2) have access to each other's unfilled customer orders as a result of common employment or other types of relationships; or (3) share profits or losses associated with their brokerage or trading activity.
A brokerage enterprise that 'books' (i.e., takes the opposite side of) retail customer orders without actually having them executed on an exchange.
Directly or indirectly taking the opposite side of a customer's order into a broker's own account or into an account in which a broker has an interest, without open and competitive execution of the order on an exchange. Also called trading against .
One who expects a rise in prices. The opposite of bear. A news item is considered bullish if it is expected to result in higher prices.
A market in which prices generally are rising over a period of months or years. Opposite of bear market.
(1) A strategy involving the simultaneous purchase and sale of options of the same class and expiration date but different strike prices. In a bull vertical spread, the purchased option has a higher delta than the option that is sold. For example, in a call bull spread, the purchased option has a lower exercise price than the sold option. Also called bull vertical spread . (2) The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a rise in prices but at the same time limiting the potential loss if this expectation is wrong. In agricultural commodities, this is accomplished by buying the nearby delivery and selling the deferred.
See Bull Spread.
Bars or ingots of precious metals, usually cast in standardized sizes.
A discretionary order entered on behalf of multiple customers.
An executed trade cancelled by an exchange that is considered to have been executed in error.
A three-legged option spread in which each leg has the same expiration date but different strike prices. For example, a butterfly spread in soybean call options might consist of one long call at a $5.50 strike price, two short calls at a $6.00 strike price, and one long call at a $6.50 strike price.
To buy (or sell) at the end of the trading session within the closing price range.
To buy (or sell) at the beginning of a trading session within the opening price range.
A market participant who takes a long futures position or buys an option. An option buyer is also called a taker, holder, or owner.
A purchase of a specified quantity of a specific grade of a commodity at a fixed number of points above or below a specified delivery month futures price with the buyer allowed a period of time to fix the price either by purchasing a futures contract for the account of the seller or telling the seller when he wishes to fix the price. See Seller's Call.
A condition of the market in which there is an abundance of goods available and hence buyers can afford to be selective and may be able to buy at less than the price that previously prevailed. See Seller's Market.
Hedging transaction in which futures contracts are bought to protect against possible increases in the cost of commodities. See Hedger.
'Cost and Freight' paid to a point of destination and included in the price quoted; same as C.A.F.
Cost, insurance, and freight paid to a point of destination and included in the price quoted.
(1) The purchase of one delivery month of a given futures contract and simultaneous sale of a different delivery month of the same futures contract; (2) the purchase of a put or call option and the simultaneous sale of the same type of option with typically the same strike price but a different expiration date. Also called a horizontal spread or time spread.
(1) An option contract that gives the buyer the right but not the obligation to purchase a commodity or other asset or to enter into a long futures position at a specified price on or prior to a specified expiration date; (2) formerly, a period at the opening and the close of some futures markets in which the price for each futures contract was established by auction; or (3) the requirement that a financial instrument such as a bond be returned to the issuer prior to maturity, with principal and accrued interest paid off upon return. See Buyer's Call, Seller's Call.
An auction in which the traders place limit bids and offers over a specified time period and those orders are subsequently matched, as opposed to an order book format where standing bid and offer prices are continuously available to all market participants.
Another term for exercised when an option is a call. In the case of an option on a physical, the writer of a call must deliver the indicated underlying commodity when the option is exercised or called. In the case of an option on a futures contract, a futures position will be created that will require margin, unless the writer of the call has an offsetting position.
Effecting transactions in an instrument underlying an option shortly before the option's expiration date to depress or prevent a rise in the price of the instrument so that previously written call options will expire worthless, thus protecting premiums previously received. See Pegging.
A trade where one borrows a currency or commoidity commodity or currency with a low cost of carry and lends a similar instrument with a high cost of carry in order to profit from the differential.
An exchange member firm, usually a futures commission merchant, through whom another broker or customer elects to clear all or part of its trades.
Also called Cost of Carry. Cost of storing a physical commodity or holding a financial instrument over a period of time. These charges include insurance, storage, and interest on the deposited funds, as well as other incidental costs. It is a carrying charge market when there are higher futures prices for each successive contract maturity. If the carrying charge is adequate to reimburse the holder, it is called a 'full charge'. See Negative Carry, Positive Carry, and Contango.
A situation in which the execution of market orders or stop loss orders on an electronic trading system triggers other stop loss orders which may, in turn, trigger still more stop loss orders. This may lead to a very large price move if there are no safety mechanisms to prevent cascading.
The physical or actual commodity as distinguished from the futures contract, sometimes called spot commodity or actuals.
See Forward Contract.
The market for the cash commodity (as contrasted to a futures contract) taking the form of: (1) an organized, self-regulated central market (e.g., a commodity exchange); (2) a decentralized over-the-counter market; or (3) a local organization, such as a grain elevator or meat processor, which provides a market for a small region.
The price in the marketplace for actual cash or spot commodities to be delivered via customary market channels.
A method of settling futures, options and other derivatives whereby the seller (or short) pays the buyer (or long) the cash value of the underlying commodity or a cash amount based on the level of an index or price according to a procedure specified in the contract.? Also called Financial Settlement. Compare to Physical Delivery.
See Commodity Credit Corporation.
Commodity Exchange Act or Commodity Exchange Authority.
A clearing organization.
A single order book covering an entire market that accepts limit orders. In general, the term is synonymous with order book.
A time deposit with a specific maturity traditionally evidenced by a certificate. Large denomination CDs are typically negotiable.
Stocks of a commodity that have been inspected and found to be of a quality deliverable against futures contracts, stored at the delivery points designated as regular or acceptable for delivery by an exchange. In grain, called stocks in deliverable position. See Deliverable Stocks.
Cancel Former Order.
See Commodity Futures Trading Commission.
Formerly, a clearing member of both the Mid-America Commodity Exchange (MidAm) and another futures exchange who, for a fee, would assume the opposite side of a transaction on MidAm by taking a spread position between MidAm and the other futures exchange that traded an identical, but larger, contract. Through this service, the changer provided liquidity for MidAm and an economical mechanism for arbitrage between the two markets. MidAm was a subsidiary of the Chicago Board of Trade (CBOT). MidAm was closed by the CBOT in 2003 after MidAm contracts were delisted on MidAm and relisted on the CBOT as Mini contracts. The CBOT continued to use changers for former MidAm contracts traded on an open outcry platform.
The use of graphs and charts in the technical analysis of futures markets to plot trends of price movements, average movements of price, volume of trading, and open interest.
Technical trader who reacts to signals derived from graphs of price movements.
Usually refers to the selection of a class of bonds or notes deliverable against an expiring bond or note futures contract. The bond or note that has the highest implied repo rate is considered cheapest to deliver.
An exotic option that is transacted in the present, but that at some specified future date is chosen to be either a put or a call option.
Excessive trading of a discretionary account by a person with control over the account for the purpose of generating commissions while disregarding the interests of the customer.
A system of coordinated trading halts and/or price limits on equity markets and equity derivative markets designed to provide a cooling-off period during large, intraday market declines. The first known use of the term circuit breaker in this context was in the Report of the Presidential Task Force on Market Mechanisms (January 1988), which recommended that circuit breakers be adopted following the market break of October 1987.
Options of the same type (i.e., either puts or calls, but not both) covering the same underlying futures contract or other asset (e.g., a March call with a strike price of 62 and a May call with a strike price of 58).
The procedure through which the clearing organization becomes the buyer to each seller of a futures contract or other derivative, and the seller to each buyer for clearing members.
See Clearing Organization.
See Clearing Organization.
The requirement in the Dodd-Frank Act that certain swap transactions be cleared through a derivatives clearing organization unless the transaction is subject to the end-user exception.
A member of a clearing organization. All trades of a non-clearing member must be processed and eventually settled through a clearing member.
An entity through which futures and other derivative transactions are cleared and settled. It is also charged with assuring the proper conduct of each contract's delivery procedures and the adequate financing of trading. A clearing organization may be a division of a particular exchange, an adjunct or affiliate thereof, or a freestanding entity. Also called a clearing house, multilateral clearing organization, central counterparty, or clearing association. A clearing organization that is registered with the CFTC is known as a Derivatives Clearing Organization. See Central Counterparty.
See Settlement Price.
The exchange-designated period at the end of the trading session during which all transactions are considered made at the close. See Call.
The price (or price range) recorded during trading that takes place in the final period of a trading session's activity that is officially designated as the 'close'.
Liquidating an existing long or short futures or option position with an equal and opposite transaction. Also known as Offset.
The placement of servers used by market participants in close physical proximity to an electronic trading facility's matching engine in order to facilitate high-frequency trading.
Puts and calls held either long or short with different strike prices and/or expirations. Types of combinations include straddles and strangles.
An entity involved in the production, processing, or merchandising of a commodity.
Domestic grain in store in public and private elevators at important markets and grain afloat in vessels or barges in lake and seaboard ports.
Short-term promissory notes issued in bearer form by large corporations, with maturities ranging from 5 to 270 days. Since the notes are unsecured, the commercial paper market generally is dominated by large corporations with impeccable credit ratings.
(1) The charge made by a futures commission merchant for buying and selling futures contracts; or (2) the fee charged by a futures broker for the execution of an order. Note: when capitalized, the word Commission usually refers to the CFTC.
See Open Interest.
A weekly report from the CFTC providing a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. Open interest is broken down by aggregate commercial, non-commercial, and non-reportable holdings.
(1) A commodity, as defined in the Commodity Exchange Act, includes the agricultural commodities enumerated in Section 1a(9) of the Commodity Exchange Act, 7 USC 1a(9),?and all other goods and articles, except onions as provided in Public Law 85-839 (7 USC?13-1), a 1958 law that banned futures trading in onions, and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in; (2)?A physical commodity such as an agricultural product or a natural resource as opposed to a financial instrument such as a currency or interest rate.?See 7 USC 1a(9)
Commodity Credit Corporation: A government-owned corporation established in 1933 to assist American agriculture. Major operations include price support programs, foreign sales, and export credit programs for agricultural commodities.
The Commodity Exchange Act, 7 USC 1, et seq., provides for the federal regulation of commodity futures and options trading and was enacted in 1936.
A regulatory agency of the U.S. Department of Agriculture established to?regulate futures trading under?the Commodity Exchange Act between 1936 and 1975. The Commodity Exchange Authority was the predecessor of the Commodity Futures Trading Commission. Before World War II, this agency was known as the Commodity Exchange Administration. Between 1922 and 1936, the Grain Futures Administration regulated grain futures trading under the Grain Futures Act.
The Commodity Exchange Commission was the successor commission to the Grain Futures Commission, which was created by the Grain Futures Act, enacted on September 21, 1922. The Commodity Exchange Commission, like its predecessor, consisted of the Secretary of Agriculture, Secretary of Commerce, and the Attorney General. The Commodity Exchange Act granted the Commodity Exchange Commission the authority to establish Federal speculative position limits, but not the authority to require exchanges to set their own speculative position limits.
世爵娱乐: The Federal regulatory agency established by the Commodity Futures Trading Act of 1974 to administer the Commodity Exchange Act.
An index of a specified set of (physical) commodity prices or commodity futures prices.
An investment fund that enters into futures or commodity swap positions for the purpose of replicating the return of an index of commodity prices or commodity futures prices.
A swap whose cash flows are intended to replicate a commodity index.
An entity that conducts futures trades on behalf of a commodity index fund or to hedge commodity index swap positions.
An option on a commodity or a futures contract.
An investment trust, syndicate, or similar form of enterprise operated for the purpose of trading commodity futures or option contracts. Typically thought of as an enterprise engaged in the business of investing the collective or “pooled” funds of multiple participants in trading commodity futures or options, where participants share in profits and losses on a pro rata basis. See 7 USC 1a(10).
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 to do so. Managers at hedge funds or their advisors are often registered with the CFTC as CPOs or CTAs. See 7 USC 1a(11).
A person who, for pay, 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. Managers at hedge funds or their advisors are often registered with the CFTC as CPOs or CTAs. See 7 USC 1a(12)
A bond in which payment to the investor is dependent to a certain extent on the price level of a commodity, such as crude oil, gold, or silver, at maturity.
A statement sent by a futures commission merchant to a customer when a futures or options position has been initiated which typically shows the price and the number of contracts bought and sold. See P&S (Purchase and Sale Statement).
(1) A market situation in which shorts attempting to cover their positions are unable to find an adequate supply of contracts provided by longs willing to liquidate or by new sellers willing to enter the market, except at sharply higher prices (see Squeeze, Corner ); (2) in technical analysis, a period of time characterized by repetitious and limited price fluctuations.
A shipment made by a producer or dealer to an agent elsewhere with the understanding that the commodities in question will be cared for or sold at the highest obtainable price. Title to the merchandise shipped on consignment rests with the shipper until the goods are disposed of according to agreement.
Market situation in which prices in succeeding delivery months are progressively higher than in the nearest delivery month; the opposite of contango is backwardation.
(1) A term of reference describing a unit of trading for a commodity future or option or other derivative; (2) an agreement to buy or sell a specified commodity, detailing the amount and grade of the product and the date on which the contract will mature and become deliverable.
Those grades of a commodity that have been officially approved by an exchange as deliverable in settlement of a futures contract.
See Delivery Month.
The actual amount of a commodity represented in a contract.
See Contract Size.
An account for which trading is directed by someone other than the owner. Also called a Managed Account or a Discretionary Account.
The tendency for prices of physicals and futures to approach one another, usually during the delivery month. Also called a 'narrowing of the basis.'
