What is a Futures Commission Merchant - FCM

A futures commission merchant (FCM) plays an essential role in enabling customers to participate in the futures markets. An FCM is an individual or organization involved in the solicitation or acceptance of buy or sell orders for futures or options on futures in exchange for payment of money (commission) or other assets from customers. An FCM also has the responsibility of collecting margin from customers.

BREAKING DOWN Futures Commission Merchant - FCM

FCMs are required to be registered with the National Futures Association (NFA). This is required unless the person handles transactions only for themselves, their firm, or the firm's affiliates, top officers or directors; or if the person is a non-U.S. resident or firm with only non-U.S. customers and he, she, or the firm submits all trades for clearing to an FCM.

An FCM may either be a clearing member firm of one or more exchanges (a "clearing FCM") or a non-clearing member firm (a "non-clearing FCM"). Clearing FCMs are required to hold substantial deposits with the clearing house of any exchange of which it is a member. A non-clearing FCM must have its customers' trades cleared by a clearing FCM.

Additionally, FCMs must also meet the Commodity Futures Trading Commission (CFTC) guidelines:

  • Segregation of customer funds from the FCMs funds
  • Maintenance of a minimum of $1,000,000 in adjusted net capital
  • Reporting, recordkeeping, and supervision of employees and affiliated brokers
  • Monthly submission of financial reports to the CFTC.

A futures commission merchant is able to handle futures contract orders as well as extend credit to customers wishing to enter into such positions. These include many of the brokerages with which investors in the futures markets deal.

If a customer wishes to purchase (or sell) a futures contract, he or she contacts an FCM who acts as an intermediary by purchasing (or selling) the contract on the customer's behalf. This is similar to what a stockbroker does with stocks. At maturity, or the delivery date, the FCM also makes sure the contract is fulfilled and either the commodity or cash is delivered to the customer.

FCMs, among other things, enable farmers and companies (called commercials) to hedge their risks and provide customers access to exchanges and clearinghouses. They can be subsidiaries of larger financial firms or smaller, independent firms. However, in recent years, and especially since the enactment of the Dodd-Frank legislation in 2010, the numbers of FCMs, especially small independents, have declined due to the regulatory burden.