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Understanding the Futures Exchange

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Understanding the Futures Exchange

When a futures trader places his trade order (electronically or via a futures broker), it will go to through a futures exchange that will match the order and route it to a clearing house to be cleared. So what does a futures exchange really do besides matching trade orders? Let’s find out.

Roles of Futures Exchange

1. Trading Place

Futures exchange is an institution that acts as a marketplace for trading futures contract. It is a place where futures trading is actually done, either by open-cry trading in a trading pit or by electronic trading platform. Most commodities futures contracts are traded on a futures exchange but other types of futures contract such as financial futures are also traded. 

2. Regulations

It is also the responsibility of a futures exchange to regulate the trading practices of its trading participants (i.e. brokers and brokerage firms) such as prohibiting fraud and misconduct as well as preventing defaulting on contract obligations.

Coffee futures is traded on Intercontinental Exchange (ICE)

3. Benchmark Prices

Futures exchanges play a very important role in establishing global benchmark prices for crucial commodities such as crude palm oil, crude oil, gold, copper, and coffee. For example, the global benchmark price for crude palm oil market is crude palm oil futures (FCPO) established by Bursa Malaysia.

4. Standardization of Futures Contracts

Specifications of futures contracts are determined by the futures exchanges that the contracts are traded on. The contract specifies which futures exchange it is traded on, the quantity, the currency used for trading, type of settlement (whether it’s physical delivery or cash), the last trading day and the contract months.

5. Clearing and Settlement

Although there are independent clearing houses that help futures exchanges handle their trades’ clearings and settlements, some futures exchanges clear the trades themselves. For example, Bursa Malaysia has its own clearing house through Bursa Malaysia Derivatives Clearing Berhad that operates and maintains a clearing house for the futures and options exchange.

Futures exchanges play a very important role in establishing global benchmark prices for crucial commodities

List of Major Futures Exchanges and Their Products

Below is a non-exhaustive list of major futures exchanges and their popular products:

Futures Exchange Popular Products
Bursa Malaysia Derivatives Berhad (BMD)

Crude Palm Oil Futures (FCPO)
FBM Kuala Lumpur Composite Index Futures (FKLI)

Chicago Mercantile Exchange (CME)

Corn Futures (ZC)
Soybean Futures (ZS)
E-Mini Dow ($5) Futures (YM)
E-Mini S&P 500 Futures (ES)

Singapore Exchange (SGX) MSCI Singapore Index Futures (SG)
Hongkong Exchange (HKex)

Hang Seng Index Futures (HSI)
Mini Hang Seng Index Futures (MHI)

London Metal Exchange (LME) Copper Grade A Futures (CA)
Intercontinental Exchange (ICE)

Coffee Futures (KC)
Cotton Futures (CT)
Sugar No. 11 Futures (SB)

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Wan Zuraiha Wan Zakaria is a staff writer at Oriental Pacific Futures (OPF) where she writes on investment and trading. OPF is a futures and options broker based in Kuala Lumpur, Malaysia and provides electronic trading, brokerage and clearing services to retail and institutional traders since 2007. OPF is licensed under the Securities Commissions of Malaysia and offers cash-settled derivatives instruments traded on Bursa Malaysia, as well as select major derivatives exchanges around the world.

Oriental Pacific Futures articles published on the Corporate Website (www.opf.com.my) may be reprinted, reposted or distributed free for educational purposes only on the condition that Oriental Pacific Futures and the Corporate Website link information http://www.opf.com.my are included. However, other organizations are invited to link to articles that are available in the public area of the Oriental Pacific Futures’ Learning Resources website. No additional permission is needed for such a link.

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