Futures Commission Merchant

Futures Commission Merchant - Octopus
Futures Commission Merchant

A futures commission merchant (FCM) is a legal entity or an individual that offers futures market brokerage services. An FCM has to be a member of the National Futures Association (NFA), which is responsible for registration and general supervision, and it must be registered with the Commodity Futures Trading Commission (CFTC) to whose regulation it is subject.

Furthermore, FCMs are subject to the regulation of the respective commodity exchanges. To enter into a futures contract, each party that is not an exchange member itself must utilize directly or indirectly an FCM’s brokerage service.

Exchange members who are not clearing members themselves are required to trade through an FCM that is a clearing member. For its services the FCM charges its customers brokerage and other fees.

The FCM assumes the counterparty risk for both long and short futures contract positions. To mitigate this risk, to guarantee market integrity, and to protect other market participants the customers, except for exchange members, typically have to deposit a margin with the FCM.

Minimum and additional margin requirements are set by the exchange and by the FCM, respectively. The margin account is opened with an initial margin payment and is used to ensure daily (or more frequent) settlement of the gains and losses of the contract position.

The FCM may make margin calls to rebalance the account and typically benefits from the interest-free use of the margin deposits. To mitigate the risk of its own default the FCM must deposit a margin with the clearing organization.