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. The FCM is also responsible for ensuring asset delivery after the futures contract has expired.

In Europe, FCMs are analogous to clearing members of the futures market.

Key Takeaways

  • A futures commission merchant (FCM) solicits and accepts trading for future contracts with customers.
  • The FCM is also responsible for collecting margins from customers and ensuring delivery of assets or cash, per terms stipulated in the contract.
  • An FCM must be registered with the National Futures Association (NFA) and must be accredited by the Commodity Futures Trading Commission (CFTC).

Basics of Futures Commission Merchant (FCM)

FCMs are required to be registered with the National Futures Association (NFA). This is required unless the entity handles transactions only for the firm itself, or the firm's affiliates, top officers, or directors; or if the entity is a non-U.S. resident or firm with only non-U.S. customers and 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, they contact 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.