Introduction to Futures Commission Merchants (FCM)
A Futures Commission Merchant (FCM) plays a crucial role in facilitating customer participation in futures markets. An FCM can be an individual or an organization that solicits or accepts orders to buy or sell futures contracts or options on futures, in exchange for money (commission) or other assets from customers. FCMs also have the vital responsibility of collecting margin funds from customers and ensuring the delivery of assets or cash upon the contract’s expiration.
In Europe, FCMs are similar to clearing members of the futures market.
Key Takeaways
- FCMs facilitate trading and manage futures contracts on behalf of customers.
- Responsible for margin collection and ensuring asset or cash delivery as per contract terms.
- Must be registered with the National Futures Association (NFA) and accredited by the Commodity Futures Trading Commission (CFTC).
The Essentials of Futures Commission Merchants (FCM)
FCMs are mandated to register with the National Futures Association (NFA), unless they solely handle transactions for the firm, its affiliates, top officers, or directors, or if they are non-U.S. entities with non-U.S. customers that clear trades through an FCM.
FCMs can be clearing member firms of exchanges (clearing FCMs) or non-clearing member firms (non-clearing FCMs). Clearing FCMs are required to maintain substantial deposits with the exchange’s clearinghouse, while non-clearing FCMs must have customer trades cleared by a clearing FCM.
Regulatory Requirements for FCMs
FCMs must comply with the Commodity Futures Trading Commission (CFTC) guidelines, including:
- Segregating customer funds from FCM funds
- Maintaining a minimum of $1,000,000 in adjusted net capital
- Keeping accurate records and supervising employees and affiliated brokers
- Submitting monthly financial reports to the CFTC.
Operational Role of an FCM
An FCM executes futures contract orders and extends credit to customers intending to enter such positions. These brokers are the gateway for investors engaging in futures trading.
When a customer desires to buy or sell a futures contract, they reach out to an FCM, who acts as the intermediary for purchasing or selling on behalf of the customer, similar to what stockbrokers do with stocks. Upon contract maturity or the delivery date, the FCM ensures fulfillment by delivering the commodity or cash to the customer.
Importance to Industries and Financial Markets
Among various functions, FCMs enable farmers and corporations (known as commercials) to hedge their risks, hence providing customers with access to exchanges and clearinghouses. FCMs may be subsidiaries of larger financial institutions or independent firms; however, post the 2010 Dodd-Frank legislation, regulatory demands have led to a decrease in the number of small, independent FCMs.
Related Terms: Clearing House, Commodity Futures Trading Commission, National Futures Association, Margin, Stockbrokers.
References
- Commodity Futures Trading Commission. “Legal Definition of Futures Commission Merchant”.
- National Futures Association. “Futures Commission Merchant (FCM) Registration”.
- Commodity Futures Trading Commission. “Clearing Member”.
- Commodity Futures Trading Commission. “Segregation of Customer Funds”.
- Commodity Futures Trading Commission. “Minimum Adjusted Net Capital Requirements for Futures Commission Merchants and Introducing Brokers”.
- Commodity Futures Trading Commission. “Disclosure”.
- Brookings Institution. “Dwindling Numbers in the Financial Industry”.
