A commodity futures contract is a standardized, legally binding agreement to buy or sell a specific quantity of a commodity at a set price on a future date, traded on a centralized exchange regulated by the Commodity Futures Trading Commission under the Commodity Exchange Act. Every term except price is fixed by the exchange before you ever place an order. You post a margin deposit, typically 3% to 12% of the contract’s full value, and your account is settled against the market every single day. Most positions never result in physical delivery; traders close out or cash-settle before expiration.
What the Contract Fixes, and What the Market Decides
Every futures contract spells out the underlying asset, the exact quantity (the contract size), the minimum quality or grade, the delivery month, and where delivery can take place. A CME corn contract covers 5,000 bushels; a crude oil contract covers 1,000 barrels.1CME Group. Corn Futures Contract Specifications2CME Group. Light Sweet Crude Oil Futures Contract Specifications The exchange’s rulebook locks all of that in so two strangers can trade the same instrument without negotiating anything.
Price is the only variable the market determines. Buyers and sellers discover it through competitive electronic bidding that reflects real-time supply and demand.
Margin: What You Actually Deposit
Initial margin is the deposit you post before opening a position. It’s a performance bond, not a down payment on the commodity. Depending on the product’s volatility, initial margin generally runs 3% to 12% of the contract’s full notional value.3CME Group. Margin – Know What Is Needed You deposit the money with a futures commission merchant, which holds it at the exchange’s clearinghouse.4Charles Schwab. How Futures Margin Works
Maintenance margin sits somewhat below the initial requirement. If your account equity drops under that level because the market has moved against you, your broker issues a margin call. You must deposit enough to bring the account back to the initial margin level. Miss the deadline and the broker can liquidate your position, often within a single business day.3CME Group. Margin – Know What Is Needed
Daily Mark-to-Market
At the end of every trading session, the clearinghouse recalculates every open position against that day’s settlement price. Gains are credited and losses debited to accounts the same day. If you spend three days on the wrong side of a price move, you’ve already paid those losses across three separate settlements rather than meeting one devastating bill at expiration.
How the Exchange Sizes Your Margin
Major exchanges use SPAN (Standard Portfolio Analysis of Risk) to set requirements. Rather than applying a flat percentage, SPAN simulates how your entire portfolio would perform under a range of worst-case market scenarios, including price swings and volatility changes. The largest potential loss across those scenarios becomes your margin requirement.5CME Group. SPAN Methodology Overview Exchanges update the parameters as market conditions change, so a quiet market can produce a lower margin requirement than a volatile one.
How a Position Closes
A futures position ends in one of three ways: an offsetting trade, cash settlement, or physical delivery.
Offsetting Trade
This is how most speculators and short-term hedgers exit. If you bought a December crude oil contract, you sell a December crude oil contract before expiration. The two cancel out, and your profit or loss is the price difference. Once the offset clears, your obligation on that contract is finished.
Cash Settlement
Some contracts never allow delivery. Stock index futures settle in cash because there’s no way to physically deliver “the S&P 500.” At expiration, the clearinghouse pays the difference between the contract price and the final settlement price. No goods change hands.
Physical Delivery
For physically delivered contracts, the seller transfers ownership through warehouse receipts or shipping certificates at an exchange-approved facility, and the buyer pays the full contract price. Only a small fraction of contracts go this route, but the possibility of delivery is what keeps futures prices anchored to real-world commodity values.
First Notice Day
First notice day is the date the exchange begins matching long and short holders for potential physical delivery. Short holders declare their intent to deliver, and the clearinghouse starts assigning delivery obligations to longs. Between first notice day and the last trading day, liquidity drops and price swings can widen.6Britannica Money. Futures Delivery – First Notice Day, Physical Delivery, and Risks
Many retail brokers automatically close client positions before first notice day to prevent accidental delivery. If a position isn’t closed in time, the trader could owe the full value of the underlying commodity rather than just the margin deposit. Experienced traders typically exit at least a week before first notice day.6Britannica Money. Futures Delivery – First Notice Day, Physical Delivery, and Risks
Position Limits and Daily Price Limits
Federal regulations cap how many contracts any single trader can hold in a given commodity. These speculative position limits exist to stop any one participant from accumulating enough contracts to corner the market or distort prices.7eCFR. 17 CFR Part 150 – Limits on Positions Separate limits apply to the spot month, any single delivery month, and the combined total across all delivery months. Exchanges can grant exemptions for legitimate hedgers, like a grain elevator operator locking in prices for inventory, but those exemptions are scrutinized.
