Based on contracts to buy and sell physical and financial assets at future dates for predetermined amounts, futures are financial derivative instruments that hold relatively high leverage. A future’s market value depends on the price or rate variations of the particular asset involved. Participants including farmers, manufacturers, municipalities, importers, exporters and investors buy and sell futures contracts and options for both physical and financial assets in the global futures market.
The modern futures exchange emerged from early United States agricultural markets, which, in the mid nineteenth century, began allowing the sale of what were called “forward contracts,” or agreements to buy and sell crops at a future date. Until that time, farmers were left with excess rotting crops in times of low demand and merchants were forced to pay steep prices for products when supply was low. These forward contracts served to reduce risk for farmers, merchants and producers and helped to balance competing interests in the agricultural sector.
While futures trading was initially limited to agricultural commodities, including wheat, corn and other crops, the marketplace has expanded in the last several decades to incorporate additional types of products. Today’s futures market involves such metal and energy commodities as gasoline, crude oil, copper and gold, as well as financial instruments like interest rates, treasury bonds, securities, stock indexes and foreign currency. Thus, the futures market allows participants in a diverse set of industries to mitigate financial risk on a global scale.
Increased regulation has accompanied this growth in the futures market. Federal oversight of futures trading in the United States began under the Department of Agriculture in the 1920s. The Commodity Futures Trading Commission Act of 1974 mandated the creation of the Commodity Futures Trading Commission (CFTC) and allowed for the formation of the National Futures Association (NFA), the industry’s self-regulatory body. The CFTC and NFA are charged with monitoring and regulating safe, competitive futures markets in the United States.