What is 'Against Actual'

Against actual is the transaction that takes place when two traders exchange futures contracts for cash. There is no physical exchange of commodities made, only the trade of currency for the deal. These types of transactions take place on the futures market.

BREAKING DOWN 'Against Actual'

Against actual transactions take place on the futures market. The futures market is a financial exchange where traders can purchase contracts to buy a specific amount and type of a commodity with a delivery in the future. The contract will specify prices and delivery dates. Future contracts may also be called options, or options contracts. The term "actual" in an against actual transaction is the commodity referenced in the contract.

There are layered risks in these types of transactions due to the potential volatility in the commodity market. The prices of the futures market are not market-set but instead set by supply and demand. As trading increases with a particular commodity, it can also increase interest in the actual.

Protections for Against Actual Transactions

Several protections have been put in place to ensure against abuse in the futures markets. These protections help support the stability of the market and facilitate trading.

  • Commodity Futures Trading Commission (CFTC) regulates the commodity futures and options markets. Its goals include the promotion of competitive and efficient futures markets and the protection of investors against manipulation, abusive trade practices, and fraud.

  • Commodity Exchange Act  (CEA) of 1974 provides federal regulation of all futures trading activities. The Act prevents and removes obstructions on interstate commerce in commodities by regulating transactions on commodity futures exchanges.

  • Commodity Futures Modernization Act  (CFMA) of 2000 further defined the roles of the CFTC while updating commodity trading regulations, most notably to address newer types of financial contracts such as derivatives.

Example of Against Actual

There are many different types of futures contracts. Traditionally, these contracts have covered commodities such as precious metals, oil, meats, and grains. These days, there are some additional modern commodities available for trade, like bandwidth and emissions credits.

For example, a buyer would introduce an against actual trade in silver futures. They would propose a dollar amount of silver to purchase and the date for the execution of the sale. An interested seller would then have an obligation to meet the proposed terms of that contract by providing the commodity, or the actual, based on the agreed upon terms. The seller would deliver the silver to the purchaser.

When making this same trade as an against actual, all of the steps still happen, except for the last one. The delivery of the real silver product does not take place. Instead, there is a promise of a future silver delivery without a set due date. The seller receives payment for the silver, but also retain the silver itself.

The buyer has bought a quantity of silver at today’s market rate, without having received the physical delivery. They may then sell the contract without having ever to take possession of the silver, which allows the potential for a profit to the original buyer.

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