8 ms·

Not saying this applies here, but assuming goods sold are delivered on time, does it matter what price and when they were purchased for sale? I can understand

Not saying this applies here, but assuming goods sold are delivered on time, does it matter what price and when they were purchased for sale? I can understand it not being legal in the case of brokerages that submit orders to an exchange but if I buy fuel (or sell a futures contract to buy fuel) the other end of that doesn't have to have the fuel at the time of agreeing to the contract, just when its delivered right? It transfers the price risk to the counter party which seems to be legal and how (to continue the example) most home heating oil companies work.

bushido 13y ago
I see where you are coming from here, and I will try and answer to the best of my abilities. There are multiple scenarios that you have opened to discussion each deals with different regulatory frameworks and the laws and scope change accordingly. Frankly any industry that comes under the purview of self-regulatory organizations and special regulatory bodies have a easier time contesting wrong doing. As this can get very lengthy I will just point you to the right resources where good information is available. In terms of futures it is correct that the other party does not need to possess the underlying commodity. In the US commodity futures and options trading comes under Commodity Futures Trading Commission[0]. With futures contracts institutions that you would initiate the trade through are required to maintain strict margins this is usually the case for speculators and small hedging operations. Most if not all trading platforms I have come across automatically close/roll-over the futures contract, thus delivery does not usually become a problem. If delivery does arise, the definition of delivery is not the traditional definition, you can read more about it at [1],[2] and [3]. In terms of a small purchase of physical crude oil from a middle man with upfront cash it comes down to the paperwork and the terms that were agreed to. For example if you were given a delivery date of 5th December with a guaranteed latest by 10th, and they failed to deliver you'll be able to take them to court if you feel the losses and hardship suffered due to the delay justifies the lawyer and court fees you would incur. In terms of a large shipment of crude (may also apply to a small purchase, but would be more trouble than necessary), the money is rarely given upfront but is usually on the basis of Letter of Credit(LC) issued by a financial institution that works similar to an Escrow, with the performance terms built-in. So in case of failure to deliver, damage etc. the monies released conform to the terms of the agreement. There is a ton of information available about how LCs work, start of with the wikipedia page [4], it would also help to learn how delivery works in international trade(Incoterms) [5]. [0] http://www.cftc.gov/index.htm http://www.cftc.gov/index.htm ---------- Futures ---------- [1] http://futures.tradingcharts.com/tafm/tafm10.html http://futures.tradingcharts.com/tafm/tafm10.html [2] http://investdaily.custhelp.com/app/answers/detail/a_id/450 http://investdaily.custhelp.com/app/answers/detail/a_id/450 [3] http://www.investopedia.com/terms/f/failuretodeliver.asp http://www.investopedia.com/terms/f/failuretodeliver.asp ---------- International Trade ---------- [4] http://en.wikipedia.org/wiki/Letter_of_credit http://en.wikipedia.org/wiki/Letter_of_credit [5] http://en.wikipedia.org/wiki/Incoterms http://en.wikipedia.org/wiki/Incoterms

bushido 13y ago

I see where you are coming from here, and I will try and answer to the best of my abilities. There are multiple scenarios that you have opened to discussion each deals with different regulatory frameworks and the laws and scope change accordingly. Frankly any industry that comes under the purview of self-regulatory organizations and special regulatory bodies have a easier time contesting wrong doing. As this can get very lengthy I will just point you to the right resources where good information is available. In terms of futures it is correct that the other party does not need to possess the underlying commodity. In the US commodity futures and options trading comes under Commodity Futures Trading Commission[0]. With futures contracts institutions that you would initiate the trade through are required to maintain strict margins this is usually the case for speculators and small hedging operations. Most if not all trading platforms I have come across automatically close/roll-over the futures contract, thus delivery does not usually become a problem. If delivery does arise, the definition of delivery is not the traditional definition, you can read more about it at [1],[2] and [3]. In terms of a small purchase of physical crude oil from a middle man with upfront cash it comes down to the paperwork and the terms that were agreed to. For example if you were given a delivery date of 5th December with a guaranteed latest by 10th, and they failed to deliver you'll be able to take them to court if you feel the losses and hardship suffered due to the delay justifies the lawyer and court fees you would incur. In terms of a large shipment of crude (may also apply to a small purchase, but would be more trouble than necessary), the money is rarely given upfront but is usually on the basis of Letter of Credit(LC) issued by a financial institution that works similar to an Escrow, with the performance terms built-in. So in case of failure to deliver, damage etc. the monies released conform to the terms of the agreement. There is a ton of information available about how LCs work, start of with the wikipedia page [4], it would also help to learn how delivery works in international trade(Incoterms) [5]. [0] http://www.cftc.gov/index.htm http://www.cftc.gov/index.htm ---------- Futures ---------- [1] http://futures.tradingcharts.com/tafm/tafm10.html http://futures.tradingcharts.com/tafm/tafm10.html [2] http://investdaily.custhelp.com/app/answers/detail/a_id/450 http://investdaily.custhelp.com/app/answers/detail/a_id/450 [3] http://www.investopedia.com/terms/f/failuretodeliver.asp http://www.investopedia.com/terms/f/failuretodeliver.asp ---------- International Trade ---------- [4] http://en.wikipedia.org/wiki/Letter_of_credit http://en.wikipedia.org/wiki/Letter_of_credit [5] http://en.wikipedia.org/wiki/Incoterms http://en.wikipedia.org/wiki/Incoterms