A position created by selling a call option, buying a put option, and buying the underlying instrument (for example, a futures contract), where the options have the same strike price and the same expiration. See Reverse Conversion.
Numbers published by a futures exchange to determine invoice prices for debt instruments deliverable against bond or note futures contracts. A separate conversion factor is published for each deliverable instrument. Invoice price = Contract Size X Futures Settlement Price X Conversion Factor + Accrued Interest.
A provision of the Commodity Exchange Act with which a registered entity such as a designated contract market, swap execution facility, swap data repository, or derivatives clearing organization must comply on an ongoing basis. There are 23 core principles for designated contract markets, 15 core principles for swap execution facilities, 4 core principles for swap data repositories, and 18 core principles for derivatives clearing organizations.
See Feed Ratio.
(1) Securing such relative control of a commodity that its price can be manipulated, that is, can be controlled by the creator of the corner; or (2) in the extreme situation, obtaining contracts requiring the delivery of more commodities than are available for delivery. See Squeeze, Congestion.
A temporary decline in prices during a bull market that partially reverses the previous rally. See Bear Market Rally.
See Carrying Charges.
Total of various charges incurred when a commodity is certified and delivered on a futures contract.
See Commitments of Traders Report.
In technical analysis, the method by which a trader takes a position contrary to the current market direction in anticipation of a change in that direction.
The opposite party in a bilateral agreement, contract, or transaction, such as a swap. In the retail foreign exchange (or Forex) context, the party to which a retail customer sends its funds; lawfully, the party must be one of those listed in Section 2(c)(2)(B)(ii)(I)-(VI) of the Commodity Exchange Act.
The risk associated with the financial stability of the party with whom one has entered into contract. Forward contracts impose upon each party the risk that the counterparty will default, but futures contracts executed on a designated contract market are guaranteed against default by the clearing organization.
A fixed dollar amount of interest payable per annum, stated as a percentage of principal value, usually payable in semiannual installments.
(1) Purchasing futures to offset a short position (same as Short Covering); see Offset, Liquidation; (2) to have in hand the physical commodity when a short futures sale is made, or to acquire the commodity that might be deliverable on a short sale.
A short call or put option position that is covered by the sale or purchase of the underlying futures contract or other underlying instrument. For example, in the case of options on futures contracts, a covered call is a short call position combined with a long futures position. A covered put is a short put position combined with a short futures position.
An option pricing model developed by John Cox, Stephen Ross, and Mark Rubinstein that can be adopted to include effects not included in the Black-Scholes Model (e.g., early exercise and price supports).
See Commodity Pool Operator.
(1) In energy futures, the simultaneous purchase of crude oil futures and the sale of petroleum product futures to establish a refining margin. One can trade a gasoline crack spread, a heating oil crack spread, or a 3-2-1 crack spread which consists of three crude oil futures contracts spread against two gasoline futures contracts and one heating oil futures contract.? The 3-2-1 crack spread is designed to approximate the typical ratio of gasoline and heating oil that results from refining a barrel of crude oil. See Gross Processing Margin. (2)?Calculation showing the theoretical market value of petroleum products that could be obtained from a barrel of crude after the oil is refined or cracked. This does not necessarily represent the refining margin because a barrel of crude yields varying amounts of petroleum products.
A put option that makes a payoff in the event the issuer of a specified reference asset defaults. Also called default option.
A bilateral over-the-counter (OTC) contract in which the seller agrees to make a payment to the buyer in the event of a specified credit event in exchange for a fixed payment or series of fixed payments; the most common type of credit derivative; also called a credit swap; similar to credit default option.
A derivative contract designed to assume or shift credit risk, that is, the risk of a credit event such as a default or bankruptcy of a borrower. For example, a lender might use a credit derivative to hedge the risk that a borrower might default or have its credit rating downgraded. Common credit derivatives include credit default swaps, credit default options, credit spread options,?and total return swaps.
An event such as a debt default or bankruptcy that will affect the payoff on a credit derivative, as defined in the derivative agreement.
A rating determined by a rating agency that indicates the agency’s opinion of the likelihood that a borrower such as a corporation or sovereign nation will be able to repay its debt. The rating agencies include Standard & Poor’s, Fitch, and Moody’s.
The difference between the yield on the debt securities of a particular corporate or sovereign borrower (or a class of borrowers with a specified credit rating) and the yield of similar maturity Treasury bills, notes, or bonds.
An option whose payoff is based on the credit spread between the debt of a particular borrower and similar maturity Treasury bills, notes, or bonds.
See Credit Default Swap.
The time period from one harvest to the next, varying according to the commodity (e.g., July 1 to June 30 for wheat; September 1 to August 31 for soybeans).
In foreign exchange, the price of one currency in terms of another currency in the market of a third country. For example, the exchange rate between Japanese yen and Euros would be considered a cross rate in the U.S. market.
Offsetting or noncompetitive match of the buy order of one customer against the sell order of another, a practice that is permissible only when executed in accordance with the Commodity Exchange Act, CFTC rules, and rules of the exchange.
Hedging a cash market position in a futures or option contract for a different but price-related commodity.
A procedure for margining related securities, options, and futures contracts jointly when different clearing organizations clear each side of the position.
In the soybean futures market, the simultaneous purchase of soybean futures and the sale of soybean meal and soybean oil futures to establish a processing margin. See Gross Processing Margin, Reverse Crush Spread.
See Commodity Trading Advisor.
These consist of four identifiers that describe transactions by the type of customer for which a trade is effected. The four codes are: (1) trading by a person who holds trading privileges for his or her own account or an account for which the person has discretion; (2) trading for a clearing member’s proprietary account; (3) trading for another person who holds trading privileges who is currently present on the trading floor or for an account controlled by such other person; and (4) trading for any other type of customer. Transaction data classified by the above codes?is included in the trade register report produced by a clearing organization.
Trading by telephone or by other means that takes place after the official market has closed and that originally took place in the street on the curb outside the market. Under the Commodity Exchange Act and CFTC rules, curb trading is illegal. Also known as kerb trading.
A swap that involves the exchange of one currency (e.g., U.S. dollars) for another (e.g., Japanese yen) on a specified schedule.
See Spot Month.
The maximum price advance or decline from the previous day's settlement price permitted during one trading session, as fixed by the rules of an exchange.
See Next Day.
An order that expires automatically at the end of each day's trading session. There may be a day order with time contingency. For example, an 'off at a specific time' order is an order that remains in force until the specified time during the session is reached. At such time, the order is automatically canceled.
A trader, often a person with exchange trading privileges, who takes positions and then offsets them during the same trading session prior to the close of trading.
The notional amount of swap positions connected to swap dealing activity below which a person engaged in such activity is not required to register with the CFTC as a swap dealer. In general, the threshold is defined as swap positions with an aggregate gross notional amount of $3 billion over the preceding 12 months ($8 billion during the rules’ phase-in period).
A large trader that declares itself a “Dealer/Merchant” on CFTC Form 40,which provides as examples “wholesaler, exporter/importer, shipper, grain elevator operator, crude oil marketer.”
The orders for purchase or sale of futures and option contracts held by a floor broker.
See Exercise.
See Expiration Date.
Failure to perform on a futures contract as required by exchange rules, such as failure to meet a margin call, or to make or take delivery.
See Credit Default Option.
See Back Months.
See Contract Grades.
Commodities located in exchange-approved storage for which receipts may be used in making delivery on futures contracts. In the cotton trade, the term refers to cotton certified for delivery. Also see Certificated or Certified Stocks.
The total supply of a commodity that meets the delivery specifications of a futures contract. See Economically Deliverable Supply.
The tender and receipt of the actual commodity, the cash value of the commodity, or of a delivery instrument covering the commodity (e.g., warehouse receipts or shipping certificates), used to settle a futures contract. See Notice of Intent to Deliver, Delivery Notice.
The date on which the commodity or instrument of delivery must be delivered to fulfill the terms of a contract.
A document used to effect delivery on a futures contract, such as a warehouse receipt or shipping certificate.
The specified month within which a futures contract matures and can be settled by delivery or the specified month in which the delivery period begins.
The written notice given by the seller of his intention to make delivery against an open short futures position on a particular date. This notice, delivered through the clearing organization, is separate and distinct from the warehouse receipt or other instrument that will be used to transfer title. Also called Notice of Intent to Deliver or Notice of Delivery.
A provision of a futures contract that provides the short with flexibility in regard to timing, location, quantity, or quality in the delivery process.
A location designated by a commodity exchange where stocks of a commodity represented by a futures contract may be delivered in fulfillment of the contract. Also called Location.
The price fixed by the clearing organization at which deliveries on futures are invoiced—generally the price at which the futures contract is settled when deliveries are made. Also called Invoice Price.
Deliveries being made during a present month. Sometimes current delivery is used as a synonym for nearby delivery.
The nearest traded month, the front month. In plural form, one of the nearer trading months.
A calculation of the expected change in an option's price given a one-unit change in the price of the underlying commodity or asset. For example, the price of an option with a delta of 0.5 would be expected to change $0.50 when the underlying commodity or asset’s price moves $1.00.
An option margining system used by some exchanges that equates the changes in option premiums with the changes in the price of the underlying futures contract to determine risk factors upon which to base the margin requirements.
Refers to a position involving options with a value that is independent of the value of the underlying instrument, i.e. that is designed to have an overall delta of zero.
See Initial Margin.
See Vault Receipt.
A financial instrument, traded on or off an exchange, the price of which is directly dependent upon (i.e. derived from) the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement (e.g., the movement over time of the Consumer Price Index or freight rates). They are used to hedge risk or to exchange a floating rate of return for fixed rate of return. Derivatives include futures, options, and swaps. For example, futures contracts with cash settlement are derivatives of the price of a commodity or the value of an index and options on futures are derivatives of futures contracts.
A clearing organization registered with the CFTC that, in respect to a contract (1) enables each party to the contract to substitute, through novation or otherwise, the credit of the derivatives clearing organization for the credit of the parties; (2) arranges or provides, on a multilateral basis, for the settlement or netting of obligations resulting from such contracts; or (3) otherwise provides clearing services or arrangements that mutualize or transfer among participants in the derivatives clearing organization the credit risk arising from such contracts. See 7 USC 1a(15).
A board of trade or exchange designated by the CFTC to trade futures, swaps, and/or options under the CEA. A contract market can allow both institutional and retail participants and can list for trading contracts on any commodity, provided that each contract is not readily susceptible to manipulation.
Self-regulatory organizations (i.e., the commodity exchanges and registered futures associations) that enforce minimum financial and reporting requirements for their members, among other responsibilities outlined in the CFTC's regulations. When a futures commission merchant (FCM) is a member of more than one SRO, the SROs may decide among themselves which of them will assume primary responsibility for these regulatory duties and, upon approval of the plan by the Commission, be appointed the 'designated self-regulatory organization' for that FCM.
A spread between two call options or two put options with different strike prices and different expiration dates. See Horizontal Spread, Vertical Spread.
The discount (premium) allowed for grades or locations of a commodity lower (higher) than the par of basis grade or location specified in the futures contact. See Allowances.
See Binary Option.
Trading strategies designed to speculate on the direction of the underlying market, especially in contrast to volatility trading. Disclosure Document: A statement that must be provided to prospective customers that describes trading strategy, potential risk, commissions, fees, performance, and other relevant information.
(1) The amount a price would be reduced to purchase a commodity of lesser grade; ( 2) sometimes used to refer to the price differences between futures of different delivery months, as in the phrase July at a discount to May indicating that the price for the July futures is lower than that of May.
An arrangement by which the holder of an account gives written power of attorney to someone else, often a commodity trading advisor, to buy and sell without prior approval of the holder; often referred to as a 'managed account or controlled account. DRT ('Disregard Tape') or Not-Held Order: Absent any restrictions, a DRT (Not-Held Order) means any order giving the floor broker complete discretion over price and time in execution of an order, including discretion to execute all, some, or none of this order.
The Dodd-Frank Act amended the Commodity Exchange Act to explicitly prohibit trading activity that (A) violates bids or offers; (B) demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or (C) enters bids and offers with the intent to cancel before execution, also called spoofing.
See Back Month.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law on July 21, 2010. Title VII of the Dodd-Frank Act amends the Commodity Exchange Act to establish a comprehensive new regulatory framework for swaps and security-based swaps. The legislation was enacted to reduce risk, increase transparency, and promote market integrity within the financial system by, among other things: 1) providing for the registration and comprehensive regulation of swap dealers and major swap participants; 2) imposing clearing and trade execution requirements on standardized derivative products; 3) creating robust recordkeeping and reporting regimes (including real-time reporting); and 4) enhancing the Commission’s rulemaking and enforcement authorities with respect to, among others, all registered entities and intermediaries subject to the Commission’s oversight.
The futures contract having the largest amount of open interest.
As used by the CFTC, it implies a situation where a trader holds a long position in the futures market in excess of the speculative position limit as an offset to a fixed price sale, even though the trader has an ample supply of the commodity on hand to fill all sales commitments.
Dual trading occurs when: (1) a floor broker executes customer orders and, on the same day, trades for his own account or an account in which he has an interest; or (2) a futures commission merchant carries customer accounts and also trades or permits its employees to trade in accounts in which it has a proprietary interest, also on the same trading day.
A measure of a bond's price sensitivity to changes in interest rates.
An auction of a debt instrument (such as a Treasury note) in which all successful bidders receive the same yield (the lowest yield that results in the sale of the entire amount to be issued).
A person with trading privileges at an exchange with an electronic trading facility who trades electronically (rather than in a pit or ring) for his or her own account, often at a trading arcade.
