Welcome to blog number 2 of WTH. In blog number 1 we discussed the IB (Introducing Broker), so we thought the next logical step would be to define the role of the FCM.
WHAT IS AN FCM?
FCM stands for Futures Commission Merchant. The formal definition from the NFA is:
“an entity that solicits or accepts orders to buy or sell futures contracts, options on futures, retail off-exchange forex contracts or swaps, and accepts money or other assets from customers to support such orders”.
An FCM sits between “The Exchange” and the “Introducing Broker” when a customer chooses to open an account through an IB. The picture below outlines that hierarchy:
So, what does all this mean for the grower?
From the hierarchy, you can see that the grower is separated by two rungs (IB and Associated Person) from the FCM. Though they’re not adjacent it doesn’t mean they’ll never interact. Every situation is unique, but the FCM and grower primarily interact during:
- Trading account setup
- Trading statements (daily, monthly, annually)
Though the grower may not interact with the FCM all that often, the FCM is doing a lot on the backend to contribute to an orderly futures market. FCMs are responsible for things like:
- Taking orders from IBs
- Sending orders to The Exchange
- Holding customer margin money
- Alerting the IBs of additional margin requirements.
- Facilitating asset delivery when a futures contract expires. (More to come on the tendering process in a future blog)
Additionally, it’s important to note that there are two types of FCMs that may have different roles and responsibilities.
THE TWO TYPES OF FCMs
The two types of FCMs are:
- Clearing
- Non-clearing (these are less common)
These two types of FCMs share a lot of the same duties, EXCEPT, (as the name states) a non-clearing FCM can’t clear trades with the exchange.
A non-clearing FCM can’t clear trades because it doesn’t hold the necessary deposits with The Exchange. These deposits are used to guarantee transactions in the unlikely event of a default by both the trader or FCM.
To further illustrate let’s go through an example of an IB working with a non-clearing FCM.
The hierarchy would be as follows:
Customer > Associated Person > IB > Non-clearing FCM > Clearing FCM > Exchange
The non-clearing FCMs duties would include
- Taking orders from IBs
- Holding customer margin money
- Alerting the IBs of additional margin requirements.
- Trading account setup
- Trading statements (daily, monthly, annually)
The non-clearing FCM would be a clearing FCMs customer for the following services
- Sending orders to The Exchange
- Facilitating asset delivery when a futures contract expires. (More to come on the tendering process in a future blog)
To summarize, though an FCM might not be on the top of a producer’s mind when they participate in the futures market, the FCM plays a role in the functioning of the market.
Additional resources:
NFAs definition of an FCM – https://www.nfa.futures.org/members/fcm/index.html
A list of clearing FCMs that work with the CME.
This material should be construed as market commentary, merely observing economic, political and/or market conditions, and not intended to refer to any particular trading strategy, promotional element or quality of service provided by Farmers Rick Inc. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by Farmers Risk Inc. The trading of derivatives such as futures and options involves substantial risk of loss and you should fully understand those risks prior to trading. Farmers Risk Inc. is not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy.