Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 112

in turn closely interfaced with the exchanges, making the whole market work in the orderly way it does. Every time a margin is deposited or a trade is carried out, the clearing houses (and by connection, the exchange) are involved in the process as middle men. In effect, when you buy and sell contracts, it is the clearing house that you are dealing with who connects you to the other traders on the opposite end. So while the investors may be anonymous to each other, the clearing houses and the exchange are well aware of their identities and the details of their transactions. As a safety net, all clearing members contribute to a pool of fund called the guarantee fund, which is tapped in case of default situations. Such guarantees are the essential part of the futures market to assure investors of a safe and fair trading process.

Also given the massive amount of money flowing through the futures market, you would hope that there would be regulatory bodies overseeing such a gigantic operation, and you would be right. The exchanges themselves set forth and enforce a collection of rules encompassing matters such as trading procedures, margin requirements, member qualification, and a host of other items. Regulating and overseeing the entire futures market is done by the Commodity Futures Trading Commission (CFTC), an independent US government agency. The agency protects market participants against manipulation, abusive trade practices, and fraud. CFTC also provides a mechanism for price discovery. Price discovery is the process of making all data about the underlying commodities available to the traders, in order for them to competitively arrive at the futures prices using informed judgments. Such a process guarantees order and fairness for all futures traders. The futures brokerages are also regulated by National Futures Association (NFA), a self-regulatory organization created by the futures industry which works in cooperation with CFTC to maintain integrity in the futures market.


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