Electronic Communications Network, refers to a electronic system for trading in stocks or futures. The critical distinction between an exchange and an ECN is that while both can match and execute trades, only an exchange can list a new security or futures contract. Trades consummated by ECNs are often routed to exchanges for clearing.
That portion of the deliverable supply of a commodity that is in position for delivery against a futures contract, and is not otherwise unavailable for delivery. For example, Treasury bonds held by long-term investment funds are not considered part of the economically deliverable supply of a Treasury bond futures contract.
In economic theory, an efficient market is one in which market prices adjust rapidly to reflect new information. The degree to which the market is efficient depends on the quality of information reflected in market prices. In an efficient market, profitable arbitrage opportunities do not persist and traders cannot expect to consistently outperform the market unless they have lower-cost access to information that is reflected in market prices or unless they have access to information before it is reflected in market prices. See Random Walk.
See Exchange for Physical.
See Energy Information Administration.
A trading facility that operates by an electronic or telecommunications network instead of a trading floor and maintains an automated audit trail of transactions. See 7 USC 1a(16).
An eligible contract participant or other entity approved by the CFTC that has a demonstrable ability to make or take delivery of an underlying commodity of a contract; incurs risks related to the commodity; or is a dealer that regularly provides risk management, hedging services, or market-making activities to entities trading commodities or derivative agreements, contracts, or transactions in commodities. See 7 USC 1a(17).
An entity, such as a financial institution, an insurance company, or commodity pool, that is classified by the Commodity Exchange Act as an eligible contract participant based upon its regulated status or the amount it invests on a discretionary basis. This classification permits these persons to engage in specific transactions (such as trading on a swap execution facility or entering into a bilateral swap trade) not directly available to non-eligible contract participants, i.e., retail customers. See 7 USC 1a(18).
Any market occurrence or circumstance which requires immediate action and threatens or may threaten such things as the fair and orderly trading in, or the liquidation of, or delivery pursuant to, any contracts on a designated contract market.
The Dodd-Frank Act’s provision that exempts non-financial entities that are end users from the clearing mandate thus allowing end users to execute swaps bilaterally for the purpose of hedging or mitigating commercial risk.
An agency of the US Department of Energy that provides statistics, data, analysis on resources, supply, production, consumption for all energy sources. EIA data includes weekly inventory statistics for crude oil and petroleum products as well as weekly natural storage data.
The commodities specifically listed in Section 1a(9) of the Commodity Exchange Act: wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice.
As used on a trading account statement, refers to the residual dollar value of a futures or option trading account, assuming it was liquidated at current prices.
See Exchange Traded Fund.
The euro denominated rate of interest at which banks borrow funds from other banks, in marketable size, in the interbank market. See LIBOR, TIBOR.
The official currency of most members of the European Union.
Certificates of Deposit (CDs), bonds, deposits, or any capital market instrument issued outside of the national boundaries of the currency in which the instrument is denominated (for example, Eurodollars, Euro-Swiss francs, or Euroyen).
U.S. dollar deposits placed with banks outside the U.S. Holders may include individuals, companies, banks, and central banks.
An option that may be exercised only on the expiration date. See American Option.
A unit of trading in a commodity established by an exchange to which official price quotations apply. See Round Lot.
A market in derivatives whose payoff is based on a specified event or occurrence such as the release of a macroeconomic indicator, a corporate earnings announcement, or the dollar value of damages caused by a hurricane.
See Transfer Trades and Exchange for Physicals.
A central marketplace such as a designated contract market with established rules and regulations where buyers and sellers meet to trade futures and options contracts or securities.
A transaction in which the buyer of a cash commodity transfers to the seller a corresponding amount of long futures contracts, or receives from the seller a corresponding amount of short futures, at a price difference mutually agreed upon. In this way, the opposite hedges in futures of both parties are closed out simultaneously. Also called Exchange of Futures for Cash, AA (against actuals), or Ex-Pit transactions.
A general term for privately negotiated trades exchanging a futures position for a related physical or swap position that are transacted off exchange but reported to the designated contract market and submitted to the DCM’s Derivatives Clearing Organization for clearing. Types of EDRP include exchange of futures for physicals (EFP), exchange of futures for swaps (EFS) and exchange of options for options (EOO).
See Exchange for Physicals.
A privately negotiated transaction in which a position in a futures contract is exchanged for a swap position in the same or a related commodity, pursuant to the rules of a futures ~exchange ~~ exchange.
A privately negotiated and simultaneous exchange of a position in an exchange-traded option on a futures contract for a corresponding OTC option position in the same or a related instrument.
The price of one currency stated in terms of another currency.
The delta of an option as computed daily by the exchange on which it is traded.
An investment vehicle holding a commodity or other asset that issues shares that are traded like a stock on a securities exchange.
In general, the Commodity Exchange Act defines an excluded commodity as: any financial instrument such as a security, currency, interest rate, debt instrument, or credit rating; any economic or commercial index other than a narrow-based commodity index; or any other value that is out of the control of participants and is associated with an economic consequence. See 7 USC 1a(19).
The Commodity Exchange Act defines an exempt commodity as any commodity other than an excluded commodity or an agricultural commodity. Examples include energy commodities and metals. See 7 USC 1a(20).
A foreign firm that does business with U.S. customers only on foreign exchanges and is exempt from registration as a futures commission merchant under CFTC regulations based upon compliance with its home country's regulatory framework (also known as a 'Rule 30.10 firm').
The price, specified in the option contract, at which the underlying futures contract, security, or commodity will move from seller to buyer.
Any of a wide variety of options with non-standard payout structures or other features, including Asian options and lookback options.
The date on which an option contract automatically expires; the last day an option may be exercised.
See Time Value.
Indicates that all delivery, inspection and elevation, or loading costs involved in putting commodities on board a carrier have been paid.
A futures spread trade involving the buying (selling) of a five-year Treasury note futures contract and the selling (buying) of a long-term (15-30 year) Treasury bond futures contract.
A futures spread trade involving the buying (selling) of a five-year Treasury note futures contract and the selling (buying) of a ten-year Treasury note futures contract.
An open outcry market situation in which transactions in the pit or ring take place in such volume and with such rapidity that price reporters fall behind with price quotations, label each quote 'FAST' and show a range of prices. Also called a fast tape.
(FERC): An independent agency of the U.S. Government that regulates the interstate transmission of natural gas, oil, and electricity. FERC also regulates natural gas and hydropower projects.
The relationship of the cost of feed, expressed as a ratio to the sale price of animals, such as the corn-hog ratio. These serve as indicators of the profit margin or lack of profit in feeding animals to market weight.
See Federal Energy Regulatory Commission.
See Futures Industry Association.
A number sequence discovered by a thirteenth century Italian mathematician Leonardo Fibonacci (circa 1170-1250), who introduced Arabic numbers to Europe, in which the sum of any two consecutive numbers equals the next highest number—i.e., following this sequence: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, and so on. The ratio of any number to its next highest number approaches 0.618 after the first four numbers. These numbers are used by technical analysts to determine price objectives from percentage retracements.
Wash trading, bucketing, cross trading, or other schemes which give the appearance of trading but actually no bona fide, competitive trade has occurred.
The execution of an order.
An order that demands immediate execution or cancellation. Typically involving a designation, added to an order, instructing the broker to offer or bid (as the case may be) one time only; if the order is not filled immediately, it is then automatically cancelled.
The price at which a cash-settled futures contract is settled at maturity, pursuant to a procedure specified by the exchange.
See Cash settlement.
The first day on which notices of intent to deliver actual commodities against futures market positions can be received. First notice day may vary with each commodity and exchange.
See Gold Fixing.
A security whose nominal (or current dollar) yield is fixed or determined with certainty at the time of purchase, typically a debt security.
A person with exchange trading privileges who, in any pit, ring, post, or other place provided by an exchange for the meeting of persons similarly engaged, executes for another person any orders for the purchase or sale of any commodity for future delivery. See 7 USC 1a(22).
A person with exchange trading privileges who executes his own trades by being personally present in the pit or ring for futures trading. See Local. See 7 USC 1a(23).
A clause in a supply contract that permits either party not to fulfill the contractual commitments due to events beyond their control. These events may range from strikes to export delays in producing countries.
The situation in which a customer's account is liquidated (open positions are offset) by the brokerage firm holding the account, usually after notification that the account is under-margined due to adverse price movements and failure to meet margin calls.
A futures exchange based outside the United States. Foreign boards of trade that wish to offer direct access in the U.S. must register with the CFTC.
Trading in foreign currency.
A transaction that solely involves the exchange of two different currencies on a specific future date at a fixed rate agreed upon on the inception of the contract covering the exchange. See 7 USC 1a(24).
A transaction that solely involves both an exchange of two different currencies on a specific date at a fixed rate that is agreed upon on the inception of the contract covering the exchange; and a reverse exchange of the same two currencies at a later date and at a fixed rate that is agreed upon on the inception of the contract covering the exchange. See 7 USC 1a(25).
Refers to the over-the-counter market for foreign exchange transactions. Also called the foreign exchange market.
A cash transaction common in many industries, including commodity merchandising, in which a commercial buyer and seller agree upon delivery of a specified quality and quantity of goods at a specified future date. Terms may be more 'personalized' than is the case with standardized futures contracts (i.e., delivery time and amount are as determined between seller and buyer). A price may be agreed upon in advance, or there may be agreement that the price will be determined at the time of delivery.
The over-the-counter market for forward contracts.
Futures contracts, currently trading, calling for later or distant delivery. See Deferred Futures, Back Months.
An OTC forward contract on a short-term interest rate. The buyer of a FRA is a notional borrower, i.e., the buyer commits to pay a fixed rate of interest on some notional amount that is never actually exchanged. The seller of a FRA agrees notionally to lend a sum of money to a borrower. FRAs can be used either to hedge interest rate risk or to speculate on future changes in interest rates.
See Contango.
The spot or nearby delivery month, the nearest traded contract month. See Back Month.
With respect to commodity futures and options, taking a futures or option position based upon non-public information regarding an impending transaction by another person in the same or related future or option. Also known as trading ahead.
A delta-neutral ratio spread in which more options are sold than bought. Also called ratio vertical spread. A front spread will increase in value if volatility decreases.
See Carrying Charges.
A commodity pool that invests in other commodity pools rather than directly in futures and options contracts.
Study of basic, underlying factors that will affect the supply and demand of the commodity being traded in futures contracts. See Technical Analysis.
The characteristic of interchangeability. Futures contracts for the same commodity and delivery month traded on the same exchange are fungible due to their standardized specifications for quality, quantity, delivery date, and delivery locations.
See Futures Contract.
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. See 7 USC 1a(28).
An agreement to purchase or sell a commodity for delivery in the future: (1) at a price that is determined at initiation of the contract; (2) that obligates each party to the contract to fulfill the contract at the specified price; (3) that is used to assume or shift price risk; and (4) that may be satisfied by delivery or offset.
(FIA): A membership organization for futures commission merchants (FCMs) which, among other activities, offers education courses on the futures markets, disburses information, and lobbies on behalf of its members.
An option on a futures contract.
(1) Commonly held to mean the price of a commodity for future delivery that is traded on a futures exchange; (2) the price of any futures contract.
A term frequently used with reference to speculative position limits for options on futures contracts. The futures-equivalent of an option position is the number of options multiplied by the previous day's risk factor or delta for the option series. For example, ten deep out-of-money options with a delta of 0.20 would be considered two futures-equivalent contracts. The delta or risk factor used for this purpose is the same as that used in delta-based margining and risk analysis systems.
A measurement of how fast the delta of an option changes, given a unit change in the underlying futures price; the 'delta of the delta.'
A non-competitive trade practice in which a floor broker, in executing an order—particularly a large order—will fill a portion of the order at one price and the remainder of the order at another price to avoid an exchange's rule against trading at fractional increments or 'split ticks.'
A contract executed by one broker for the client of another broker that the client orders to be turned over to the second broker. The broker accepting the order from the customer collects a fee from the carrying broker for the use of the facilities. Often used to consolidate many small orders or to disperse large ones.
The setting of the gold price at 10:30 a.m. (first fixing) and 3:00 p.m. (second fixing) in London by representatives of the London gold market.
The number of ounces of silver required to buy one ounce of gold at current spot prices.
Order which is valid only for the week in which it is placed.
An order which is valid until cancelled by the customer. Unless specified GTC, unfilled orders expire at the end of the trading day. See Open Order.
See Gross Processing Margin.
Various qualities of a commodity.
A formal document setting forth the quality of a commodity as determined by authorized inspectors or graders.
Federal statute that provided for the regulation of trading in grain futures, effective June 22, 1923; administered by the Grain Futures Administration, an agency of the U.S. Department of Agriculture. The Grain Futures Act was amended in 1936 by the Commodity Exchange Act and the Grain Futures Administration became the Commodity Exchange Administration, later the Commodity Exchange Authority.
The maker, writer, or issuer of an option contract who, in return for the premium paid for the option, stands ready to purchase the underlying commodity (or futures contract) in the case of a put option or to sell the underlying commodity (or futures contract) in the case of a call option.
Refers to the difference between the cost of a commodity and the combined sales income of the finished products that result from processing the commodity. Various industries have formulas to express the relationship of raw material costs to sales income from finished products. See Crack Spread, Crush Spread, and Spark Spread.
See Good 'Till Canceled Order.
See Good This Week Order.
An introducing broker that has entered into a guarantee agreement with a futures commission merchant (FCM), whereby the FCM agrees to be jointly and severally liable for all of the introducing broker’s obligations under the Commodity Exchange Act. By entering into the agreement, the introducing broker is relieved from the necessity of raising its own capital to satisfy minimum financial requirements. In contrast, an independent introducing broker must raise its own capital to meet minimum financial requirements.
