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  • 4.4.5-COTTON TRADING-ORGANIZATION OF A FUTURES MARKET

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  • Organization of a futures market

    Chapter 4 - Cotton trading - Cotton futures and options – ICE Futures U.S. 

     
     
    Clearing house

    The clearing house conducts all futures business, including the assignment of delivery notices of physicals under the terms of the futures contract. The ICE Clear U.S. is the designated clearing house for the ICE Futures U.S. Inc. NYCC was originally organized in 1915 as the New York Cotton Exchange Clearing Association and later became the Commodity Clearing Corporation. Although a NYBOT subsidiary, NYCC has its own separate membership, board of directors, elected officers and operating staff. It provides clearing services and financial stability for its clearing members.

    The development of the clearing corporation adds a crucial advantage to futures trading. The clearing house removes counterparty credit risks and performs two major functions: reconciliation and clearing of all futures and options transactions made on the exchange; and assuring the financial integrity of such transactions. Through its system of financial safeguards and transaction guarantees, NYCC protects the interests of the trading public, members of the exchange and its clearing members.

    NYCC assures contract performance through stringent financial requirements and NYCC member position limits.

    Trading

    Floor trading of futures contracts is permitted only between exchange members or those who have a permit to trade on the exchange. In the traditional not-for-profit membership organization model of the exchange, members must own or lease a membership (a seat) on the exchange; they may sell this membership at any time to other firms. The memberships are owned by a variety of entities from large firms to local traders.

    Many exchanges have become publicly owned, for-profit companies: NYBOT was acquired by IntercontinentalExchange (NYSE:ICE) in January 2007 and is now part of a public company. ‘Memberships’ have been changed to represent floor trading rights only; this still restricts who can actually trade on the floor of the exchange in traditional open outcry. However, any would-be trader can be given direct access to the electronic trading platform if he is so permissioned by the electronic member who carries his trading account. This is one of the key advantages of an open electronic trading platform. The firms and individuals that trade represent many interests both speculative and hedging. Local traders (individuals who trade for their own accounts) have long represented a significant portion of the daily volume on an exchange and thus an important source of liquidity.

    Buy and sell positions for the same contractmonth offset each other and are built up on a daily basis. The members use the clearing house to match offsetting positions and clear them from the records of the brokers who handled them each day. Trades are matched and cleared electronically throughout the day. The clearing house then takes the place of the buying or selling member; it performs the role of seller to all buyers and that of buyer to all sellers. Direct settlements of accounts are automatically possible at the close of each trading day.

    The clearing house checks, settles and reports each day’s business and guarantees the fulfilment of each contract. This is assured through the payment of margins and the collection of all outstanding obligations from members within 24 hours. Each account is ‘marked-to-market’ at the end of the trading day, with payments moving in or out depending on the movement of that day’s market price. Clearing members pay into a permanent guarantee fund, enabling the clearing house to assume financial responsibility if a member defaults.

    Supervision and regulation

    The United States Commodity Futures Trading Commission (CFTC) is charged with the supervision of trading in commodity futures. CFTC reports direct to the United States Congress and it is charged with protecting the trading public from abuses by the futures industry, such as manipulation of the market or deceptive practices that might prevent the market from correctly reflecting supply and demand factors. It also seeks to ensure that exchange members are financially viable. The NYBOT exchange bylaws, rules and regulations are statutory and have the force of law. The provisions of the CFTC Act require that every intermediary who deals with the members of the public investing in futures must be registered with the National Futures Association, a self-regulatory body created by the Act. NYBOT, through the use of electronic surveillance and professional personnel, actively monitors trading activity and enforces trading rules and regulations.