What is an Assignable Contract

An assignable contract has a provision permitting the holder to convey his or her rights and obligations to another person before the contract expires. The assignee would then be entitled to take delivery of the underlying asset and receive all of the benefits of that contract before it closes, along with the obligation to fulfill all other requirements of the holder.

In the financial markets, assignable contracts are typically futures contracts.

BREAKING DOWN Assignable Contract

Assignable contracts provide a way for current contract holders to close out their position, locking in profits or cutting losses, before the expiration date of the contract itself. Not all futures contracts have this provision. In fact, most exchange traded contracts are not assignable. If you are interested in buying or selling a contract, make sure to carefully check its terms and conditions to see if it is assignable or not. Some contracts may prohibit assignment while other contracts may require the other party in the contract to consent to the assignment.

An assignment doesn't always take away the assignor's risk and liability because the original contract could require a guarantee that, whether assigned or not, performance of all terms of the contract be completed as required.

A mortgage given by a local bank is a great example of an assigned contract. Shortly after the mortgage originates, the bank may sell it to a third party, to whom the mortgagee pays all monthly installments. Aside from the name on the check, there should be little difference noticed by the mortgagee.

In the futures market, if an investor holds a futures contract and the holder finds that the security has appreciated by 1% at or before the contract is closed, then the contract holder may decide to assign the contract to a third party for the appreciated amount, payable in cash, thus making a profit on the contract before it even closes.

Aside from possible requirements to notify the other party in the contract, an assignment may be void if the terms of the contract change substantially or it violates any laws or public policy.

Assignment vs. Trading for Futures

Owners of assignable futures contracts may opt to assign their holdings instead of selling them in the open market, via the exchange. However, there are few reasons to do so, especially since the exchange, or its clearing agent, will handle clearing and payment functions. One reason might be an above market offer from the third party in an illiquid market where bid and ask spreads are wide or there is simply not enough product to satisfy the order at a reasonable price.

Offering the current contract holder above the price at which he or she could sell that position (the bid), as long as it is below the price needed to pay to buy the illiquid contracts (the ask), might be of benefit to both parties.

However, selling the contract outright is the cleaner solution and it also guarantees that all liabilities with regard to the contract are discharged.