In computing the value of assets for purposes of capital, segregation, or margin requirements, a percentage reduction from the stated value (e.g., book value or market value) to account for possible declines in value that may occur before assets can be liquidated.
A Speculative Position Limit whose exceedance is a violation of exchange rules and consequently triggers predefined penalties. This is in contrast to a position accountability level, which when exceeded triggers a notification to an exchange but is not itself a violation of exchange rules.
In technical analysis, a chart formation that resembles a human head and shoulders and is generally considered to be predictive of a price reversal. A head and shoulders top (which is considered predictive of a price decline) consists of a high price, a decline to a support level, a rally to a higher price than the previous high price, a second decline to the support level, and a weaker rally to about the level of the first high price. The reverse (upside-down) formation is called a head and shoulders bottom (which is considered predictive of a price rally).
A market in which prices are demonstrating either an inability to advance or a slight tendency to decline.
An exemption from speculative position limits for bona fide hedgers and certain other persons who meet the requirements of exchange and CFTC rules.
A private investment fund or pool that trades and invests in various assets such as securities, commodities, currency, and derivatives on behalf of its clients, typically wealthy individuals. Some commodity pool operators operate hedge funds.
Ratio of the value of futures contracts purchased or sold to the value of the cash commodity being hedged, a computation necessary to minimize basis risk.
A market participant who enters into positions in a futures or other derivatives market opposite to positions held in the cash market to minimize the risk of financial loss from an adverse price change; or who purchases or sells futures as a temporary substitute for a cash transaction that will occur later. One can hedge either a long cash market position (e.g., one owns the cash commodity) or a short cash market position (e.g., one plans on buying the cash commodity in the future).
A natural gas pipeline hub in Louisiana that serves as the delivery point for New York Mercantile Exchange natural gas futures contracts and often serves as a benchmark for wholesale natural gas prices across the U.S.
An order placed on an electronic trading system whereby only a portion of the order is visible to other market participants. As the displayed part of the order is filled, additional quantities become visible. Also called Iceberg, Max Show.
A statistical measure of the volatility (specifically, the annualized standard deviation) of a futures contract, security, or other instrument over a specified number of past trading days.
See Feed Ratio.
An option spread involving the simultaneous purchase and sale of options of the same class and strike prices but different expiration dates. See Diagonal Spread, Vertical Spread.
A security having one or more payments indexed to the value, level, or rate of, or providing for the delivery of, one or more commodities. See 7 USC 1a(29).
See Introducing Broker.
See Hidden Quantity Order.
The rate of return that can be obtained from selling a debt instrument futures contract and simultaneously buying a bond or note deliverable against that futures contract with borrowed funds. The bond or note with the highest implied repo rate is cheapest to deliver.
The volatility of a futures contract, security, or other instrument as implied by the prices of an option on that instrument, calculated using an options pricing model.
Refers to a commodity located where it can readily be moved to another point or delivered on a futures contract. Commodities not so situated are 'out of position.' Soybeans in Mississippi are out of position for delivery in Chicago, but in position for export shipment from the Gulf of Mexico.
The amount of a particular commodity that arrives at terminal or central locations in or near producing areas. When a commodity is 'in sight,' it is inferred that reasonably prompt delivery can be made; the quantity and quality also become known factors rather than estimates.
A term used to describe an option contract that has a positive value if exercised. A call with a strike price of $1100 on gold trading at $1150 is in-the-money 50 dollars. See Intrinsic Value.
The simultaneous purchase (sale) of stock index futures and the sale (purchase) of some or all of the component stocks that make up the particular stock index to profit from sufficiently large intermarket spreads between the futures contract and the index itself. Also see Arbitrage, Program Trading.
Also referred to as indirect trading against. It occurs when a floor broker effectively trades opposite his customer in a pair of non-competitive transactions by buying (selling) opposite an accommodating trader to fill a customer order and by selling (buying) for his personal account opposite the same accommodating trader. The accommodating trader assists the floor broker by making it appear that the customer traded opposite him rather than opposite the floor broker.
Generally a debt instrument (such as a bond or note) on which the payments are adjusted for inflation and deflation. In a typical inflation-indexed instrument, the principal amount is adjusted monthly based on an inflation index such as the Consumer Price Index.
See Initial Margin.
Customers' funds put up as security for a guarantee of contract fulfillment at the time a futures market position is established. See Original Margin.
A tradable asset such as a commodity, security, or derivative, or an index or value that underlies a derivative or could underlie a derivative.
Trades made between counterparties that share the same majority-ownership.
A spread in which the long and short legs are in two different but generally related commodity markets. Also called an intermarket spread. See Spread.
A broker that facilitates bilateral trades between large market participants.
A spread involving two different months of the same commodity. Also called an intracommodity spread. See Spread.
Futures contracts traded on fixed income securities such as U.S. Treasury issues, or based on the levels of specified interest rates such as LIBOR (London Interbank Offered Rate). Currency is excluded from this category, even though interest rates are a factor in currency values.
A swap in which the two counterparties agree to exchange interest rate flows. Typically, one party agrees to pay a fixed rate on a specified series of payment dates and the other party pays a floating rate that may be based on LIBOR (London Interbank Offered Rate) on those payment dates. The interest rates are paid on a specified principal amount called the notional principal.
See Spread and Intercommodity Spread.
A person who acts on behalf of another person in connection with futures trading, such as a futures commission merchant, introducing broker, commodity pool operator, commodity trading advisor, or associated person.
A New York-based group of major international swap dealers, that publishes the Code of Standard Wording, Assumptions and Provisions for Swaps, or Swaps Code, for U.S. dollar interest rate swaps as well as standard master interest rate, credit, and currency swap agreements and definitions for use in connection with the creation and trading of swaps.
See Spread and Interdelivery Spread.
A measure of the value of an option or a warrant if immediately exercised, that is, the extent to which it is in-the-money. The amount by which the current price for the underlying commodity or futures contract is above the strike price of a call option or below the strike price of a put option for the commodity or futures contract.
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. See 7 USC 1a(31).
A futures market in which the nearer months are selling at prices higher than the more distant months; a market displaying 'inverse carrying charges,' characteristic of markets with supply shortages. See Backwardation.
Uncounted stocks of a commodity in the hands of wholesalers, manufacturers, and producers that cannot be identified accurately; stocks outside commercial channels but theoretically available to the market. See Visible Supply.
The price fixed by the clearing house at which deliveries on futures are invoiced—generally the price at which the futures contract is settled when deliveries are made. Also called Delivery Price.
See International Swaps and Derivatives Association.
A form of contract having a smaller unit of trading than is featured in a regular contract.
See Curb Trading.
A provision in an option or other derivative contract, whereby the contract is activated only if the price of the underlying instrument reaches a specified level before a specified expiration date.
A provision in an option or other derivative contract, whereby the contract is immediately canceled if the price of the underlying instrument reaches a specified level during the life of the contract.
A large trader is one who holds or controls a position in any one future or in any one option expiration series of a commodity on any one exchange equaling or exceeding the exchange or CFTC-specified reporting level.
The final day on which notices of intent to deliver on futures contracts may be issued.
The amount of time that elapses between the placement of a market order or marketable limit order on an electronic trading system and the execution of that order.
Long-dated, exchange-traded options. Stands for 'Long-term Equity Anticipation Securities.'
The ability to control large dollar amounts of a commodity or security with a comparatively small amount of capital.
The London Interbank Offered Rate. The rate of interest at which banks borrow funds (denominated in U.S. dollars) from other banks, in marketable size, in the London interbank market. Some interest rate futures contracts, including Eurodollar futures, are cash settled based on LIBOR. Also see EURIBOR and TIBOR.
A warehouse approved by an exchange from which a commodity may be delivered on a futures contract. See Regular Warehouse.
Period between the beginning of trading in a particular futures contract and the expiration of trading. In some cases, this phrase denotes the period already passed in which trading has already occurred. For example, 'The life-of-contract high so far is $2.50.' Same as life of delivery or life of the future.
The maximum price advance or decline from the previous day's settlement price permitted during one trading session, as fixed by the rules of an exchange. In some futures contracts, the limit may be expanded or removed during a trading session a specified period of time after the contract is locked limit. See Daily Price Limit.
See Locked Limit.
The definite price stated by a customer to a broker restricting the execution of an order to buy for not more than, or to sell for not less than, the stated price.
An order in which the customer specifies a minimum sale price or maximum purchase price, as contrasted with a market order, which implies that the order should be filled as soon as possible at the market price.
A market in which selling and buying can be accomplished with minimal effect on price.
The closing out of a long position. The term is sometimes used to denote closing out a short position, but this is more often referred to as covering. See Cover, Offset.
An individual with exchange trading privileges who trades for his own account, traditionally on an exchange floor, and whose activities provide market liquidity. See Floor Trader, E-Local.
A Delivery Point for a futures contract.
A price that has advanced or declined the permissible limit during one trading session, as fixed by the rules of an exchange. Also called Limit Move.
A hedged position that cannot be lifted without offsetting both sides of the hedge (spread). See Hedging. Also refers to being caught in a limit price move.
Refers to the dealers in the London Bullion Market Association who set (fix) the gold price in London. See Gold Fixing.
(1) One who has bought a futures contract to establish a market position; (2) a market position that obligates the holder to take delivery; (3) one who owns an inventory of commodities. See Short.
See Buying Hedge.
A person or firm that has bought the spot commodity and hedged with a sale of futures is said to be long the basis.
An over-the-counter option that is cash settled based on the settlement price of a similar exchange-traded futures contract on a specified trading day.
An over-the-counter swap that is cash settled based on the settlement price of a similar exchange-traded futures contract on a specified trading day.
An exotic option whose payoff depends on the minimum or maximum price of the underlying asset during some portion of the life of the option. Lookback options allow the buyer to pay or receive the most favorable underlying price during the lookback period.
A unit of trading. See Even Lot, Job Lot, and Round Lot.
A hedge fund that specializes in strategies designed to profit from expected macroeconomic events.
Swaps trades that are subject to the clearing mandate, and that have been “Made Available to Trade” by a DCM or SEF must be executed on a DCM or SEF.
See Margin.
see Major Swap Participant and 7 USC 1a(32).
A designation in the Commodity Exchange Act as amended by the Dodd-Frank Act for large traders in swap markets that are not swap dealers. There are three parts to the Dodd-Frank Act definition. A person that satisfies any one of them is an MSP:: 1) A person that maintains a 'substantial position' in any of the major swap categories, excluding positions held for hedging or mitigating commercial risk and positions maintained by certain employee benefit plans for hedging or mitigating risks in the operation of the plan.; (2) A person whose outstanding swaps create 'substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets.'; (3) Any 'financial entity' that is 'highly leveraged relative to the amount of capital such entity holds and that is not subject to capital requirements established by an appropriate Federal banking agency' and that maintains a 'substantial position' in any of the major swap categories. A similar definition applies to security-based swaps. For details see 77 Fed. Reg. 30596 (May 23, 2012). See 7 USC 1a(33).
See Controlled Account and Discretionary Account.
A futures market participant who engages in futures trades on behalf of investment funds or clients. While MMTs are commonly equated with hedge funds, they may include Commodity Pool Operators and other managed accounts as well as hedge funds. While CFTC Form 40 does not provide a place to declare oneself a Managed Money Trader, a large trader can declare itself a “Hedge Fund (H)” or “Managed Accounts and Commodity Pools.”
Any planned operation, transaction, or practice that causes or maintains an artificial price. Specific types include corners and squeezes as well as unusually large purchases or sales of a commodity or security in a short period of time in order to distort prices, and putting out false information in order to distort prices.
A large trader that declares itself a “Manufacturer” on CFTC Form 40, which provides as examples “refiner, miller, crusher, fabricator, sawmill, coffee roaster, cocoa grinder.”
Refers to a trading platform in which multiple participants have the ability to execute or trade commodities, derivatives, or other instruments by accepting bids and offers made by multiple other participants. In contrast to one-to-many platforms, many-to-many platforms are considered trading facilities under the Commodity Exchange Act. Traditional exchanges are many-to-many platforms.
The amount of money or collateral deposited by a customer with his broker, by a broker with a clearing member, or by a clearing member with a clearing organization. The margin is not partial payment on a purchase. Also called Performance Bond. (1) Initial margin is the amount of margin required by the broker when a futures position is opened; (2) Maintenance margin is an amount that must be maintained on deposit at all times. If the equity in a customer's account drops to or below the level of maintenance margin because of adverse price movement, the broker must issue a margin call to restore the customer's equity to the initial level. See Variation Margin. Exchanges specify levels of initial margin and maintenance margin for each futures contract, but futures commission merchants may require their customers to post margin at higher levels than those specified by the exchange. Futures margin is determined by the SPAN margining system, which takes into account all positions in a customer's portfolio.
(1) A request from a brokerage firm to a customer to bring margin deposits up to initial levels; (2) a request by the clearing organization to a clearing member to make a deposit of original margin, or a daily or intra-day variation margin payment because of adverse price movement, based on positions carried by the clearing member.
Part of the daily cash flow system used by U.S. futures exchanges to maintain a minimum level of margin equity for a given futures or option contract position by calculating the gain or loss in each contract position resulting from changes in the price of the futures or option contracts at the end of each trading session. These amounts are added or subtracted to each account balance.
