The futures market is an exchange where standard contracts are traded in an open and transparent environment. One of the most important roles, in terms of business transacted on this exchange, is FCM.
FCM is a Futures Commission Trader. FCM is an individual or organization that requests and/or receives orders to buy or sell futures contracts, options on futures contracts, retail foreign exchange contracts or to exchange and receive money or other assets from customers in support of such orders. FCM is also responsible for collecting margin from customers.
Commodity Futures Trading Commission
The Commodity Futures Trading Commission (CFTC) regulates FCM. Any person or company executing futures contracts on behalf of another person must register with the National Futures Association. There are certain exceptions from registration. For example, if a firm or individual handles transactions solely for themselves or their own firm or their firm affiliates, senior officers, directors or if they are non-US resident or firm with only non-US customers and the individual or firm submits all trades for clearing to regulated FCMs that do not have to be registered by companies or individuals.
There are many rules and regulations that apply to FCM, these rules became stricter after the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Customers who trade futures through an Introducing Broker (IB) have trades executed and settled through FCM.The largest FCMs are generally banks and financial institutions with many diverse lines of business. However, some FCMs only operate within the confines of the futures business. One of the most important rules governing FCM is that the CFTC forbids them from mixing their own funds with those of their customers. FCM must segregate all customer funds. This rule protects corporate clients from losses. The case of a company, MF Global illustrates why this rule is so important.
MF Global is an FCM that trades for its own account. When the trade goes against the company, they lose a lot of money. After an investigation, the CFTC found that MF Global had mixed the company’s own money with money collected from customers. In October 2011, the company transferred nearly $900 million from customer accounts to broker-dealers to cover losses on trading company holdings. Therefore, when MF Global went bankrupt in 2011, the company’s customers lost their own money. If MF Global followed the rules and segregated their customers’ funds, the company might still go bankrupt due to bad trading but their customers wouldn’t. suffer losses, the rules will protect them. While many of MF Global’s customers eventually got their money back, it took almost two years to sort out the mess. As you can see, there are important reasons for rules and regulations in the volatile futures industry. Regulators designed this rule primarily to protect customers.
FCM must be subject to audits and demonstrate a sufficient level of capital to operate their business. In addition, FCM employees must demonstrate proficiency in the futures trading business and be subject to background checks. Trading and investing in the futures market has attracted a growing number of participants over the last few years. Futures markets tend to be more volatile than other asset markets and they operate with a high degree of leverage. Only a small amount of margin (performance bond) is required to initiate a futures position. Without a regulated Futures Commission Trader controlling the flow of business to the exchange, the potential for abuse would be enormous. Futures brokers are usually employees of or affiliated with FCM. It streamlines the operation of the activity that takes place on the exchange. This creates an environment where effective regulation and supervision is possible. Futures Commission traders play an important role in the volatile world of futures trading.