Exchanges also impose daily price limits that cap how far a contract’s price can move in a single session. When a limit is hit, trading may pause or halt. Circuit breakers work in tiers: a first trigger pauses trading briefly, and if prices keep moving after the pause, a wider limit kicks in.8CME Group. Understanding Price Limits and Circuit Breakers
Who Regulates the Market and How Your Money Is Protected
The Commodity Exchange Act, codified at 7 U.S.C. § 1 et seq., sets up the regulatory framework for all commodity futures trading in the United States.9Office of the Law Revision Counsel. 7 USC 1 – Short Title Under 7 U.S.C. § 2, the CFTC holds exclusive jurisdiction over futures contracts and the exchanges where they trade.10Office of the Law Revision Counsel. 7 USC 2 – Jurisdiction of Commission
A designated contract market is the formal term for an exchange authorized to list futures contracts. The exchange’s clearinghouse becomes the legal counterparty to every trade: the buyer to every seller, and the seller to every buyer. That structure guarantees performance and takes counterparty risk off the individual trader.11Office of the Law Revision Counsel. 7 USC 7 – Designation of Contract Markets
The National Futures Association
The National Futures Association operates as a self-regulatory organization under CFTC oversight. The CFTC has delegated registration to the NFA, so every futures commission merchant, commodity pool operator, and introducing broker must register through the NFA and pass a background investigation before doing business.12National Futures Association. Registration and Membership The NFA also runs a customer arbitration program for disputes between traders and brokers. Claims first go to mediation; if that fails, they move to an arbitration panel.13National Futures Association. Customer Arbitration
Segregation of Your Funds
Federal law requires your broker to keep your margin deposits completely separate from its own money. Under 7 U.S.C. § 6d, a futures commission merchant must treat customer funds as belonging to the customer, account for them separately, and never commingle them with the firm’s capital or use one customer’s money to cover another’s trades.14Office of the Law Revision Counsel. 7 USC 6d – Dealing by Unregistered Futures Commission Merchants or Introducing Brokers Prohibited The implementing regulation, 17 CFR § 1.20, requires the segregated account name to identify the funds as belonging to futures customers.15eCFR. 17 CFR 1.20 – Futures Customer Funds to Be Segregated and Separately Accounted For That rule is the primary safeguard keeping your margin accessible if the brokerage itself runs into financial trouble.
Penalties for Market Abuse
The Commodity Exchange Act treats market manipulation, fraud, and related violations as felonies carrying up to $1,000,000 in fines and 10 years in prison.16Office of the Law Revision Counsel. 7 USC 13 – Violations Generally, Punishment, Costs of Prosecution Civil penalties are separate and get adjusted for inflation. As of the most recent CFTC adjustment, manipulation cases can carry civil fines of up to roughly $1.49 million per violation, or triple the trader’s monetary gain, whichever is greater. Non-manipulation violations can still reach over $200,000 per violation in an administrative action.17CFTC. Inflation Adjusted Civil Monetary Penalties The statute also prohibits manipulative and deceptive devices in connection with any futures or swap transaction, giving the CFTC broad authority to pursue new forms of market abuse.18Office of the Law Revision Counsel. 7 USC 9 – Prohibition Regarding Manipulation and False Information
How Futures Are Taxed
Regulated futures contracts receive favorable tax treatment under Internal Revenue Code Section 1256. Regardless of holding period, gain or loss is split 60/40: 60% is taxed as long-term capital gains and 40% as short-term.19Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market That blend gives most futures traders a lower effective rate than they’d pay on ordinary short-term stock trades.
Section 1256 also requires year-end mark-to-market treatment. If you’re still holding a futures position on December 31, the IRS treats it as if you sold at fair market value that day. You report the resulting gain or loss for the tax year even though the position is still open.20Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market
Gains and losses from Section 1256 contracts are reported on IRS Form 6781. Your broker will typically provide the figures on your year-end statements, but filing the form is your responsibility.21Internal Revenue Service. About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles
What You Have to Receive Before You Trade
Before you can place your first futures trade, your broker must give you a written Risk Disclosure Statement as the very first page of your account documents. Federal regulation 17 CFR § 1.55 requires this, and you must sign and date an acknowledgment confirming you received and understood it.22eCFR. 17 CFR 1.55 – Public Disclosures by Futures Commission Merchants Beyond the risk statement, the broker must also disclose material information about its own financial condition, regulatory capital, risk practices, and how it would handle customer property in a bankruptcy.
What It Costs to Trade
Futures trading involves several layers of fees on top of your margin deposit. Exchange fees are charged per contract, per side: once when you open and again when you close. On CME Group as of April 2026, Micro E-mini equity index futures cost $0.09 per side on the electronic platform, standard E-mini contracts run $0.35, and full-size S&P 500 futures cost $0.80.23CME Group. CME Fee Schedule – April 2026 Cryptocurrency, energy, and specialty products can cost considerably more.
The NFA charges a regulatory assessment of $0.02 per side per futures contract.24National Futures Association. NFA Assessment Fees FAQs Your broker then adds its own commission, which varies by firm and volume tier. Active traders who qualify for volume discounts can pay well under a dollar per side for many products; less active accounts may pay $1.50 or more. The costs are small on any single trade and large across a high-frequency strategy that runs dozens of round trips a day.