A professional securities dealer or person with trading privileges on an exchange who has an obligation to buy when there is an excess of sell orders and to sell when there is an excess of buy orders. By maintaining an offering price sufficiently higher than their buying price, these firms are compensated for the risk involved in allowing their inventory of securities to act as a buffer against temporary order imbalances. In the futures industry, this term is sometimes loosely used to refer to a floor trader or local who, in speculating for his own account, provides a market for commercial users of the market. Occasionally a futures exchange will compensate a person with exchange trading privileges to take on the obligations of a market maker to enhance liquidity in a newly listed or lightly traded futures contract. See Specialist System.
Refers to the means by which individual trades take place. An example of a broad class of market microstructures is an order book. Another such class covers the markets associated with most OTC derivative trading pre-Dodd-Frank Act in which transactions were negotiated bilaterally over the phone.
An order to buy or sell a futures contract at whatever price is obtainable at the time it is entered in the order book, ring, pit, or other trading platform.
An order that becomes a market order when a particular price is reached. A sell MIT is placed above the market; a buy MIT is placed below the market. Also referred to as a board order. Compare to Stop Order.
An order to buy or sell at the end of the trading session at a price within the closing range of prices. See Stop-Close-Only Order.
An order to buy or sell at the beginning of the trading session at a price within the opening range of prices.
A manipulative or disruptive trading practice whereby a trader buys or sells a large number of futures contracts during the closing period of a futures contract (that is, the period during which the futures settlement price is determined) in order to benefit an even larger position in an option, swap, or other derivative that is cash settled based on the futures settlement price on that day. Also called “Banging the Close.”
A set of rules (encoded in software in the case of electronic markets) for determining when and if bids and offers are matched to one another.
Period within which a futures contract can be settled by delivery of the actual commodity.
See Hidden Quantity Order.
See Limit (Up or Down) and Daily Price Limit.
Commission charged for the execution of an order for a person who is a member of or has trading privileges at the exchange.
Refers to a futures contract that has a smaller contract size than an otherwise identical futures contract.
A hybrid commercial forward contract for agricultural products that includes a provision guaranteeing the person making delivery a minimum price for the product. For agricultural commodities, these contracts became much more common with the introduction of exchange-traded options on futures contracts, which permit buyers to hedge the price risks associated with such contracts.
Smallest increment of price movement possible in trading a given contract.
See Minimum Price Fluctuation.
Refers to standards for market microstructure that all Swap Execution Facilities (SEFs) must offer. Generally, Minimum Trading Functionality requires SEFs to allow traders to execute transactions using an order book.
A mixed swap is a swap that has characteristics of both a swap and a security-based swap. For example, a credit default swap on a single firm that includes contingencies based on the price of a commodity, would be considered a mixed swap. Mixed swaps are subject to joint oversight by the CFTC and the SEC. See 7 U.S.C. §1a(47)(D).
Million British Thermal Units, the unit of trading in the natural gas futures market.
A spread between the municipal bond futures contract and the Treasury bond contract, also known as munis over bonds.
In technical analysis, the relative change in price over a specific time interval. Often equated with speed or velocity and considered in terms of relative strength.
The market for short-term debt instruments.
See Clearing Organization.
The sale of a call or put option without holding an equal and opposite position in the underlying instrument. Also referred to as an uncovered option, naked call, or naked put.
In general, the Commodity Exchange Act defines a narrow-based security index as an index of securities that meets one of the following four requirements (1) it has nine or fewer components; (2) one component comprises more than 30 percent of the index weighting; (3) the five highest weighted components comprise more than 60 percent of the index weighting, or (4) the lowest weighted components comprising in the aggregate 25 percent of the index’s weighting have an aggregate dollar value of average daily volume over a six-month period of less than $50 million ($30 million if there are at least 15 component securities). However, the legal definition in Section 1a(35) of the Commodity Exchange Act contains several exceptions to this provision. See Broad-Based Security Index, Security Future. See 7 USC 1a(35).
National Futures Association (NFA): A self-regulatory organization whose members include futures commission merchants, commodity pool operators, commodity trading advisors, introducing brokers, designated contract markets, swap execution facilities, 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.
The month of the futures contract closest to maturity; the front month or lead month.
The cost of financing a financial instrument (the short-term rate of interest), when the cost is above the current return of the financial instrument. See Carrying Charges and Positive Carry.
The value of each unit of participation in a commodity pool.
The difference between the open long contracts and the open short contracts held by a trader in any one commodity.
The process of calculating aggregate risk exposures across the portfolios of market participant. For example, if a trader has entered one trade in which she is long $100 worth of corn and another where she is short $90 of corn, her risk exposure after netting would be long $10 worth of corn. The rules by which netting occurs can have important ramifications for margin requirements. If, in the example above, the traders’ two positions were on different exchanges without any arrangement for netting, she might be required to post collateral as if she had not hedged her position by entering into off-setting agreements.
A spot contract that provides for delivery of a commodity on the next calendar day or the next business day. Also called day ahead.
National Futures Association.
A futures spread trade involving the buying (selling) of a Treasury note futures contract and the selling (buying) of a Treasury bond futures contract.
Computed price quotation on a futures or option contract for a period in which no actual trading took place, usually an average of bid and asked prices or computed using historical or theoretical relationships to more active contracts.
Any day on which notices of intent to deliver on futures contracts may be issued.
A notice that must be presented by the seller of a futures contract to the clearing organization prior to delivery. The clearing organization then assigns the notice and subsequent delivery instrument to a buyer. Also notice of delivery.
In an interest rate swap, forward rate agreement, or other derivative instrument, the amount or, in a currency swap, each of the amounts to which interest rates are applied in order to calculate periodic payment obligations. Also called the notional amount, the contract amount, the reference amount, and the currency amount.
See One Cancels the Other Order.
See Over-the-Counter.
An indication of willingness to sell at a given price; opposite of bid, the price level of the offer may be referred to as the ask.
Liquidating a purchase of futures contracts through the sale of an equal number of contracts of the same delivery month, or liquidating a short sale of futures through the purchase of an equal number of contracts of the same delivery month. See Closing Out and Cover.
An account carried by one futures commission merchant, the carrying FCM, for another FCM, the originating FCM, in which the transactions of two or more persons, who are customers of the originating FCM, are combined and carried by the carrying FCM. Omnibus account titles must clearly show that the funds and trades therein belong to customers of the originating FCM. An originating broker must use an omnibus account to execute or clear trades for customers at a particular exchange where it does not have trading or clearing privileges.
(1) A type of deferred delivery in which the price is set f.o.b. seller's location, and the buyer agrees to pay freight costs to his destination; (2) commodities loaded in railroad cars on tracks.
A pair of orders, typically limit orders, whereby if one order is filled, the other order will automatically be cancelled. For example, an OCO order might consist of an order to buy 10 calls with a strike price of 50 at a specified price or buy 20 calls with a strike price of 55 (with the same expiration date) at a specified price.
Refers to a proprietary trading platform in which the platform operator posts bids and offers for commodities, derivatives, or other instruments and serves as a counterparty to every transaction executed on the platform. In contrast to many-to-many platforms, one-to-many platforms are not considered trading facilities under the Commodity Exchange Act.
The total number of futures contracts long or short in a delivery month or market that has been entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery. Also called open contracts or open commitments.
An order that remains in force until it is canceled or until the futures contracts expire. See Good Till Canceled and Good This Week orders.
A method of public auction, common to most U.S. commodity exchanges during the 20th century, where trading occurs on a trading floor and traders may bid and offer simultaneously either for their own accounts or for the accounts of customers. Transactions may take place simultaneously at different places in the trading pit or ring. At most exchanges open outcry has been replaced or largely replaced by electronic trading platforms. See Specialist System.
The unrealized gain or loss on open futures positions.
The period at the beginning of the trading session officially designated by the exchange during which all transactions are considered made 'at the opening'
The price (or price range) recorded during the period designated by the exchange as the official opening.
A contract that gives the buyer the right, but not the obligation, to buy or sell a specified quantity of a commodity or other instrument at a specific price within a specified period of time, regardless of the market price of that instrument. Also see Put and Call.
The person who buys calls, puts, or any combination of calls and puts.
See Delta.
The person who originates an option contract by promising to perform a certain obligation in return for the price or premium of the option. Also known as option grantor or option seller.
A market structure, electronic or through other means of communication, whereby bids and offers are matched exclusively based on their price and/or the time that they arrived at the market.
Term applied to the initial deposit of margin money each clearing member firm is required to make according to clearing organization rules based upon positions carried, determined separately for customer and proprietary positions; similar in concept to the initial margin or security deposit required of customers by exchange rules. See Initial Margin.
See Over-the-Counter.
See In Position.
A trade that cannot be cleared by a clearing organization because the trade data submitted by the two clearing members or two traders involved in the trade differs in some respect (e.g., price and/or quantity). In such cases, the two clearing members or traders involved must reconcile the discrepancy, if possible, and resubmit the trade for clearing. If an agreement cannot be reached by the two clearing members or traders involved, the dispute would be settled by an appropriate exchange committee.
A term used to describe an option that has no intrinsic value. For example, a call with a strike price of $400 on gold trading at $390 is out-of-the-money 10 dollars.
An order to buy or sell only one specific type of futures contract; an order that is not a spread order.
The trading of commodities, contracts, or other instruments not listed on any exchange. OTC transactions can occur electronically or over the telephone. Also referred to as Off-Exchange.
A technical opinion that the market price has risen too steeply and too fast in relation to underlying fundamental factors. Rank and file traders who were bullish and long have turned bearish.
A trade which is not liquidated during the same trading session during which it was established.
A technical opinion that the market price has declined too steeply and too fast in relation to underlying fundamental factors; rank and file traders who were bearish and short have turned bullish.
A statement sent by a futures commission merchant to a customer when any part of a futures position is offset, showing the number of contracts involved, the prices at which the contracts were bought or sold, the gross profit or loss, the commission charges, the net profit or loss on the transactions, and the balance. Futures commission merchants also send P&S Statements whenever any other event occurs that alters the account balance including when the customer deposits or withdraws margin and when the FCM places excess margin in interest bearing instruments for the customer’s benefit.
The profit or loss that would be realized if open contracts were liquidated as of a certain time or at a certain price.
(1) Refers to the standard delivery point(s) and/or quality of a commodity that is deliverable on a futures contract at contract price. Serves as a benchmark upon which to base discounts or premiums for varying quality and delivery locations; (2) in bond markets, an index (usually 100) representing the face value of a bond.
An option whose valuation and payoff depends on the realized price path of the underlying asset, such as an Asian option or a Lookback option.
A shorthand method of referring to the payment of a loss (pay) and receipt of a gain (collect) by a clearing member to or from a clearing organization that occurs after a futures position has been marked-to-market. See Variation Margin.
Effecting transactions in an instrument underlying an option to prevent a decline in the price of the instrument shortly prior to the option's expiration date so that previously written put options will expire worthless, thus protecting premiums previously received. See Capping.
See Margin.
This term is used in rules for swap execution facilities to describe illiquid or bespoke swaps and swaps transactions that are not subject to the trade execution mandate. Unlike required transactions, permitted transactions can be executed on SEFs using any method of execution.
A contract or derivative that provides for the physical delivery of a commodity rather than cash settlement. See Financial.
A tangible commodity rather than a financial commodity, typically an agricultural commodity, energy commodity or a metal.
A provision in a futures contract or other derivative for delivery of the actual commodity to satisfy the contract. In the context of a financial derivative, that means delivering the actual underlying asset (often bonds). Compare to cash settlement.
The smallest price unit of a commodity or currency.
A specially constructed area on the trading floor of some exchanges where trading in a futures contract or option is conducted. On certain other exchanges, the term ring designates the trading area for commodity contract.
A statement prepared by futures commission merchants to show profit or loss on all open contracts using an official closing or settlement price, usually at calendar month end.
A method of charting that uses prices to form patterns of movement without regard to time. It defines a price trend as a continued movement in one direction until a reversal of a predetermined criterion is met.
Named after Charles Ponzi, a man with a remarkable criminal career in the early 20th century, the term has been used to describe pyramid arrangements whereby an enterprise makes payments to investors from the proceeds of a later investment rather than from profits of the underlying business venture, as the investors expected, and gives investors the impression that a legitimate profit-making business or investment opportunity exists, where in fact it is a mere fiction.
One of the major cuts of the hog carcass that, when cured, becomes bacon.
A service that helps market participants identify positions in a portfolio of OTC derivatives that are redundant after netting across a pool of other portfolios of OTC derivatives. After identifying redundant trades, Portfolio Compression Service providers will suggest ways to substitute overlapping and redundant positions for a smaller position in notional terms that provides the same net risk exposure. In general, portfolio compression services are intended to reduce the outstanding trade count and outstanding gross notional value of two or more market participants’ portfolios. See Risk Mitigation Service.
A trading strategy that uses stock index futures and/or stock index options to protect stock portfolios against market declines.
A method for setting margin requirements that evaluates positions as a group or portfolio and takes into account the potential for losses on some positions to be offset by gains on others. Specifically, the margin requirement for a portfolio is typically set equal to an estimate of the largest possible decline in the net value of the portfolio that could occur under assumed changes in market conditions. Sometimes referred to as risked-based margining. Also see Strategy-Based Margining.
An interest in the market, either long or short, in the form of one or more open contracts.
A rule adopted by an exchange in lieu of position limits requiring persons holding a certain number of outstanding contracts to report the nature of the position, trading strategy, and hedging information of the position to the exchange, upon request of the exchange. See Speculative Position Limit.
See Speculative Position Limit.
A commodity trader who either buys or sells contracts and holds them for an extended period of time, as distinguished from a day trader, who will normally initiate and offset a futures position within a single trading session.
The cost of financing a financial instrument (the short-term rate of interest), where the cost is less than the current return of the financial instrument. See Carrying Charges and Negative Carry.
