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CFTC Consumer Information – Futures Markets Basics

This article was provided by the Commodity Futures Trading Commission (CFTC), a federal government agency, regulates the commodity futures, commodity options, and swaps trading markets.

About the Futures Market

  • Trading commodity futures and options is rarely ever used by individual investors or “retail customers”
  • Trading commodity futures and options is a volatile, complex, and risky venture
  • Many individual investors lose all of the money put in, and could even owe more than that
  • Fraud Advisories from the CFTC alert about possible fraudulent activity

Basics of Futures Trading

  • A futures contract is an agreement between a buyer and a seller
  • The agreement is for one to buy a quantity of a commodity in the future from the seller
  • The agreement details the exact amount of the commodity and the price
  • Most futures contracts contemplate actual delivery of the commodity can take place to fulfill the contract
  • Some futures contracts require cash settlement in lieu of delivery, and most contracts are liquidated before the delivery date
  • A commodity futures options contract gives the buyer the right to convert it into a futures contract
  • Futures and options must be executed through a commodity exchange—with very limited exceptions
  • Futures and options must be executed through persons and firms who are registered with the CFTC

Typical Users of Futures Trading

  • Most futures and option market participants are commercial or institutional commodity users
  • Most participants are called "hedgers" and these participants want the value of their assets’ to increase and limit, if possible, any loss
  • Participants may use the commodity markets to reduce the risk of financial loss due to a price change
  • Other participants are "speculators" who hope to profit from the price changes of the futures or option contract

Regulation of Futures Professionals

  • Companies and individuals who handle customer funds or give trading advice must apply for registration through the National Futures Association, a self-regulatory organization approved by the CFTC
  • The CFTC seeks to protect customers by requiring:
    • market risks and past performance be disclosed to prospective customers
    • customer funds be kept in accounts separate from the firm’s funds for its own use
    • customer accounts be adjusted to reflect  each trading day’s current market value at close
    • The CFTC also monitors registrant supervision systems, internal controls, and sales practice compliance programs
    • The National Futures Association (NFA) provides detailed information for traders at www.nfa.futures.org

Before Putting Any Money in Futures or Options Contracts:

  • Consider your financial experience, goals, and financial resources
  • Know how much you can afford to lose above and beyond your initial payment
  • Understand all of the obligations in entering into those contracts
  • Thoroughly review the risk disclosure documents that are required to be provided by the broker Know whom to contact with a problem or question
  • Ask lots questions and gather information before opening an account
  • Visit www.cftc.gov for general information about trading commodity futures and options

If you have questions, are aware of suspicious activities, or believe you have been defrauded, please let the CFTC know quickly. Call the CFTC or visitwww.cftc.gov/ConsumerProtection/FileaTiporComplaint.

Contact Information

Commodity Futures Trading Commission

1155 21st Street, NW

Washington, DC 20581

866.366.2382 (Consumer Hotline)

202.418.5514 (TTY)

[email protected]

www.cftc.gov/consumerprotection