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Trading volume in futures contracts and options on
futures on U.S. markets has risen to more than 500 million contracts
annually. And the dollar value of futures contracts traded currently
exceeds severalfold the dollar value of common stocks traded on
all U.S. stock exchanges.
A requisite for this growth has been the financial integrity
of futures markets. While trading in futures contracts obviously
involves risks related to price changes, market participants have
historically had little reason to be concerned about the security
of their funds. Customer losses due to the insolvency of a futures
brokerage firm have been virtually non-existent. Indeed, such losses
have totaled less over 50 years than the Securities Investor Protection
Corporation has paid, on the average, to reimburse customers of
the securities industry for member firm insolvency losses each year.
For anyone considering participation in the nation's futures
markets, the reasons behind this continuing and impressive record
of financial soundness are worth knowing about.
Daily Cash Settlement
As futures prices move upward and downward, the market value of
customers' open positions increases and decreases. Resulting gains
and losses from futures trading are credited or charged to each
customer's account each day following the close of trading. Subject
to existing margin requirements, all gains deposited to a customer's
account through this procedure become immediately available to the
customer.
Margin Requirements
Buyers and sellers of futures contracts are required to at all times
maintain sufficient funds on deposit in their brokerage accounts
to cover losses that might be incurred as a result of price changes.
Margin deposits provide protection for all market participants.
In volatile markets, the exchanges increase margin requirements
accordingly. The availability of such funds is what makes daily
cash settlements possible under all market conditions.
The Exchange Clearing Houses
Once each purchase of a futures contract is precisely matched to
the corresponding sale (a process which occurs each day), the clearing
organization of the exchange where the contracts are traded becomes
the "buyer to every seller and the seller to every buyer." The purpose:
provide a mechanism that assures the payment of all gains and collection
of all losses on a daily basis.
Capital Requirements
Every firm that conducts business with the public as a Futures Commission
Merchant must have and maintain sufficient capital to meet its financial
obligations to its customers. These requirements are subject to
continuous audit and stringent enforcement. Regulatory agencies
have the authority to determine compliance on a daily basis and
in volatile markets clearing organization can demand that a firm
provide additional capital on one hour's notice!
Segregated Accounts
Firms and principals of firms in the futures industry are required
to maintain their customers' funds and margin deposits in bank accounts
which are totally separate from their own. Rules further stipulate
that such funds can be used only for the purposes the customers
intended and can at no time be commingled with the firm's funds
or the funds of the firm's principals. Compliance is strictly enforced
and regulators possess power to take such immediate action as is
considered necessary to protect the security of customers' money.
Transfer of Market Positions
Should a firm be determined to be in a financial situation that
could potentially jeopardize the safety of its customers' funds,
it can be directed to immediately cease operations and transfer
all open customer positions in the market to a firm which is financially
sound. This is to ensure that adequately margined positions with
a troubled firm will not be liquidated at a time when the customer
may not wish for them to be liquidated.
Regulation
Regulation of the U.S. futures industry is primarily self-regulation,
with the role of the federal Commodity Futures Trading Commission
being principally an oversight role (to determine that self-regulation
is continuous and effective). Of the total expenditures on futures
regulation, more than three-fifths of the cost is presently being
paid by the exchanges where futures contracts are traded and by
National Futures Association (NFA), the industrywide self-regulatory
organization authorized by Congress and established in 1982. The
purpose of self-regulation is to assure that those who conduct futures
trading business with the public do so in a professional, ethical
and honest manner.
NFA's responsibilities include screening, testing and registering
persons applying to conduct business in the futures industry. NFA
and the exchanges have responsibility for auditing and enforcing
compliance with industry rules. These rules encompass financial
requirements, segregation of customers' funds, accounting procedures,
sales activities and, in the case of the exchanges, floor trading
practices.
Although there is no guarantee against customer losses
due to the insolvency of a futures brokerage firm, the above mechanisms
are designed to ensure the financial integrity of this nation's
futures markets, and have in fact minimized the risk of customer
losses.
National Futures Association
200 W. Madison Street, Suite 1600
Chicago, Illinois 60606-3447 |
