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A futures commission merchant is an individual, firm, or organization engaged in trading contracts, options, or commodity purchases to be delivered or paid at some future time. This is similar to a broker who deals with trading securities such as stocks and bonds. A major goal in futures trading is to offer a potential investment and certain protections for those involved so that risks are mitigated and investors can potentially receive a return on investment.
The futures commission merchant acts as a third party in facilitating trades. These merchants buy and sell and also act as a holding company for funds that are deposited by those wishing to buy or sell futures. Futures are contracts to buy and sell at a specified future date. Originally futures developed in the commodities market, such as wheat, where farmers wished to guarantee a certain price for their wheat and millers wanted to guard against excessive pricing for wheat depending on how well the harvest did in the future.
First millers offered contracts to specific farmers to set a price for wheat before the wheat was harvested. Then third parties became involved and created a futures market exchange where farmers could sell and millers could buy without having to find specific individuals or companies. This process can be considered a hedge against future price fluctuations.
Speculators and investors also become involved with a futures commission merchant as a way to leverage their investments and to increase return on investment. Futures are a type of derivative because they get their value from other assets rather than having intrinsic value. Besides commodities, futures could be based on the value of stocks, bonds, or even the weather.
There may be an approved delivery facility involved when a futures commission merchant facilitates an exchange. The facility is where the physical exchange is agreed to take place. In the case of commodities, this could be a warehouse, but in the exchange of currencies or interest rates instead of commodities the approved delivery facility may simply be a financial institution.
The futures market is the exchange place that a futures commission merchant facilitates between those who want to sell and those who want to buy. It is like any market, where there are opportunities waiting for those who are seeking them. But instead of physical items on display for sale, the offers are agreements to buy and sell in the future at a price that is set in the present.
The Futures Industry Association was created to assist in disseminating information concerning the futures markets and to provide a venue to represent the industry to regulatory agencies. Members include futures commission merchants, financial institutions, and trading advisers. It was organized to promote fair trade and guard against abuse in the industry.