Understand Your Contractual Obligations
Understanding Commodity Futures and Options Contracts
- Most individual traders do not trade commodity futures or options on commodity futures directly on an exchange. Commonly, they access such markets through financial firms known as futures commission merchants or introducing brokers.
- Many major brokers, and some smaller firms, may operate as futures commission merchants or introducing brokers. However, no matter their size, generally intermediary financial firms in the derivatives industry must be registered with the CFTC through the National Futures Association.
- Trading is done for an individual through either a “discretionary” or “non-discretionary” account.
- An individual may open an account with a registered Futures Commission Merchant or through an Introducing Broker.
- An Introducing Broker may accept an individual’s orders and transmit them for execution to a Futures Commission Merchant with whom the Introducing Broker has a relationship.
- An Introducing Broker is not permitted to accept funds from the individual; the individual deposits funds directly with the Futures Commission Merchant.
- Trading accounts are not insured. Traders can lose all of their money, and in some cases may be required to pay more than invested initially.
Individual Discretionary Accounts
- In an individual discretionary account, the individual grants power-of-attorney to a Futures Commission Merchant, an Introducing Broker, one of their Associated Persons, or a Commodity Trading Advisor to make trading decisions on his or her behalf.
- In a commodity pool, the individual purchases a share or interest in the pool, and trades are executed for the pool, rather than for the individuals who have interests in the pool.
- Pool participants share proportionately in gains or losses.
- Fees will reduce an individual’s rate of return.
- In an individual account, the disclosure statement specifies fees and expenses.
- Individuals are encouraged to consult with a broker about the fees they will be charged.
- A commodity pool is required to provide a prospective investor with a complete description of fees, commissions and other expenses.
- Before allocating any funds to a pool, the individual should pay particular attention to the "break-even analysis" and other required fee disclosures to determine how fees will affect his or her potential rate of return.
- Before participating in a commodity pool, individuals should read the disclosure document closely for information on losses.
- Losses to commodity pool participants are ordinarily (but not always) limited to the amount of their participation.
- Sometimes in a commodity pool, in order to protect against catastrophic losses, a loss greater than a given percentage will trigger the sale of all open positions and will result in closing the pool account.
- The disclosure document must clearly state this possible course of action.
- In an individual account, the leveraged nature of transactions can result in significant losses or gains, and losses may exceed the initial margin deposit.
- If so, the individual is responsible for covering those losses with additional funds.
- If the individual plans to participate in a commodity pool, information on past performance must be included in the risk disclosure document, which is required to be provided to the individual by the Commodity Pool Operator.
- Past performance is NOT a predictor of future results.
- If the individual authorizes a Commodity Trading Advisor to direct trading in his or her individual account, the Commodity Trading Advisor must provide the individual with a disclosure document including information on past performance.
- In reading the disclosure document, note whether the performance results are based on actual trading results of client accounts.
- The Commodity Trading Advisor must disclose whether information is based on the Advisor's own proprietary (personal) account, or based on hypothetical or simulated results.
- If the information is based on hypothetical or simulated results, the Commodity Trading Advisor must disclose the inherent limitations of these results.
- No representation may be made that any account will or is likely to achieve profits or losses similar to those shown.
Individuals’ Access to Funds
- The funds needed to meet initial margin requirements in an individual account can only be withdrawn after trades are settled and, in some cases, after all open positions are closed.
- Funds held in an individual account above and beyond the required margin or account-opening requirements should be able to be withdrawn.
- If an individual participates in a commodity pool, the individual may or may not be able to withdraw some or all of their money at any given time.
- Some pools have limitations on when funds can be withdrawn.
- If, in his or her individual account, the individual trades on commodity markets located outside of the United States, the brokerage firm will set up an additional trading account, which is in addition to the one set up for trading on U.S. markets.
- The individual should ask his or her broker about account protection and should be aware of the limitations imposed on the protection of the funds in his or her commodity trading accounts.
If you have questions, are aware of suspicious activities, or believe you have been defrauded, please contact the CFTC immediately by calling the CFTC’s Consumer Protection Hotline at 866.366.2382, or filing a tip or complaint.