Legal Definitions - futures-commission merchant

A futures-commission merchant is a person or company that acts as an intermediary for clients who want to trade futures contracts or options on futures contracts. They execute buy and sell orders on behalf of their clients on regulated exchanges and typically earn a commission for their services. Essentially, they are brokers specializing in these specific types of financial instruments.

• Example 1: Agricultural Hedging

  Imagine "Golden Harvest Farms," a large agricultural cooperative, is concerned about potential drops in wheat prices before their harvest is ready. To protect their income, they decide to sell wheat futures contracts, locking in a price for their future crop. Golden Harvest Farms contacts "AgriTrade Brokers," a firm specializing in commodity markets, to place these orders on the futures exchange.

  AgriTrade Brokers is acting as the futures-commission merchant because it is executing orders (selling wheat futures contracts) on behalf of its client (Golden Harvest Farms) on a regulated exchange, helping the farm manage its price risk.

• Example 2: Institutional Investment Strategy

  "Global Macro Fund," a large investment firm, believes that the price of crude oil will significantly increase over the next six months due to geopolitical factors. To capitalize on this prediction, they decide to buy a substantial number of crude oil futures contracts. They instruct "Capital Markets Solutions," a financial services firm, to execute these purchases on their behalf.

  Capital Markets Solutions serves as the futures-commission merchant by executing Global Macro Fund's orders to buy crude oil futures contracts, enabling the fund to speculate on future oil price movements.

• Example 3: Corporate Risk Management

  "AeroJet Airlines," a major airline company, faces significant exposure to fluctuating jet fuel prices, which directly impact their operating costs. To gain flexibility in managing these costs, they decide to purchase options on jet fuel futures contracts, giving them the right, but not the obligation, to buy fuel at a predetermined price. AeroJet Airlines engages "Energy Futures Group" to handle these complex transactions.

  Energy Futures Group is functioning as a futures-commission merchant because it is executing orders for futures options on behalf of AeroJet Airlines, helping the airline manage its fuel price risk without committing to a direct futures purchase.