The Role and Structure of Canada's Commodity Exchanges

The cash market is when actual physical commodities are purchased and sold at a price agreed upon between the buyer and seller. However, the futures market operates on legally binding futures contracts rather than the real commodities themselves, which can be purchased and traded. These agreements (futures contracts) call for the delivery or receipt of a predetermined amount of a specific commodity during a future month. Futures contracts rarely include the transfer of ownership of the commodity. Instead, futures contracts involve the possibility of receiving or delivering the commodity at a future date. As a result, commodities can be bought and sold in a futures market in the form of contracts, regardless of whether you grow them or own the real commodities themselves. Hundreds of futures contracts are traded on exchanges throughout the United States, Canada, and the world. The following are the North American exchanges that offer key agricultural-related futures contracts. All of these exchanges also trade options, which are an additional risk management tool offered by each exchange for a specific asset.

Commodity clearinghouse



All commodity exchanges utilize a clearinghouse to manage the bookkeeping for trading futures and options contracts. The clearinghouse acts as a third party to keep track of deals between all buyers and sellers. After each trading day, all exchange members must submit their transactions to the clearinghouse.

The clearinghouse then ensures that all buyers and sellers' financial obligations are met. The clearinghouse insures all contracts by requiring all participants to maintain cash deposits (margin money) for their open futures holdings. With the transition to electronic trading, exchanges now offer longer trading hours. All still have a daily close, but may reopen a few hours later via the electronic platform. Some commodity exchanges continue to operate a physical marketplace, where buyers and sellers conduct transactions via open outcry on the trading floor. However, these exchanges operate alongside computerized trading platforms.

Futures contracts.



Futures contracts are standardized and legally enforceable papers. Contracts are standardized to facilitate trading. Futures contracts specify the commodity, quantity, quality, delivery or price reference point, delivery period, and delivery conditions. The following are explanations of the ICE Futures Canola contract specifications. Delivery or pricing reference points. Delivery or price reference points are critical for the effective operation of each futures contract. The exchange has identified these physical locations. For example, the ICE canola contract prices physical delivery of Canada canola free-on-board (FOB) at key delivery sites in eastern Saskatchewan, with other delivery points located throughout the Canadian prairies. This pricing reference point is known as the FOB Par area. This means that all ICE canola futures buyers and sellers are aware that they are negotiating canola prices in the Par region.

From a financial standpoint, a weaker Canadian dollar will make Canadian markets and assets more appealing to overseas investors. Lower currency prices frequently provide better value for international purchasers and investors, potentially driving up foreign direct investment in Canadian enterprises and investment markets. On the other hand, Canadian investors looking to invest abroad may encounter unfavorable conditions such as greater costs, which could have an influence on their international investment and returns. Overall, the declining dollar creates possibilities and problems for Canadian trade and investment.

Daily trading limits



To keep the market orderly, commodity exchanges set trading limitations. These restrictions prevent prices from rising or falling over a certain range from the previous day's closing price. These ranges differ for each contract. The daily restriction for ICE canola is $30 per tonne ($600 per contract). Given the previous day's closing price, the trading price can only rise or fall by that amount the following trading day. The maximum daily trading range is thus $60 per tonne, or double the trading limit. Other exchanges and contracts have varying restrictions. Commodity futures trading does not halt once a limit up or down is reached. As long as there are buyers and sellers, activity at the limit price will continue. Daily limits may be expanded for trade the day after a limit move, depending on the contract specification provided by the exchange.

The buyer or seller of a futures transaction must deposit a portion of the total value of the specified commodity future that is purchased or sold. This is referred to as margin money. This deposit is required by each commodity exchange's regulations and must be made with an RFCM prior to the purchase or sale of a futures contract. Margin money is effectively a guarantee that the trader, or RFCM customer, would honour the contract. So, when a Canadian company sells a product to a US corporation and expects to be paid in Canadian dollars, they don't care if the US devalues its own currency; they expect to be paid an equivalent Canadian dollar per product. The duty of making up the difference falls on the US buyer. No Canadian company will offer things priced in US dollars; instead, they will sell them in Canadian dollars. The buyer is responsible for any foreign conversion rate variations.

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