What is a 'Eligible Commercial Entity'

An eligible commercial entity is a type of participant in a contract who has a specific set of abilities and responsibilities about futures trading. Their abilities include being able to force, or to take, delivery of the specified commodity and manage and incur risk, including price risk. This party may also regularly provide hedging services and may be a market maker for the specified commodities.

BREAKING DOWN 'Eligible Commercial Entity'

​​​​​​​Individuals cannot become eligible commercial entities, nor can instruments of the state. Eligible commercial entities may be a financial institution, an investment firm, or insurance brokers. Whether or not an entity is qualified to be an eligible commercial entity is determined by the regulations set forth under the Commodities Exchange Act (CEA).

Eligible commercial entities participate in futures trading. The U.S. Commodity Futures Trading Commission  (CFTC) regulates futures trading. When people engage in futures trading, they are promising to buy, or sell, a specific product at a predetermined price on specified dates. Thus, the futures market has a basis on hedging and speculation and predictions of how the market will look at a certain point in the future.

How Eligible Commercial Entities Come Into Play

As an example of how eligible commercial entities can impact the market, imagine a national bread company suspects grain prices will rise in the next year. The company wants to lock in a reasonable price on future wheat it needs later in the year. The company contacts a financial institution which is an eligible commercial entity. A broker from that institution will be able to help the bread company secure a futures contract for wheat.

The broker should have a knowledge of the wheat market and a sense of how it fluctuates. With their specialized knowledge, the broker can advise the bread company to purchase 500 tons of wheat on the futures market, offering $175 per ton. If they enter into a contract, the company will pay that $175 price at a date six months from now. If the broker has reason to believe that the price of wheat will not dip significantly over the next six months, so this is a reasonably safe deal for the bread company.

If the broker is correct and the price of wheat does indeed rise, the company is happy paying a lower amount for the future wheat they require. However, if the broker is incorrect, and the price of the grain falls, the company will have an opportunity to sell their higher price future contracts, probably at a loss, and buy new contracts. 

Over the next six months, the price of wheat on the open market could skyrocket or fall considerably. Either way, the bread company will not be affected by the new prices, because of the locked-in price of the futures contract.

  1. Cash Settlement

    Cash settlement is a method used in certain derivatives contracts ...
  2. Commodity

    A commodity is a basic good used in commerce that is interchangeable ...
  3. Commercial

    Commercial is a term relating to commerce or business. In the ...
  4. Exempt Commodity

    Any commodity other than an excluded or agricultural commodity. ...
  5. Eligible Contract Participant

    An Eligible Contract Participant (ECP) is a group or individual ...
  6. Clearing Corporation

    A clearing corporation is an organization associated with an ...
Related Articles
  1. Investing

    Why Hedge Funds are Mass-Selling Agricultural Futures

    An oversupplied wheat market, speculation about Federal Reserve shifts to interest rates, and other factors have contributed to the large-scale shift.
  2. Investing

    Wheat Completes Technical Sell Signal

    Wheat prices declined on improving weather reports and fears that President Trump's tariff plans will lead to retaliation.
  3. Investing

    How To Valuate The Market Price Of A Commodity

    We explain how to analyze the market price of commodities including, gold, cocoa, and wheat.
  4. Trading

    Futures Fundamentals

    This tutorial explains what futures contracts are, how they work and why investors use them.
  5. Investing

    Commodities trading: An overview

    Trading commodities can seem challenging to a novice trader but we break it down for you. Learn more about the history of commodities, the types of commodities, and how to invest in them.
  6. Investing

    Commodity Investing 101

    From the orange juice we drink to the gas we use to power our vehicles and heat our homes, commodities play important roles in our daily lives.
  1. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. Learn how futures contracts can be used to limit ... Read Answer >>
  2. How does investment banking differ from commercial banking?

    Discover how investment banking differs from commercial banking, the responsibilities of each and how the two can be combined ... Read Answer >>
  3. What are managed futures?

    Managed futures are futures positions entered into by professional money managers, known as commodity trading advisors, on ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center