Describes markets where basic data on recent transactions (such as the price and terms of the transactions) is promptly and routinely reported to the market participants and the public. See Pre-Trade Transparency and Transparency.
Describes markets where basic data on proposed transactions (such as the prices and quantities of the best bid and offer) are generally available to market participants. See Post-Trade Transparency and Transparency.
Trading between brokers in accordance with an expressed or implied agreement or understanding, which is a violation of the Commodity Exchange Act and CFTC regulations.
(1) The payment an option buyer makes to the option writer for granting an option contract; (2) the amount a price would be increased to purchase a better quality commodity; (3) refers to a futures delivery month selling at a higher price than another, as 'July is at a premium over May' Price Banding: A CME Group and ICE-instituted mechanism to ensure a fair and orderly market on an electronic trading platform. This mechanism subjects all incoming orders to price verification and rejects all orders with clearly erroneous prices. Price bands are monitored throughout the day and adjusted if necessary.
A CME Group and ICE-instituted mechanism to ensure a fair and orderly market on an electronic trading platform. This mechanism subjects all incoming orders to price verification and rejects all orders with clearly erroneous prices. Price bands are monitored throughout the day and adjusted if necessary.
A situation where producers, processors, merchants, or consumers of a commodity establish commercial transaction prices based on the futures prices for that or a related commodity (e.g., an offer to sell corn at 5 cents over the December futures price).
The process of determining the price level for a commodity through the interaction of buyers and sellers and based on supply and demand conditions.
(1) For producers, their major purchaser of commodities; (2) to processors, the market that is the major supplier of their commodity needs; and (3) in commercial marketing channels, an important center at which spot commodities are concentrated for shipment to terminal markets.
A large trader that declares itself a “Producer” on CFTC Form 40, which provides as examples, “farmer” and “miner.” A firm that extracts crude oil or natural gas from the ground would also be considered a Producer.
The purchase (or sale) of a large number of stocks contained in or comprising a portfolio. Originally called program trading when index funds and other institutional investors began to embark on large -scale buying or selling campaigns or 'programs' to invest in a manner that replicates a target stock index, the term now also commonly includes computer-aided stock market buying or selling programs, and index arbitrage.
The date on which the buyer of an option will buy or sell the underlying commodity (or futures contract) if the option is exercised.
A proprietary trading group, especially one where the group's traders trade electronically at a physical facility operated by the group.
An account that a futures commission merchant (FCM) carries for itself or a closely related person, such as a parent, subsidiary or affiliate company, general partner, director, associated person, or an owner of 10 percent or more of the capital stock. The FCM must segregate customer funds from funds related to proprietary accounts.
An organization whose owners, employees, and/or contractors trade in the name of accounts owned by the group and exclusively use the funds of the group for all of their trading activity.
In trade parlance, non-professional speculators as distinguished from hedgers and professional speculators or traders.
Grain elevators in which bulk storage of grain is provided to the public for a fee. Grain of the same grade but owned by different persons is usually mixed or commingled as opposed to storing it 'identity preserved.' Some elevators are approved by exchanges as regular for delivery on futures contracts, see Regular Warehouse.
See P&S.
An option contract that gives the holder the right but not the obligation to sell a specified quantity of a particular commodity, security, or other asset or to enter into a short futures position at a given price (the strike price) prior to or on or prior to a specified expiration date.
The use of profits on existing positions as margin to increase the size of the position, normally in successively smaller increments.
The definition of QEP is too complex to summarize here; please see Qualified Eligible Person (QEP) CFTC Regulation 4.7(a)(2) and (a)(3), 17 CFR 4.7(a)(2) and (a)(3),for the full definition.
The actual price or the bid or ask price of either cash commodities or futures contracts.
An upward movement of prices.
An economic theory that market price movements move randomly. This assumes an efficient market. The theory also assumes that new information comes to the market randomly. Together, the two assumptions imply that market prices move randomly as new information is incorporated into market prices. The theory implies that the best predictor of future prices is the current price, and that past prices are not a reliable indicator of future prices. If the random walk theory is correct, technical analysis cannot work.
The difference between the high and low price of a commodity, futures, or option contract during a given period.
The number of options compared to the number of futures contracts bought or sold in order to establish a hedge that is neutral or delta neutral.
This strategy, which applies to both puts and calls, involves buying or selling options at one strike price in greater number than those bought or sold at another strike price. Ratio spreads are typically designed to be delta neutral. Back spreads and front spreads are types of ratio spreads.
See Front Spread.
A downward price movement after a price advance.
The reporting of basic data on most swaps transactions (including price and volume to swap data repositories in real time, as required under the Commodity Exchange Act).
An asset, such as a corporate or sovereign debt instrument, that underlies a credit derivative.
Any of several types of organizations that facilitate activity in derivatives markets and are registered with the CFTC, including designated contract markets (DCMs), derivatives clearing organizations (DCOs), swap execution facilities (SEFs), and swap data repositories (SDRs). SEFs and SDRs were created by the Dodd-Frank Act. See 7 USC 1a(40).
A processing plant or warehouse that satisfies exchange requirements for financing, facilities, capacity, and location and has been approved as acceptable for delivery of commodities against futures contracts. See Licensed Warehouse.
A portfolio of assets for which changes in value match those of a target asset. For example, a portfolio replicating a standard option can be constructed with certain amounts of the asset underlying the option and bonds. Sometimes referred to as a synthetic asset.
A transaction in which one party sells a security to another party while agreeing to repurchase it from the counterparty at some date in the future, at an agreed price. Repos allow traders to short-sell securities and allow the owners of securities to earn added income by lending the securities they own. Through this operation the counterparty is effectively a borrower of funds to finance further. The rate of interest used is known as the repo rate.
Sizes of positions set by the exchanges and/or the CFTC at or above which commodity traders or brokers who carry these accounts must make daily reports about the size of the position by commodity, by delivery month, and whether the position is controlled by a commercial or non-commercial trader. See the Large Trader Reporting Program.
A trading system or platform whereby market participants transmit a request for buy or sell prices for a specific instrument and transaction size to other market participants, similar to a competitive bidding process.
Refers to those swaps transactions on swap execution facilities that are subject to the trade execution mandate and thus must be traded on a SEF or DCM. CFTC rules require SEFs to offer certain methods of execution for required transactions. See Permitted Transaction.
In technical analysis, a price area where new selling will emerge to dampen a continued rise. See Support.
A limit order to buy at a price below or to sell at a price above the prevailing market that is being held by a floor broker. Such orders may either be day orders or open orders.
A customer that does not qualify as an eligible contract participant under Section 1a(18) of the Commodity Exchange Act, 7 USC 1a(18). An individual with total assets that do not exceed $10 million, or $5 million if the individual is entering into an agreement, contract, or transaction to manage risk, would be considered a retail customer.
In specific circumstances, some exchanges permit holders of futures contracts who have received a delivery notice through the clearing organization to sell a futures contract and return the notice to the clearing organization to be reissued to another long; others permit transfer of notices to another buyer. In either case, the trader is said to have retendered the notice.
A reversal within a major price trend.
A change of direction in prices. See Reverse Conversion.
With regard to options, a position created by buying a call option, selling a put option, and selling the underlying instrument (for example, a futures contract). See Conversion. Reverse Crush Spread: The sale of soybean futures and the simultaneous purchase of soybean oil and meal futures. See Crush Spread.
The sale of soybean futures and the simultaneous purchase of soybean oil and meal futures. See Crush Spread.
Trading in an interest rate futures contract according to the expectations of change in the yield curve.
See pit.
See Delta.
Similar to Portfolio Compression Services, Risk Mitigation Service providers evaluate the portfolio of a swaps market participant and enter into new trades with counterparties in the service providers’ network based on the overall risk profile of their client’s portfolio. However, unlike Portfolio Compression Services, Risk Mitigation Services are not restricted to netting out redundant positions. Risk Mitigation Services may result in new positions that modify the overall risk profile of the client.
The relationship between the probability of loss and profit. This ratio is often used as a basis for trade selection or comparison.
See Portfolio Margining.
A trading procedure involving the shift of one month of a straddle into another future month while holding the other contract month. The shift can take place in either the long or short straddle month. The term also applies to lifting a near futures position and re-establishing it in a more deferred delivery month.
A quantity of a commodity equal in size to the corresponding futures contract for the commodity. See Even Lot.
See Wash Trading.
A completed transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase.
The principles for governing an exchange. In some exchanges, rules are adopted by a vote of the membership, while in others, they can be imposed by the governing board.
Messengers or clerks on a trading floor who deliver orders received by phone clerks to brokers for execution in the pit.
Usually the lowest quality of a commodity, too low to be acceptable for delivery in satisfaction of futures contracts.
To purchase or sell a scale down means to buy or sell at regular price intervals in a declining market. To buy or sell on scale up means to buy or sell at regular price intervals as the market advances.
Traditionally, a speculator, often with exchange trading privileges (a local), who buys and sells rapidly, with small profits or losses, holding his positions for only a short time during a trading session. Typically, a scalper will stand ready to buy at a fraction below the last transaction price and to sell at a fraction above, e.g., to buy at the bid and sell at the offer or ask price, with the intent of capturing the spread between the two, thus creating market liquidity. See Day Trader, Position Trader.
A form of auction where buyers submit one concealed bid (or sellers submit one concealed offer, in the case of a reverse auction). After a round of bidding has closed, submitted bids are compared and the person with the highest bid wins the award and pays the amount of his bid to the seller. (Again this process is reversed in the case of a reverse auction.) In a sealed bid, market participants cannot see their competitors’ price submissions so they must base their own submission exclusively on their own willingness-to-pay for the auctioned item.
An instrument granting trading privileges on an exchange. If the exchange has a mutual ownership structure, a seat may also represent an ownership interest in the exchange.
SEC: The Federal regulatory agency established in 1934 to administer Federal securities laws.
Generally, a transferable instrument representing an ownership interest in a corporation (equity security or stock) or the debt of a corporation, municipality, or sovereign. Other forms of debt such as mortgages can be converted into securities. Certain derivatives on securities (e.g., options on equity securities and security based swaps) are also considered securities for the purposes of the securities laws. Security futures products are considered to be both securities and futures products. Futures contracts on broad-based securities indexes are not considered securities. See 7 USC 1a(41).
See Margin.
A contract for the sale or future delivery of a single security or of a narrow-based security index. See 7 USC 1a(31). See 7 USC 1a(44).
A security future or any put, call, straddle, option, or privilege on any security future. See 7 USC 1a(45).
Any agreement, contract, or transaction that otherwise meets the definition of a swap but is also designated a security by the Securities Exchange Act of 1934. In practice, security-based swaps base their payments on variables that are closely tied to the major categories of securities that are regulated by the SEC, including swaps based on a single equity or debt security, single name credit default swaps, or swaps based on narrow-based security indexes. See 7 USC 1a(42).
A swap dealer that deals in security based swaps under SEC regulation. See 7 USC 1a(43).
A swap execution facility regulated by the SEC where security-based swaps are executed.
The requirement that FCMs keep customer funds such as margin deposits separate from the firms’ own funds.
Exchanges and registered futures associations that enforce financial and sales practice requirements for their members. See Designated Self-Regulatory Organizations.
Seller's call, also referred to as call purchase, is the same as the buyer's call except that the seller has the right to determine the time to fix the price. See Buyer's Call.
A condition of the market in which there is a scarcity of goods available and hence sellers can obtain better conditions of sale or higher prices. See Buyer's Market.
The right of a seller to select, within the limits prescribed by a contract, the quality of the commodity delivered and the time and place of delivery.
Selling futures contracts to protect against possible decreased prices of commodities. See Hedging.
Options of the same type (i.e., either puts or calls, but not both), covering the same underlying futures contract or other underlying instrument, having the same strike price and expiration date.
The act of fulfilling the delivery requirements of the futures contract.
The daily price at which the clearing organization clears all trades and settles all accounts between clearing members of each contract month. Settlement prices are used to determine both margin calls and invoice prices for deliveries. The term also refers to a price established by the exchange to even up positions which may not be able to be liquidated in regular trading.
A negotiable instrument used as the futures delivery instrument for certain physical commodities. The shipping certificate is issued by exchange-approved facilities and represents a commitment by the facility to deliver the commodity to the holder of the certificate under the terms specified therein. Unlike an issuer of a warehouse receipt, who has physical product in store, the issuer of a shipping certificate may honor its obligation from current production or through-put as well as from inventories.
A temporary restriction in the trading of certain stock index futures contracts that becomes effective following a significant intraday decrease in stock index futures prices. Designed to provide an adjustment period to digest new market information, the restriction bars trading below a specified price level. Shock absorbers are generally market specific and at tighter levels than circuit breakers.
(1) The selling side of an open futures contract; (2) a trader whose net position in the futures market shows an excess of open sales over open purchases. See Long.
See Cover.
See Selling Hedge.
Selling a futures contract or other instrument with the idea of delivering on it or offsetting it at a later date.
See Squeeze.
The purchase of futures as a hedge against a commitment to sell in the cash or spot markets. See Hedging.
An electronic trading venue in which one dealer is the counterparty to and market maker for all trades. Unlike trading facilities, the firm involved in every trade is itself a dealer, looking to profit from its trading.
A futures contract on a single stock as opposed to a stock index. Single stock futures were illegal in the U.S. prior to the passage of the Commodity Futures Modernization Act of 2000. See Security Future, Security Futures Product.
Traders who hold or control positions in futures or options that are below the reporting level specified by the exchange or the CFTC.
