Eligible Contract Participant

What Is an Eligible Contract Participant?

An eligible contract participant (ECP) is an entity or individual permitted to participate in certain financial transactions that are not open to the average investor. ECPs are many times corporations, partnerships, organizations, trusts, brokerage firms, or investors that have total assets in the large numbers. There are extremely tough requirements before one can arrive at eligible contract participant status.

Grasping Eligible Contract Participants

The Commodity Exchange Act frames the capabilities for ECP qualification (in Section 1a(18) of the CEA). Eligible contract participants — like financial institutions, insurance companies, and investment management firms — have adequate regulatory status, however others can become ECPs too. These are ordinarily experts and investing more than $10 million (on a discretionary basis) in the interest of customers.

Eligible contract participants can utilize margin, which can be utilized for the purpose of hedging or trying to accomplish higher returns.

While the base for individuals, partnerships, and corporations to turn into an ECP is $10 million in assets, that figure drops to $5 million assuming the ECP contract is being utilized to hedge risk. Government substances, agent sellers, and commodity pools (with more than $5 million of assets under management) are here and there eligible contract participants too.

ECPs are permitted to utilize margin subsequent to meeting certain requirements. In the first place, the amount invested, on a discretionary basis, must surpass $5 million. Second, the purpose of margin trading is to deal with the risk of an existing asset or liability.

An ECP normally utilizes margin, not to upgrade returns, but rather to reduce the risk of an existing asset or position. That is, the ECP is utilizing margin to make protective positions or hedges that reduce risks associated with existing holdings.

Benefits and Disadvantages of ECPs

The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in response to the financial crisis in 2008, precludes non-ECPs from taking part in certain over-the-counter derivative transactions. The requirements were put in place as part of a more extensive exertion expected to assist with forestalling a repeat of the financial crisis, which was partly accused on the developing utilization of derivatives. An eligible contract participant, then again, is permitted to participate in the derivatives market for various purposes, including to hedge or oversee risk.

In sum, an eligible contract participant has a more extensive scope of investment decisions and financial options compared to a standard investor. An ECP can take part in complex stock or futures transactions, for example, hedging, block trades, structured products, excluded commodities (with no cash market), and other derivative transactions.

Features

• An eligible contract participant is permitted to invest in a number of markets that are not commonly accessible to the average investor.
• Financial institutions, insurance companies, representative vendors, and investors with more than $10 million in assets can become ECPs
• The requirements are less assuming the primary activity of the ECP is hedging: $5 million in assets on the off chance that hedging investment risk and $1 million if hedging commercial risk
• The specific rules for ECPs are illuminated in Section 1a(18) of the Commodity Exchange Act.