Defining Futures Commission Merchants (FCM)
Futures commission merchants (FCMs) let clients engage in futures markets. An FCM is a person or organization that solicits or accepts buy or sell orders for futures or options in return for commissions or other assets from customers. As an FCM, you must collect margins from clients. The FCM ensures asset delivery after the futures contract expires.
FCMs in Europe are like futures market clearing members.
Futures Commission Merchant basics
FCMs must register with the National Futures Association (NFA). This is necessary unless the company handles transactions only for the firm, its affiliates, senior executives, or directors. It is a non-U.S. resident or firm with non-U.S. clients and sends trades to an FCM for clearing.
An FCM can be a clearing or non-clearing member firm of one or more exchanges. Clearing FCMs must maintain significant deposits with the clearing house of any exchange they are a part of. Non-clearing FCMs must clear their clients’ transactions.
FCMs must additionally comply with CFTC guidelines:
- Separating customer and FCM money
- Minimum $1,000,000 adjusted net capital
- Employee and connected broker reporting, recordkeeping, and supervision
- The CFTC receives monthly financial reports.
Customers can get credit and place futures contract orders with a futures commission merchant. Many brokerages work with investors in the futures markets.
For customers to buy or sell futures contracts, an FCM acts as a middleman to make the purchase or sale. It resembles what a stockbroker does with equities. Upon maturity, the FCM ensures contract fulfillment and the transfer of goods or cash to the consumer.
FCMs help farmers and entrepreneurs mitigate risks and access exchanges and clearinghouses. They might be standalone or subsidiaries of more significant financial organizations. Recently, especially after the 2010 Dodd-Frank law, the number of tiny FCMs, or tiny independents, has decreased due to regulatory burdens.
- Customers can trade futures contracts with a futures commission merchant (FCM).
- According to the contract, the FCM collects client margins and delivers assets or cash.
- FCMs must be NFA-registered and CFTC-accredited.