Against Actual: An Overview
Against actual is an exchange between commodities traders of a cash position in a commodity for a futures contract for the same commodity. The exchange of the cash position frees the trader of the obligation to take delivery of the commodity.
There is no physical exchange of commodities made, only the payment of cash for the contract.
Against Actual In Depth
Futures markets have existed for centuries for a very practical purpose: To allow producers and buyers of essential goods to set reasonable prices for commodities in advance of their actual production. A farmer who grows corn, for example, has an agreement with a wholesale buyer to supply a certain amount of corn at a set price on a particular date.
- In an against actual transaction, a buyer first proposes a trade in a certain commodity, to be finalized at a certain date.
- A seller agrees to the proposed transaction.
- The seller receives payment for the contract, not the physical commodity.
- The buyer sells the contract later (hopefully at a profit).
The largest commodities market in the world is the Chicago Mercantile Exchange, now called the CME Group. Its location is perfectly situated for the distribution of farm produce throughout the U.S. Its original purpose was to facilitate futures trading in goods such as wheat, corn, and soybeans. (Possibly the best-known of these commodities was pork bellies, which once served as a practical bellwether of commodities pricing but were phased out in 2011 due to waning demand.)
Many other commodities are traded these days in Chicago and elsewhere, ranging from oil and natural gas to precious metals. In recent years, some modern commodities have been added, like bandwidth and emissions credits.
Commodities markets exist to bring some certainty to the volatile prices of commodities. That volatility attracts another distinct class of commodities buyer and seller: The trader who buys and sells commodities futures in order to capitalize on price volatility.
This type of commodities trader has no intention of accepting delivery on 5,000 bushels of soybeans or any other commodity. Hence the actual transaction that allows them to close out of a trade before they're forced to accept delivery.
Where Actual Transactions Take Place
Against actual transactions take place on the futures market. The futures market is a financial exchange in which dealers purchase contracts that commit them to buy a specific amount of a commodity at a certain price on a set date in the future.
Against actual transactions are now made for many commodities from wheat to bandwidth (but not for pork bellies).
Futures traders work through clearinghouses that act as middlemen for transactions, so their contact with soybeans or any other commodity is minimal.
Future contracts are also called options or options contracts. The term "actual" in an against actual transaction refers to the commodity named in the contract.
There are risks in these types of transactions due to the volatility of the commodity market. Prices in the futures market are not market-set but instead set by supply and demand. A single storm can affect a commodity's price. A political event can rock oil prices.
As trading increases with a particular commodity, it can also increase interest in the actual.
Protections for Against Actual Transactions
Several protections are 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.
- The Commodity Exchange Act (CEA) of 1974 provides federal regulation of all futures trading activities. The Act prevents and removes obstructions to interstate commerce in commodities by regulating transactions on commodity futures exchanges.
- The 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 an Against Actual Transaction
First consider what might be called an actual sale. In this conventional transaction, a buyer might propose a trade in silver futures. That trader would propose to purchase a dollar amount of silver and a date to execute the sale. An interested seller would then agree 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 above steps take place except for the last one. There is no delivery of silver to the buyer. Instead, there is a promise of a future silver delivery without a set due date. The seller receives payment for the silver, but also retains the silver itself.
The buyer has bought a quantity of silver at today’s market rate, without having received physical delivery of it. The goal is to then sell the contract without having ever to take possession of the silver, which allows the original buyer to profit.