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3.6. Types of futures contracts

There are many futures exchanges around the world, and the variety of contracts is vast. Table 2 shows an excerpt of the contracts that are listed (from Wall Street Journal).

FINANCIAL

COMMODITIES

Interest rate

Equity / share

Foreign currencies

Agricultural

Metals and energy

Physical

Physical

Physical

Grains and oilseeds

Physical -Metals

Treasury bonds

Various specific

Japanese yen

Wheat

Gold

Treasury notes

shares

DM

Soybeans

Platinum

Treasury bills

British pound

Corn (maize)

Silver

Federal funds

Index (notional)

Swiss franc

Copper

Canadian govt

DJ Industrial

French franc

Livestock and meat

Aluminium

bond

S&P 500

Australian dollar

Cattle - live

Palladium

Eurodollar

NASDAQ 100

Brazilian real

Hogs - lean

Euromark

CAC-40

Mexican peso

Pork bellies

Physical -Energy

Euroyen

DAX-30

Sterling/mark cross

Crude oil - light

Eurobond

FTSE100

rate

Food and fibre

sweet

Toronto 35

Cocoa

Natural gas

Index (notional)

Nikkei 225

Index (notional)

Coffee

Brent crude

Short sterling bond

NYSE

US dollar index

Sugar

Propane

index

Cotton

Long sterling bond

Orange juice

Index (notional)

index

CRB index

Municipal bond

index

Physical = the actual instrument, currency, commodity. Index = indices of exchanges, etc. CRB index = Commodity Research Bureau.

Table 2: Examples of futures contracts

There are various contracts under each of these names, i.e. contracts that have different expiry dates. For example, there may be four S&P 40 contracts running simultaneously - the 15 March, the 16 June, the 15 September, and the 15 December. It is to be noted that The Wall Street Journal's futures contract complete list is about three times the above list provided.

3.7. Organisational structure of futures markets

organisational structure of derivative financial markets

Figure 4: organisational structure of derivative financial markets

Financial markets have many aspects to them. One way of depicting the organisational structure of financial markets is as in Figure 4.

Does the futures market have both primary markets and secondary markets? The answer is that the market type is primary market; however, while futures cannot be sold, they can be "closed out" at any time by dealing in the opposite direction. The "closing out" results a loss or profit as in the case of a spot instrument sale (or purchase in the case of a "short" sale24) in the secondary market.

The market form of the futures market is formal in the shape of an exchange. There are many futures exchanges in the world or futures divisions of exchanges as in the case of South Africa.

As regards trading driver and the trading system, the futures market in South Africa is order and ATS (automated trading system), i.e. an order-matching method on an ATS is followed. This requires some elucidation:

• The broking members of the exchange register their clients with the exchange. This is in fact unique in that most futures exchanges do not know who the clients of the members are.

• The members we refer to by the generic term broker-dealers, because they may deal as principals or agents and the capacity of trading is disclosed to the client. The broker-dealers at times deal in dual capacity in a single deal (see last bullet point).

• Some broker-dealers do not have clients and only deal as principals, and some broker-dealers deal only as agents with clients (both are called single capacity).

• The ATS is constructed in such a way that broker-dealers input their orders into the system (directly onto a computer). An example is buy 300 December ALSI contracts at 9020 (this is an index value). Sellers do so also. The system places on the screen the best buy and sell orders for all the different contracts, and has a drop-down facility where the non-best buy and sell orders appear (to show the depth of the market).

• Because the buyers and sellers are ultimately to deal with the exchange, the identities of the broker-dealers are not displayed.

• When two opposite orders match, the deal is automatically consummated by the ATS, and the two members are informed via the system. The clients (if applicable) are informed in turn by their broker-dealers.

• A broker-dealer, as noted, can deal in dual capacity, meaning that a single order can be split between principal and agent. For example, the buy example mentioned earlier can be 100 contracts as principal and 200 contracts as agent.

Because large deals (defined as for example over 500 contracts) may affect prices unduly, the rules of the exchange allow for off-ATS trading. These deals are negotiated between members and then reported on the ATS. However, most futures deals are done via the ATS.

The above is the organisation of the South African futures market. In some futures markets, the open outcry floor method of trading is preferred. This is also an order driven trading system, which is highly transparent because the broker-dealers face each other in a "trading pit", i.e. ensuring that clients' orders (and broker-dealers' own orders) are transacted at the best prices. An ATS may be seen as imitating the transparency of floor trading.

As regards delivery, in the futures markets delivery of the underlying asset usually does not take place. This is discussed in the later section "cash settlement versus physical settlement". However, unlike as in the case of forwards (the unsophisticated future) margin is required. This is discussed after the following section on clearing.

 
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