Understanding the Dynamics of Canada's Commodity Exchanges

On the cash market, real goods are bought and sold at prices that are agreed upon by both buyers and sellers. But the futures market works with legally binding futures contracts instead of the goods themselves, which can be bought and sold. These deals, called "futures contracts," say that a certain amount of a certain good will be delivered or received in a certain month in the future. When you sign a futures contract, you generally don't give up ownership of the commodity. Instead, futures contracts are about the possibility of getting or giving the good at a certain time in the future. Because of this, you can buy and sell commodities in the form of contracts on a futures market, even if you don't grow the product or have it in real life. On exchanges in the US, Canada, and other places around the world, hundreds of futures products are bought and sold. Here is a list of the North American stock markets that have main agricultural futures contracts. All of these exchanges also trade options, which are another way to control risk for a certain product that each exchange offers.

Clearinghouse for goods



All commodity exchanges use a clearinghouse to keep track of the money that comes in and out of selling futures and options contracts. In its role as a third party, the clearinghouse is in charge of keeping track of all deals between buyers and sellers. All members of the exchange must report their trades to the clearinghouse at the end of each trading day.

After that, the center makes sure that all buyers and sellers pay each other. All contracts are guaranteed by the clearinghouse, which makes all players keep cash deposits (margin money) for their open futures positions. Because of the switch to electronic trade, exchanges can now be open longer. All of them still close every day, but using the computer platform, some may open again a few hours after the close. Some commodity exchanges have kept a real market open, where people can still buy and sell goods by shouting at each other on the trading floor. But these exchanges work at the same time as the electronic trading sites.

Deals for the future



Futures contracts are standard forms that must be followed by everyone. To make buying easier, contracts are standardized. Futures contracts spell out the good, the amount, the grade, the delivery point or price reference point, the delivery time, and the terms of delivery. It is explained below what the ICE Futures Canola contracts are for. Delivery or price points of reference. There are important delivery or price reference points for each futures contract in order for it to work right. These real-world places are chosen by the exchange. For instance, the ICE canola contract sets the prices for the actual delivery of Canadian canola free-on-board (FOB) at main delivery points in eastern Saskatchewan and other delivery points across the Canadian prairies. This point in time for prices is called the FOB Par area. All people who buy or sell ICE canola futures know that they are negotiating a price for canola that is at or near the Par region.

Limits on daily trades



To keep the market running smoothly, commodity exchanges set trade limits. Prices can't go up or down more than a certain amount from the previous day's end price because of these limits. For each contract, these amounts are different. The daily cap for ICE canola is $30 per tonne, or $600 per contract. Based on the price at the end of the previous trading day, the price can only go up or down by that much the next trading day. This means that the biggest price range that can be traded every day is $60 per tonne, which is twice the trading cap. The limits are different for other plans and exchanges. When a ceiling up or down is reached, trade in a commodity futures doesn't stop. At the maximum price, trade can go on as long as there are buyers and sellers. Trading limits may be raised the day after a limit move, as long as the contract terms set by the exchange are followed.

There is a deposit that the buyer or seller of a futures contract must make equal to a certain amount of the futures contract's total value. It's called "margin money." This deposit must be made with an RFCM before a futures contract is bought or sold. It is needed by the rules set by each commodity exchange. Margin money is a promise from the trader, who is the RFCM's user, that they will keep the deal.

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