Legal Definitions - ringing up

Ringing up refers to a practice among commodities dealers where they settle contracts for future delivery without the need for actual physical transfer of the goods. This is achieved by offsetting, canceling, or adjusting prices of existing contracts among a group of traders before the delivery date. The primary purpose is to avoid the significant costs and logistical complexities associated with the physical delivery, storage, and change of possession of large quantities of commodities.

Here are some examples to illustrate this concept:

• Crude Oil Futures: Imagine two large energy trading firms, Alpha Corp and Beta Inc, both actively trading crude oil futures. Alpha Corp has a contract to buy 50,000 barrels of crude oil from Beta Inc for delivery next month. Separately, Beta Inc has another contract to buy 40,000 barrels of crude oil from Alpha Corp, also for delivery next month. Instead of Alpha Corp physically receiving 50,000 barrels from Beta Inc, and then Beta Inc physically receiving 40,000 barrels from Alpha Corp, they can "ring up" these contracts. They agree to offset their obligations, meaning Alpha Corp will now only receive a net of 10,000 barrels (50,000 - 40,000) from Beta Inc, or they might even settle the entire difference in cash if they have other offsetting contracts. This process saves both companies substantial costs related to transporting, storing, and insuring 90,000 barrels of oil, as only the net difference (or no physical oil at all) needs to be handled.

• Wheat Futures on an Agricultural Exchange: Consider a scenario involving three commodities dealers—Dealer X, Dealer Y, and Dealer Z—who trade wheat futures. Dealer X has agreed to sell 10,000 bushels of wheat to Dealer Y for delivery in three months. Dealer Y, in turn, has agreed to sell 10,000 bushels of wheat to Dealer Z for delivery in the same month. And Dealer Z has agreed to sell 10,000 bushels of wheat back to Dealer X. Before the delivery date, these dealers, as part of their trading group, can engage in "ringing up." They identify these interconnected obligations and agree to cancel them out. No physical wheat moves between X, Y, and Z. This eliminates the need for three separate physical deliveries of wheat, avoiding the logistical complexities, transportation costs, and storage fees that would otherwise be incurred by each dealer. They simply settle any price differences in cash.

• Precious Metals (Gold) Futures: A group of specialized precious metals dealers frequently trade gold futures contracts. Suppose Dealer P has a contract to buy 1,000 ounces of gold from Dealer Q. Dealer Q has a contract to buy 700 ounces of gold from Dealer R. Dealer R has a contract to sell 300 ounces of gold to Dealer P. Through "ringing up," these dealers can net out their positions. For example, Dealer P is effectively owed 700 ounces (1,000 owed by Q minus 300 owed to R). Dealer Q owes 300 ounces to R (700 owed to R minus 1,000 owed by P, but P owes Q 1,000). Dealer R is owed 400 ounces (700 owed by Q minus 300 owed to P). They can arrange for Dealer Q to deliver 700 ounces to Dealer P, and Dealer R to deliver 300 ounces to Dealer P, effectively settling all obligations with minimal physical movement. This avoids the costly and secure physical transfer of gold bars between multiple parties, which involves high security, insurance, and storage expenses, by settling the financial differences based on the contract prices.