Saturday, September 19, 2009

Traders Active in The Future Market

A wide of financial institutions and individuals are active in futures trading today. The principal traders in financial futures are individuals and commodity pools. Commodity pools are like mutual funds, offering shares to the individual investor who regularly purchases futures contracts. Commodity pools offer the advantage of diversifying risk by trading in many contracts with varied maturities; in addition, they are professionally managed. the majority of commodity pools try to limit losses to the investor‘s original investment. Liquidating investor holdings rather than issuing margin calls. Combined, individuals and commodity pools held close to half of total open contract positions in 1979, and their share as been growing over time.
Firms and individual traders representing the future industry run a close second to individual investors and commodity pools, with open positions ranging from a fifth to about 35 percent of contracts outstanding, depending on the instrument being traded. many of these industry personal speculate on interest-rate movements or arbitrage between spot and futures markets, purchasing one contract and selling another in the expectation that interest rates on purchased contracts will decline more than (or rise less than) rates on contract sold. Alternatively, futures firms and industry traders will buy or sell futures contracts simultaneously with a sell or buy move in the spot market.
Financial institutions also play a prominent role in future trading, led by securities dealers, commercial banks, mortgages bankers, and savings and loans associations. Securities dealers appear to be less interested in risk reduction through hedging and more interested in profitable traders arising from correctly guessing the future course of interest rates and contract prices. Savings and loan associations and mortgage bankers, not surprisingly, are most involved in futures trading of GNMA mortgage-backed instruments. Rapid increases in long-term mortgage rates and volatile swings in the demand for new housing over the past two decades have brought substantial risk to the mortgage lending business. Under pressure from rising interest costs and deposit withdrawals, many savings and loan associations today have been forced to deeply discount and sell their old, low-yielding mortgage loans in the secondary market in order to raise funds. Losses incurred in the sale of old mortgages can be at least partially offset by trades executed in GNMA futures contracts. For their part, mortgages bankers frequently sell GNMA futures to hedge against interest-rate changes that may occur between the time mortgage loans are taken into their portfolios and the time they are sold in package to other investors.
The participation of savings and loan associations in futures trading was been a substantial boost in July 1981. The federal home loan bank broad (FHLBB), the industry ´s chief regulator, loosened the old rules, which limited the total volume of futures contracts an S&L could have outstanding at any one time to no more than the association's net worth position (normally about 5 percent of total assets). The new rules permit a savings and loan to hedge all of its assets if it so chooses. Trading may be carried out in any securities which a savings associations is legally entitled to hold. Many savings and loans sell GNMA futures to hedge the fixed-rate mortgages they hold on single-family homes. However, the new rules for futures trading set by the FHLBB allow savings associations to hedge on both the asset and liability side of the balance sheet and especially to offset the rapidly rising cost of deposits and nondeposit borrowings.
Participation by commercial banks in futures trading has been quite limited to date. Banks accounted for no more than 4 percent of all positions in the three most-active futures markets, according to a survey taken in March 1979. the survey, conducted by the Commodity Futures Trading Commission, found that only 24 banks held open positions in Treasury bill futures and only 14 carried positions in bond futures at that time. One major factor limiting commercial bank participation in the futures market is uncertainly over the attitude of the regulatory authorities, especially the Federal Reserve System and the Comptroller of the Currency. Another problem centers on the required accounting treatment of gains and losses from futures trading. Losses must be recognized immediately for tax purposes, while gains can be deferred. The result is volatile fluctuations in reported income for those banks active in futures trading. However, it is anticipated that bank participation in the futures market will expand significantly as the regulatory community becomes more comfortable with the hedging concept.

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