The document outlines key differences between spot and futures markets, emphasizing the importance of transparency, integrity, and standardized contract terms in the latter. It identifies characteristics of an ideal market for futures contracts, including homogeneity, cash price volatility, and market participant diversity, which are conducive to price discovery and hedging. Additionally, it discusses the concept of 'deliverable supply,' stating that sufficient availability of the commodity is necessary for effective convergence of cash and futures prices.

1. Christa Lachenmayr, Division of Market Oversight
Kevin Piccoli, Office of International Affairs
Tracey Wingate, Office of International Affairs
December 2017
From Spot to Futures
U.S. COMMODITY FUTURES TRADING COMMISSION
OFFICE OF INTERNATIONAL AFFAIRS

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3. KeyDifferences
• Relationship-based vs. Anonymous Matching – in spot or cash
markets, you choose who you do business with – based on
longstanding working relationships, trust or some other quality.
In futures markets, buyers (longs) and sellers (shorts) are
matched anonymously in a centralized marketplace
• Standardized contract terms and conditions vs. bespoke
• So, in order to be successful, futures markets and contracts must
have transparency and integrity
• Publicly available terms and conditions for contracts that
draw on established commercial practices
• Clear delineation of responsibilities between buyers and
sellers
• Penalty provisions and disciplinary actions
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4. EconomicUtility
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• A good candidate market for a futures contract has an
underlying commodity that:
• is homogenous, i.e. “commodity grade”
• has a large and active cash market that responds to a
similar, or correlated, set of supply and demand fundamentals
• has a diversity of potential market participants with risks
dispersed across a wide range of producers, merchants and
consumers
• experiences a considerable amount of cash price volatility
• is not subject to regulatory treatment that can interrupt
supply and demand

5. CorrelationwiththeCashMarket
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• To design a contract that satisfies a hedging need and
promotes price discovery of the underlying
commodity, the contract should account for:
• Size and structure of the underlying market
• Historical patterns of production, consumption and supply, including
seasonality, growth, market concentration, trade patterns
• Quality or grade of the underlying commodity
• Liquidity and cash pricing system (transparency, frequency)
• Vertical integration of production and consumption among producers,
merchants & consumers
• Existence of price controls, embargoes or other regulations

6. PromotionofConvergence
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“The Commission believes that, to meet the statutory
requirement of tending to prevent or to diminish price
manipulation, market congestion, or the abnormal
movement of a commodity in interstate commerce, a
futures contract should have a deliverable supply that,
for all delivery months on the contract, is sufficiently large
and available to market participants that futures deliveries,
or the credible threat thereof, can assure an appropriate
convergence of cash and futures prices.”
- CFTC Federal Register Notice, November 13, 1997

7. DeliverableSupply
• Generally defined as the quantity of the commodity that
potentially could be made available for sale on a spot
basis at current prices at the contract's delivery points.
• Qualifiers:
• meets the contract's delivery specifications
• reasonably can be expected to be readily available to short traders
and salable by long traders
• at its market value
• in normal cash marketing channels
• at the contract's delivery points
• during the specified delivery period
• …and barring abnormal movement in interstate commerce.
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8. DeliverableSupply
• Exclusions
• Quantities of the commodity that would not economically
obtainable or deliverable at prevailing price levels (i.e.,
supplies that are “out of position”)
• Amount of commodity “committed for long-term
agreements” of deliverable supply (acknowledges information
about long-term agreements may not be publicly available)
• While fairly detailed, the guidance does not provide any
commodity-specific information and therefore offers a
considerable amount of room for interpretation
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9. DeliverableSupplytoFutures
• Consult with potential market users
• Detailed cash market description over relevant timeframe and based
on publicly available data (national, regional or local)
• production or supply, including historical patterns
• that is “economically obtainable,” meeting established commercial standards, or a
range thereof
• within or adjacent to a geographically defined area – principle production or use/processing
• storage and seasonal characteristics of production, consumption and supply,
particularly when supplies are at their lowest
• tradeflows, “normal” flow of goods vs. distorted
• market/industry concentration in production and consumption
• typical contracting arrangements and transfer of goods
• between which parties?
• for what time horizons?
• are they binding?
• external factors or regulatory controls
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