(1) A description of a price that is gradually weakening; or (2) this term also refers to certain 'soft' commodities such as sugar, cocoa, and coffee.
Certain agricultural commodities such as sugar, cocoa, and coffee.
As developed by the Chicago Mercantile Exchange, the industry standard for calculating performance bond requirements ( margins) on the basis of overall portfolio risk. SPAN calculates risk for all enterprise levels on derivative and non-derivative instruments at numerous exchanges and clearing organizations worldwide.
The differential between the price of electricity and the price of natural gas or other fuel used to generate electricity, expressed in equivalent units. See Gross Processing Margin.
A type of trading commonly formerly used for the exchange trading of securities in which one individual or firm acts as a market-maker in a particular security, with the obligation to provide fair and orderly trading in that security by offsetting temporary imbalances in supply and demand by trading for the specialist's own account. Like Open Outcry, the specialist system was supplanted by electronic trading during the early 21st century. In 2008, the New York Stock Exchange replaced the specialist system with a competitive dealer system. Specialists were converted into Designated Market Makers who have a different set of privileges and obligations than specialists had.
A rapid run-up in prices caused by excessive buying that is unrelated to any of the basic, underlying factors affecting the supply or demand for a commodity or other asset. Speculative bubbles are usually associated with a 'bandwagon' effect in which speculators rush to buy the commodity (in the case of futures, 'to take positions' before the price trend ends, and an even greater rush to sell the commodity (unwind positions) when prices reverse.
See Speculative Position Limit.
The maximum position, either net long or net short, in one commodity future (or option) or in all futures (or options) of one commodity combined that may be held or controlled by one person (other than a person eligible for a hedge exemption) as prescribed by an exchange and/or by the CFTC.
In commodity futures, a trader who does not hedge, but who trades with the objective of achieving profits through the successful anticipation of price movements.
A condition that refers to price differences in transactions at the close of any market session.
See Disruptive Trading Practice.
Market of immediate delivery of and payment for the product.
(1) The actual commodity as distinguished from a futures contract; (2) sometimes used to refer to cash commodities available for immediate delivery. See Actuals or Cash Commodity.
The futures contract that matures and becomes deliverable during the present month. Also called Current Delivery Month.
The price at which a physical commodity for immediate delivery is selling at a given time and place. See Cash Price.
The purchase of one futures delivery month against the sale of another futures delivery month of the same commodity; the purchase of one delivery month of one commodity against the sale of that same delivery month of a different commodity; or the purchase of one commodity in one market against the sale of the commodity in another market, to take advantage of a profit from a change in price relationships. The term spread is also used to refer to the difference between the price of a futures month and the price of another month of the same commodity. A spread can also apply to options. See Arbitrage.
A market situation in which the lack of supplies tends to force shorts to cover their positions by offset at higher prices. Also see Congestion, Corner.
See Self-Regulatory Organization.
A stop limit order is an order that goes into force as soon as there is a trade at the specified price. The order, however, can only be filled at the stop limit price or better. Compare to Stop Order.
A provision applicable to futures traded on the CME’s Globex electronic trading system designed to prevent excessive price movements caused by cascading stop orders. Stop Logic Functionality introduces a momentary pause in matching (Reserved State) when triggered stops would cause the market to trade outside predefined values. The momentary pause provides an opportunity for additional bids or offers to be posted.
See Stop Order.
This is an order that becomes a market order when a particular price level is reached. A sell stop is placed below the market, a buy stop is placed above the market. Sometimes referred to as stop loss order. Compare to market-if-touched order.
A stop order that can be executed, if possible, only during the closing period of the market. See also Market-on-Close Order.
(1) See Spread; (2) an option position consisting of the purchase of put and call options having the same expiration date and strike price.
A term for a fully electronic administrative system backstopping financial trades. Currently, trades may involve some data reentry or manual processing. This may lengthen the time between when a trade is made and when it can be settled. Straight Through Processing offers a reduction in settlement and clearing risk.
An option position consisting of the purchase of put and call options having the same expiration date, but different strike prices.
A method for setting margin requirements whereby the potential for gains on one position in a portfolio to offset losses on another position is taken into account only if the portfolio implements one of a designated set of recognized trading strategies as set out in the rules of an exchange or clearing organization. Also see Portfolio Margining.
A daily record kept by futures commission merchants and clearing members showing details of each futures and option transaction, including date, price, quantity, market, commodity, future, strike price, option type, and the person for whom the trade was made.
The price, specified in the option contract, at which the underlying futures contract, security, or commodity will move from seller to buyer.
A sequence of futures contract months (e.g., the June, July, and August natural gas futures contracts) that can be executed as a single transaction.
A book-entry system operated by the Federal Reserve permitting separate trading and ownership of the principal and coupon portions of selected Treasury securities. It allows the creation of zero coupon Treasury securities from designated whole bonds.
In technical analysis, a price area where new buying is likely to come in and stem any decline. See Resistance.
The statutory definition of “swap” is detailed and comprehensive, though certain agreements, contracts, and transactions are excluded from the definition. It includes, for example, interest rate swaps, commodity swaps, currency swaps, equity swaps and credit default swaps. Congress directed both the Commission and the Securities and Exchange Commission to further define the term “swap” (and security-based swap) jointly. The Commissions in 2012 adopted rules and interpretations to clarify that a few types of transactions in particular are swaps. These include foreign currency options, commodity options, non-deliverable forwards in foreign exchange, cross-currency swaps, forward rate agreements, contracts for differences, options to enter into swaps and forward swaps. See 7 U.S.C. §1a(47) and 17 C.F.R. 1.3.
Swap data repositories (SDRs) are registered entities created by the Dodd-Frank Act that collect and maintain information or records with respect to transactions or positions in, or the terms and conditions of, swaps entered into by third parties for the purpose of providing a centralized recordkeeping facility for swaps. See 7 U.S.C. §1a(48).
The Dodd-Frank Act and subsequent CFTC rules, in general, identify a “swap dealer” as any person who:1. holds itself out as a dealer in swaps, 2. makes a market in swaps; 3. regularly enters into swaps with counterparties as an ordinary course of business for its own account, or 4. engages in activity causing itself to be commonly known in the trade as a dealer or market maker in swaps.The CFTC requires that persons engaged in these activities register as swaps dealers after they have reached a “de minimis” threshold, meaning that, the aggregate gross notional amount of the swaps, with certain exceptions, that the person enters into over the prior 12 months in connection with dealing activities exceeds $3 billion. (This threshold is currently set at $8 billion, as part of a phase-in period.) See 7 USC 1a(49)
A trading system or platform created by the Dodd-Frank Act in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce. The Dodd-Frank Act imposed different statutory provisions on SEFs than on designated contract markets. See 7 USC 1a(50).
A guarantee of a swap is a collateral promise by a guarantor to answer for the debt or obligation of a counterparty obligor under a swap.
An option to enter into a swap - i.e., the right, but not the obligation, to enter into a specified type of swap at a specified future date.
Offsetting a position in one delivery month of a commodity and simultaneous initiation of a similar position in another delivery month of the same commodity, a tactic referred to as 'rolling forward'.
A position created by combining call and put options. A synthetic long futures contract is created by combining a long call option and a short put option for the same expiration date and the same strike price. A synthetic short futures contract is created by combining a long put and a short call with the same expiration date and the same strike price.
Market risk due to factors that cannot be eliminated by diversification.
The risk that a default by one market participant will have repercussions on other participants due to the interlocking nature of financial markets. For example, Customer A’s default in X market may affect Intermediary B’s ability to fulfill its obligations in Markets X, Y, and Z.
See Treasury Bond.
An approach to forecasting commodity prices that examines patterns of price change, rates of change, and changes in volume of trading and open interest, without regard to underlying fundamental market factors. Technical analysis can work consistently only if the theory that price movements are a random walk is incorrect. See Fundamental Analysis.
(1) The difference between the interest rate on three-month U.S. Treasury bills and three-month LIBOR; (2) traditionally, the difference between the price of the three-month U.S. Treasury bill futures contract and the price of the three-month Eurodollar time deposit futures contract with the same expiration month (Treasury Over Eurodollar).
To give notice to the clearing organization of the intention to initiate delivery of the physical commodity in satisfaction of a short futures contract. Also see Retender.
See Contract Grades.
An elevator located at a point of greatest accumulation in the movement of agricultural products that stores the commodity or moves it to processors.
Usually synonymous with commodity exchange or futures market, specifically in the United Kingdom.
A daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the Japan wholesale money market (or interbank market). See EURIBOR, LIBOR.
Refers to a minimum change in price up or down. An up-tick means that the last trade was at a higher price than the one preceding it. A down-tick means that the last price was lower than the one preceding it. See Minimum Price Fluctuation.
The tendency of an option to decline in value as the expiration date approaches, especially if the price of the underlying instrument is exhibiting low volatility. See Time Value.
The selling of a nearby option and buying of a more deferred option with the same strike price. Also called Horizontal Spread.
That portion of an option's premium that exceeds the intrinsic value. The time value of an option reflects the probability that the option will move into-the-money. Therefore, the longer the time remaining until expiration of the option, the greater its time value. Also called Extrinsic Value.
A transaction providing for subsequent delivery within a stipulated time limit of a specific grade of a commodity.
A type of credit derivative in which one counterparty receives the total return (interest payments and any capital gains or losses) from a specified reference asset and the other counterparty receives a specified fixed or floating cash flow that is not related to the creditworthiness of the reference asset. Also called total rate of return swap, or TR swap.
A commodity option transaction in which the purchaser is reasonably believed by the writer to be engaged in business involving use of that commodity or a related commodity.
(1) A merchant involved in cash commodities; (2) a professional speculator who trades for his own account and who typically holds exchange trading privileges.
See Front Running.
A facility, often operated by a clearing member that clears trades for locals, where e-locals who trade for their own account can gather to trade on an electronic trading facility (especially if the exchange is all-electronic and there is no pit or ring).
An exchange rule which permits the parties to a futures trade during a trading day to agree that the price of the trade will be that day’s settlement price (or the settlement price plus or minus a specified differential).
In general, a person or group of persons that provides a physical or electronic facility or system in which multiple participants have the ability to execute or trade agreements, contracts, or transactions by accepting bids and offers made by other participants in the facility or system or through the interaction of multiple bids or multiple offers within a system with a pre-determined non-discretionary automated trade matching and execution algorithm. See Many-to-Many. See 7 USC 1a(51).
A physical trading facility where traders make bids and offers via open outcry or the specialist system.
The entry or liquidation of a trade.
A term used on some exchanges to describe a notice of delivery. See Retender.
Entries made upon the books of futures commission merchants for the purpose of: (1) transferring existing trades from one account to another within the same firm where no change in ownership is involved; (2) transferring existing trades from the books of one futures commission merchant (FCM) to the books of another FCM where no change in ownership is involved.
A contract that permits a position in the option market to be offset by a transaction on the opposite side of the market in the same contract.
Transparency in financial markets refers to the ability of a wide group of market participants and the public to access basic information describing market activity including the price at which a product, service, or asset is trading. Post-trade transparency refers to information about trades that have recently occurred, including execution price and transaction information. Pre-trade transparency refers to information about bids and offers, including bid-ask spreads and quantities available.
Short-term zero coupon U.S. government obligations, generally issued with various maturities of up to one year.
Long-term (more than ten years) obligations of the U.S. government that pay interest semiannually until they mature, at which time the principal and the final interest payment is paid to the investor.
Same as Treasury bonds except that Treasury notes are medium-term (more than one year but not more than ten years).
The general direction, either upward or downward, in which prices have been moving.
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All orders not filled by the end of a trading day are deemed 'unable' and void, unless they are designated GTC ( Good Till Canceled) or open.
See Naked Option.
The cash commodity underlying a futures contract. Also, the commodity or futures contract on which a commodity option is based, and which must be accepted or delivered if the option is exercised.
A price limit schedule, determined by an exchange, that permits variations above or below the normally allowable price movement for any one trading day.
Payment made on a daily or intraday basis by a clearing member to the clearing organization based on adverse price movement in positions carried by the clearing member, calculated separately for customer and proprietary positions.
A document indicating ownership of a commodity stored in a bank or other depository and frequently used as a delivery instrument in precious metal futures contracts.
Coefficient measuring the sensitivity of an option value to a change in volatility.
Any of several types of option spread involving the simultaneous purchase and sale of options of the same class and expiration date but different strike prices, including bull vertical spreads, bear vertical spreads, back spreads, and front spreads. See Horizontal Spread and Diagonal Spread.
Usually refers to supplies of a commodity in licensed warehouses. Often includes floats and all other supplies 'in sight' in producing areas. See Invisible Supply.
An interdealer broker who brokers derivatives transactions via telephone, instant message, or similar means of communication.
A statistical measurement (the annualized standard deviation of returns) of the rate of price change of a futures contract, security, or other instrument underlying an option. See Historical Volatility, Implied Volatility.
Refers to the quoting of bids and offers on option contracts in terms of their implied volatility rather than as prices.
A delta-neutral option spread designed to speculate on changes in the volatility of the market rather than the direction of the market.
Strategies designed to speculate on changes in the volatility of the market rather than the direction of the market.
Named for former United States Federal Reserve Chairman Paul Volcker, the Volcker Rule is a section of the Dodd-Frank Act that generally prohibits banking entities from engaging in proprietary trading or certain other high risk investments or strategies.
The number of contracts traded during a specified period of time. It is most commonly quoted as the number of contracts traded, but for some physical commodities may be quoted or as the total of physical units, such as bales, or bushels, pounds or dozens or barrels.
A document certifying possession of a commodity in a licensed warehouse that is recognized for delivery purposes by an exchange.
