Legal Definitions - leverage contract

A leverage contract is a private agreement to buy or sell a specific quantity of a commodity, most commonly a precious metal like gold or silver, at a predetermined price for future delivery. Unlike a standard futures contract, which is traded on a regulated exchange with standardized terms, a leverage contract's terms are set by the individual merchant or seller. This type of contract does not grant the buyer the right to a specific physical lot of the commodity, nor does the merchant guarantee a market for repurchasing the contract or continued brokerage services. Leverage contracts are generally prohibited for agricultural commodities.

Here are some examples to illustrate how a leverage contract works:

• Example 1: Speculating on Silver Prices
  Sarah believes the price of silver will increase significantly in the next year. She wants to invest in silver's future price movement but doesn't want to buy physical silver, nor does she want to open an account on a major futures exchange. Sarah finds a specialized dealer offering "silver leverage contracts." She enters into an agreement to buy a contract for 1,000 ounces of silver for delivery in 12 months at a set price. The dealer sets the margin requirements, the fees, and the specific terms for how the contract can be closed or settled. Sarah understands that if she wants to sell her position before the 12 months, she must do so through this specific dealer, who is not obligated to offer a competitive repurchase price or even to buy it back at all. She also knows she won't receive specific silver bars; rather, the contract is for a generic quantity.
  This illustrates a leverage contract because it's a private agreement with a dealer, not a regulated exchange. The dealer dictates the terms, and there's no guaranteed market for Sarah to easily sell her contract back.
• Example 2: Investing in Palladium Without Exchange Access
  David is interested in investing in the future price of palladium, a precious metal used in catalytic converters. He researches options and discovers that while palladium futures exist, they require a substantial initial investment and are traded on a large, regulated exchange. David instead finds a private firm that offers "palladium leverage contracts." This firm allows him to invest a smaller amount, but in return, the firm dictates all the terms of the contract, including the specific delivery date, any fees, and the conditions under which he can exit the contract. David acknowledges that there's no public market where he can easily sell his contract to another party; he is entirely dependent on the firm to facilitate any sale or settlement, and they are not obliged to do so.
  This example highlights the private nature of the contract and the fact that the individual merchant (the private firm) sets all the terms, rather than a standardized exchange. It also shows the lack of a guaranteed repurchase market.
• Example 3: Gold Investment Without Specific Lot Rights
  Emily wants to invest in gold, anticipating a rise in its value. She decides against buying physical gold coins or bars because of storage and insurance costs. Emily enters into a leverage contract with a private broker for 50 ounces of gold to be delivered in six months. The contract specifies the quantity and price but explicitly states that Emily has no right to a particular lot of gold—meaning she can't specify which gold bars she would receive if she took physical delivery. Furthermore, the broker sets all the terms regarding margin calls, settlement procedures, and any fees, and does not guarantee a market for Emily to easily sell her contract to another buyer if she changes her mind before the delivery date.
  This scenario demonstrates the "no right to a particular lot of the commodity" aspect, meaning the buyer doesn't get to choose specific physical units. It also reinforces that the broker (merchant) sets the terms and doesn't guarantee a secondary market for the contract.