Settlement is the act of consummating the contract, and can be done in one of two ways, as specified per type of futures contract:
* Physical delivery – the amount specified of the underlying asset of the contract is delivered by the seller of the contract to the exchange, and by the exchange to the buyers of the contract. Physical delivery is common with commodities and bonds. In practice, it occurs only on a minority of contracts. Most are cancelled out by purchasing a covering position – that is, buying a contract to cancel out an earlier sale (covering a short), or selling a contract to liquidate an earlier purchase (covering a long). The Nymex crude futures contract uses this method of settlement upon expiration
* Cash settlement – a cash payment is made based on the underlying reference rate, such as a short term interest rate index such as Euribor, or the closing value of a stock market index. The parties settle by paying/receiving the loss/gain related to the contract in cash when the contract expires. Cash settled futures are those that, as a practical matter, could not be settled by delivery of the referenced item – ie how would one deliver an index? A futures contract might also opt to settle against an index based on trade in a related spot market. Ice Brent futures use this method.
Expiry (or Expiration in the U.S.) is the time and the day that a particular delivery month of a futures contract stops trading, as well as the final settlement price for that contract. For many equity index and interest rate futures contracts (as well as for most equity options), this happens on the third Friday of certain trading months. On this day the t+1 futures contract becomes the t futures contract. For example, for most CME and CBOT contracts, at the expiration of the December contract, the March futures become the nearest contract. This is an exciting time for arbitrage desks, which try to make quick profits during the short period (perhaps 30 minutes) during which the underlying cash price and the futures price sometimes struggle to converge. At this moment the futures and the underlying assets are extremely liquid and any disparity between an index and an underlying asset is quickly traded by arbitrageurs. At this moment also, the increase in volume is caused by traders rolling over positions to the next contract or, in the case of equity index futures, purchasing underlying components of those indexes to hedge against current index positions. On the expiry date, a European equity arbitrage trading desk in London or Frankfurt will see positions expire in as many as eight major markets almost every half an hour.
The Commodity Futures Trading Commission (CFTC) is an independent agency of the United States government.
The Commodity Exchange Act (CEA), 7 U.S.C. ยง 1 et seq., prohibits fraudulent conduct in the trading of futures contracts. In 1974, Congress amended the Act to create a more comprehensive regulatory framework for the trading of futures contracts and created the Commodity Futures Trading Commission, replacing the Commodity Exchange Authority. The stated mission of the CFTC is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets.
Futures contracts for agricultural commodities have been traded in the U.S. for more than 150 years and have been under Federal regulation since the 1920s. In recent years, trading in futures contracts has expanded rapidly beyond traditional physical and agricultural commodities into a vast array of financial instruments, including foreign currencies, U.S. and foreign government securities, and U.S. and foreign stock indices.
Evolving mission and responsibilities
Congress created the CFTC in 1974 as an independent agency with the mandate to regulate commodity futures and option markets in the United States. The agency’s mandate has been renewed and expanded several times since then, most recently in December 2000 when Congress passed the Commodity Futures Modernization Act of 2000, which instructed the Securities & Exchange Commission and the CFTC to develop a joint regulatory regime for single-stock futures, and the products subsequently began trading in November 2002. Today, the CFTC assures the economic utility of the futures markets by encouraging their competitiveness and efficiency, ensuring their integrity, protecting market participants against manipulation, abusive trading practices, and fraud, and ensuring the financial integrity of the clearing process. Through effective oversight, the CFTC enables the futures markets to serve the important function of providing a means for price discovery and offsetting price risk.
From the outset, the CFTC has been plagued by limited budgets and manpower. In addition, it has faced numerous efforts by the Securities & Exchange Commission (SEC) to usurp its regulatory jurisdiction. For example, the current Chairperson of the SEC, Mary Schapiro, was previously Chairperson of the CFTC. When she assumed the Commission’s top position, Schapiro recruited several former SEC staffers and gave them prominent roles within the agency. Her plan was to reshape the Commission into a mini-SEC with an eventual goal of folding the CFTC into the SEC. Her plan failed to bear fruit because her term in office was relatively brief. It was cut short by her decision to leave the agency for a more lucrative position with a securities self-regulatory agency.[citation needed] President Obama’s effort to reorganize the regulation of entities such as hedge funds and products such as derivative contracts will provide Chairperson Schapiro with another opportunity to attempt to expand SEC jurisdiction at the expense of the CFTC.