An issuer-based product that gives the buyer the right, but not the obligation, to buy (in the case of a call) or to sell (in the case of a put) a stock or a commodity at a set price during a specified period.
Certificate of physical deposit, which gives title to physical metal in an exchange-approved warehouse.
See Wash Trading.
Entering into, or purporting to enter into, transactions to give the appearance that purchases and sales have been made, without incurring market risk or changing the trader's market position. The Commodity Exchange Act prohibits wash trading. Also called Round Trip Trading, Wash Sales.
A derivative whose payoff is based on a specified weather event, for example, the average temperature in Chicago in January. Such a derivative can be used to hedge risks related to the demand for heating fuel or electricity.
Refers to a provision of any physical delivery Treasury bond or Treasury note futures contract that permits shorts to wait until as late as 8:00 p.m. Chicago time on any notice day to announce their intention to deliver at invoice prices that are fixed at 2:00 p.m., the close of futures trading, on that day.
Wheat that is planted in the fall, lies dormant during the winter, and is harvested beginning about May of the next year.
A procedure common in derivatives markets that allows negotiated transactions to expand. In a work-up, after a price and quantity for a bilateral deal have been set, the parties involved can offer to expand the quantity of the deal, until the other party objects. In the case of brokered deals, third parties can similarly offer (through the broker) to expand the size of the trade until the appetite on one side of the trade has been exhausted.
The issuer, grantor, or seller of an option contract.
No entries defined
A graphic representation of market yield for a fixed income security plotted against the maturity of the security. The yield curve is positive when long-term rates are higher than short-term rates.
The rate of return an investor receives if a fixed income security is held to maturity.
Refers to a debt instrument that does not make coupon payments, but, rather, is issued at a discount to par and redeemed at par at maturity.
7 USC 1a(6): The term board of trade means any organized exchange or other trading facility.
7 USC 1a(9) Commodity The term 'commodity' means wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice, and all other goods and articles, except onions (as provided by section 13–1 of this title) and motion picture box office receipts (or any index, measure, value, or data related to such receipts), and all services, rights, and interests (except motion picture box office receipts, or any index, measure, value or data related to such receipts) in which contracts for future delivery are presently or in the future dealt in.
7 USC 1a(10) Commodity pool (A) In general The term 'commodity pool' means any investment trust, syndicate, or similar form of enterprise operated for the purpose of trading in commodity interests, including any - (i)commodity for future delivery, security futures product, or swap; (ii)agreement, contract, or transaction described in section 2(c)(2)(C)(i) of this title or section 2(c)(2)(D)(i) of this title;(iii)commodity option authorized under section 6c of this title; or (iv)leverage transaction authorized under section 23 of this title.(B) Further definition The Commission, by rule or regulation, may include within, or exclude from, the term commodity pool any investment trust, syndicate, or similar form of enterprise if the Commission determines that the rule or regulation will effectuate the purposes of this chapter.
7 USC 1a(11) Commodity pool operator (A) In general The term commodity pool operator means any person - (i)engaged in a business that is of the nature of a commodity pool, investment trust, syndicate, or similar form of enterprise, and who, in connection therewith, solicits, accepts, or receives from others, funds, securities, or property, either directly or through capital contributions, the sale of stock or other forms of securities, or otherwise, for the purpose of trading in commodity interests, including any (I)commodity for future delivery, security futures product, or swap; (II)agreement, contract, or transaction described in section 2(c)(2)(C)(i) of this title or section 2(c)(2)(D)(i) of this title; (III)commodity option authorized under section 6c of this title; or (IV)leverage transaction authorized under section 23 of this title; or (ii)who is registered with the Commission as a commodity pool operator. (B) Further definition The Commission, by rule or regulation, may include within, or exclude from, the term commodity pool operator any person engaged in a business that is of the nature of a commodity pool, investment trust, syndicate, or similar form of enterprise if the Commission determines that the rule or regulation will effectuate the purposes of this chapter.
(15) Derivatives clearing organization (A) In general The term “derivatives clearing organization” means a clearinghouse, clearing association, clearing corporation, or similar entity, facility, system, or organization that, with respect to an agreement, contract, or transaction— (i)enables each party to the agreement, contract, or transaction to substitute, through novation or otherwise, the credit of the derivatives clearing organization for the credit of the parties; (ii)arranges or provides, on a multilateral basis, for the settlement or netting of obligations resulting from such agreements, contracts, or transactions executed by participants in the derivatives clearing organization; or (iii)otherwise provides clearing services or arrangements that mutualize or transfer among participants in the derivatives clearing organization the credit risk arising from such agreements, contracts, or transactions executed by the participants. (B) Exclusions The term “derivatives clearing organization” does not include an entity, facility, system, or organization solely because it arranges or provides for— (i)settlement, netting, or novation of obligations resulting from agreements, contracts, or transactions, on a bilateral basis and without a central counterparty; (ii)settlement or netting of cash payments through an interbank payment system; or (iii)settlement, netting, or novation of obligations resulting from a sale of a commodity in a transaction in the spot market for the commodity.
(16) Electronic trading facility The term “electronic trading facility” means a trading facility that— (A)operates by means of an electronic or telecommunications network; and (B)maintains an automated audit trail of bids, offers, and the matching of orders or the execution of transactions on the facility.
(19) Excluded commodity The term “excluded commodity” means— (i)an interest rate, exchange rate, currency, security, security index, credit risk or measure, debt or equity instrument, index or measure of inflation, or other macroeconomic index or measure; (ii)any other rate, differential, index, or measure of economic or commercial risk, return, or value that is— (I)not based in substantial part on the value of a narrow group of commodities not described in clause (i); or (II)based solely on one or more commodities that have no cash market; (iii)any economic or commercial index based on prices, rates, values, or levels that are not within the control of any party to the relevant contract, agreement, or transaction; or (iv)an occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or level of a commodity not described in clause (i)) that is— (I)beyond the control of the parties to the relevant contract, agreement, or transaction; and (II)associated with a financial, commercial, or economic consequence.
(20) Exempt commodity The term “exempt commodity” means a commodity that is not an excluded commodity or an agricultural commodity.
22) Floor broker (A) In general The term “floor broker” means any person— (i)who, in or surrounding any pit, ring, post, or other place provided by a contract market for the meeting of persons similarly engaged, shall purchase or sell for any other person— (I)any commodity for future delivery, security futures product, or swap; or (II)any commodity option authorized under section 6c of this title; or (ii)who is registered with the Commission as a floor broker. (B) Further definition The Commission, by rule or regulation, may include within, or exclude from, the term “floor broker” any person in or surrounding any pit, ring, post, or other place provided by a contract market for the meeting of persons similarly engaged who trades for any other person if the Commission determines that the rule or regulation will effectuate the purposes of this chapter.
23) Floor trader (A) In general The term “floor trader” means any person— (i)who, in or surrounding any pit, ring, post, or other place provided by a contract market for the meeting of persons similarly engaged, purchases, or sells solely for such person’s own account— (I)any commodity for future delivery, security futures product, or swap; or (II)any commodity option authorized under section 6c of this title; or (ii)who is registered with the Commission as a floor trader. (B) Further definition The Commission, by rule or regulation, may include within, or exclude from, the term “floor trader” any person in or surrounding any pit, ring, post, or other place provided by a contract market for the meeting of persons similarly engaged who trades solely for such person’s own account if the Commission determines that the rule or regulation will effectuate the purposes of this chapter.
(24) Foreign exchange forward The term “foreign exchange forward” means a transaction that solely involves the exchange of 2 different currencies on a specific future date at a fixed rate agreed upon on the inception of the contract covering the exchange.
(25) Foreign exchange swap The term “foreign exchange swap” means a transaction that solely involves— (A)an exchange of 2 different currencies on a specific date at a fixed rate that is agreed upon on the inception of the contract covering the exchange; and (B)a reverse exchange of the 2 currencies described in subparagraph (A) at a later date and at a fixed rate that is agreed upon on the inception of the contract covering the exchange.
(28) Futures commission merchant (A) In general The term “futures commission merchant” means an individual, association, partnership, corporation, or trust— (i)that— (I)is— (aa)engaged in soliciting or in accepting orders for— (AA)the purchase or sale of a commodity for future delivery; (BB)a security futures product; (CC)a swap; (DD)any agreement, contract, or transaction described in section 2(c)(2)(C)(i) of this title or section 2(c)(2)(D)(i) of this title; (EE)any commodity option authorized under section 6c of this title; or (FF)any leverage transaction authorized under section 23 of this title; or (bb)acting as a counterparty in any agreement, contract, or transaction described in section 2(c)(2)(C)(i) of this title or section 2(c)(2)(D)(i) of this title; and (II)in or in connection with the activities described in items (aa) or (bb) of subclause (I), accepts any money, securities, or property (or extends credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom; or (ii)that is registered with the Commission as a futures commission merchant. (B) Further definition The Commission, by rule or regulation, may include within, or exclude from, the term “futures commission merchant” any person who engages in soliciting or accepting orders for, or acting as a counterparty in, any agreement, contract, or transaction subject to this chapter, and who accepts any money, securities, or property (or extends credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom, if the Commission determines that the rule or regulation will effectuate the purposes of this chapter.
(29) Hybrid instrument The term “hybrid instrument” means a security having one or more payments indexed to the value, level, or rate of, or providing for the delivery of, one or more commodities.
(31) Introducing broker (A) In general The term “introducing broker” means any person (except an individual who elects to be and is registered as an associated person of a futures commission merchant)— (i)who— (I)is engaged in soliciting or in accepting orders for— (aa)the purchase or sale of any commodity for future delivery, security futures product, or swap; (bb)any agreement, contract, or transaction described in section 2(c)(2)(C)(i) of this title or section 2(c)(2)(D)(i) of this title; (cc)any commodity option authorized under section 6c of this title; or (dd)any leverage transaction authorized under section 23 of this title; and (II)does not accept any money, securities, or property (or extend credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom; or (ii)who is registered with the Commission as an introducing broker. (B) Further definition The Commission, by rule or regulation, may include within, or exclude from, the term “introducing broker” any person who engages in soliciting or accepting orders for any agreement, contract, or transaction subject to this chapter, and who does not accept any money, securities, or property (or extend credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom, if the Commission determines that the rule or regulation will effectuate the purposes of this chapter.
32) Major security-based swap participant The term “major security-based swap participant” has the meaning given the term in section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)).
(D) Mixed swap The term “security-based swap” includes any agreement, contract, or transaction that is as described in section 3(a)(68)(A) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(68)(A)) and also is based on the value of 1 or more interest or other rates, currencies, commodities, instruments of indebtedness, indices, quantitative measures, other financial or economic interest or property of any kind (other than a single security or a narrow-based security index), or the occurrence, non-occurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence (other than an event described in subparagraph (A)(iii)).
(40) Registered entity The term “registered entity” means— (A)a board of trade designated as a contract market under section 7 of this title; (B)a derivatives clearing organization registered under section 7a–1 of this title; (C)a board of trade designated as a contract market under section 7b–1 of this title; (D)a swap execution facility registered under section 7b–3 of this title; (E)a swap data repository registered under section 24a of this title; and (F)with respect to a contract that the Commission determines is a significant price discovery contract, any electronic trading facility on which the contract is executed or traded.
(44) Security future The term “security future” means a contract of sale for future delivery of a single security or of a narrow-based security index, including any interest therein or based on the value thereof, except an exempted security under section 3(a)(12) of the Securities Exchange Act of 1934 [15 U.S.C. 78c(a)(12)] as in effect on January 11, 1983 (other than any municipal security as defined in section 3(a)(29) of the Securities Exchange Act of 1934 [15 U.S.C. 78c(a)(29)] as in effect on January 11, 1983). The term “security future” does not include any agreement, contract, or transaction excluded from this chapter under section 2(c), 2(d), 2(f), or 2(g) of this title (as in effect on December 21, 2000) or sections 27 to 27f of this title.
(45) Security futures product The term “security futures product” means a security future or any put, call, straddle, option, or privilege on any security future.
(42) Security-based swap The term “security-based swap” has the meaning given the term in section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)).
(43) Security-based swap dealer The term “security-based swap dealer” has the meaning given the term in section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)).
(48) Swap data repository The term “swap data repository” means any person that collects and maintains information or records with respect to transactions or positions in, or the terms and conditions of, swaps entered into by third parties for the purpose of providing a centralized recordkeeping facility for swaps.
(49) Swap dealer (A) In general The term “swap dealer” means any person who— (i)holds itself out as a dealer in swaps; (ii)makes a market in swaps; (iii)regularly enters into swaps with counterparties as an ordinary course of business for its own account; or (iv)engages in any activity causing the person to be commonly known in the trade as a dealer or market maker in swaps, provided however, in no event shall an insured depository institution be considered to be a swap dealer to the extent it offers to enter into a swap with a customer in connection with originating a loan with that customer. (B) Inclusion A person may be designated as a swap dealer for a single type or single class or category of swap or activities and considered not to be a swap dealer for other types, classes, or categories of swaps or activities. (C) Exception The term “swap dealer” does not include a person that enters into swaps for such person’s own account, either individually or in a fiduciary capacity, but not as a part of a regular business. (D) De minimis exception The Commission shall exempt from designation as a swap dealer an entity that engages in a de minimis quantity of swap dealing in connection with transactions with or on behalf of its customers. The Commission shall promulgate regulations to establish factors with respect to the making of this determination to exempt.
(50) Swap execution facility The term “swap execution facility” means a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, including any trading facility, that— (A)facilitates the execution of swaps between persons; and (B)is not a designated contract market.
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