Contract Market

What Is Contract Market?

Contract market, or designated contract market, is a registered exchange where commodities and options contracts are traded. It is some of the time known as a "designated exchange."

Understanding Contract Markets

A contract market, or designated contract market (DCM) is any board of trade (exchange) designated to trade a specific options or futures contracts. It must register with the overseeing regulatory authority, most eminently the Commodity Futures Trading Commission (CFTC), according to Section 5 of the Commodity Exchange Act (CEA). Most large futures markets likewise give clearing and settlement functions.

A contract market, otherwise known as an exchange, gives the environment, whether it be a physical market floor or virtual electronic platforms, where futures and options contracts are bought and sold. It is a marketplace wherein securities, commodities, derivatives, and other financial instruments are traded. The core function of an exchange is to guarantee fair and orderly trading, financial controls, and the efficient spread of trade price data.

To keep up with liquidity, contracts trading on a contract market have normalized sizes, expiration dates, and, for options, strike prices. This normalization can be stood out from the over-the-counter (OTC) market where purchasers and venders redo and consent to the terms.

History of Contract Markets in the U.S.

The largest futures exchange in the U.S., the Chicago Mercantile Exchange (CME), was shaped in the late 1890s, when the main futures contracts offered were for agricultural products. The development of interest rates, or bond futures, and currency futures in major foreign exchange markets came during the 1970s. The present futures exchanges are fundamentally larger, with hedging of financial instruments through futures. These futures hedging contracts involve the majority of the futures market activity. Futures exchanges play an important job in the operation of the global financial system.

Financial exchanges have seen numerous mergers, with the most critical being between the CME and the Chicago Board of Trade (CBOT) in 2007. Rebranded as the CME Group, it then acquired NYMEX Holdings Inc., the parent of the New York Mercantile Exchange (NYMEX) and Commodity Exchange Inc. (COMEX) in 2008. Filling again in 2012, it added the Kansas City Board of Trade, which is a predominant player in hard red winter wheat.

Another major player in the U.S. is the Intercontinental Exchange (ICE). Brought into the world as an electronic exchange in 2000, ICE acquired the International Petroleum Exchange (ICE) in 2001. In 2007, it acquired both the New York Board of Trade (NYBOT) and the Winnipeg Commodity Exchange (WCE). At long last, it expanded into equities with the acquisition of NYSE Euronext in 2013.

Because of Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), legislation enacted in 2010, DCMs are one of two types of exchanges on which mandatory cleared swaps might trade. The other type of exchange is called a swap execution facility (SEF). The legislation endeavored to move what were contracts between two gatherings onto the two types of exchanges with the goal that they were accessible to numerous counterparties.

Features

• A contract market is a registered exchange where derivatives contracts are traded.
• Contract markets must register with the overseeing regulatory authority, for example, the Commodity Futures Trading Commission (CFTC), as per Section 5 of the Commodity Exchange Act (CEA).
• The core function of a contract market is to guarantee fair and orderly trading, financial controls, and the efficient dispersal of trade price data.
• In the interest of keeping up with liquidity, contracts trading on a contract market have normalized sizes, expiration dates, and, for options, strike prices, which stands out from over-the-counter (OTC) contracts.