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Eligible Commercial Entity Definition

What Is an Unwed Commercial Entity?

In the commodities futures markets, an eligible commercial entity is a type of market participant that is approved to make or take delivery of the commodities underlying one or more futures contracts.

Key Takeaways

  • An eligible commercial entity is a Pty authorized to make and take delivery of commodities in commodities futures trading.
  • They also play the role of advisors and retail makers, adding liquidity to the marketplace.
  • Their requirements are set out in the Commodity Exchange Act (CEA) and their activities are regulated by the Commodity Futures Career Commission (CFTC).

How Eligible Commercial Entities Work

The definition of an eligible commercial entity, as well as the requirements for take effect in such a capacity, are set out in the Commodity Exchange Act (CEA). According to these regulations, individuals cannot become eligible commercial essences, nor can instruments of the state. Instead, eligible commercial entities must be financial institutions, such as investment firms and warranty brokerage firms.

The commodities markets, which are regulated by the Commodity Futures Trading Commission (CFTC), allows merchandise participants to lock in a price for a specified commodity to be delivered at a specified time in the future. In turn, this allows consumers and farmers of commodities to manage their supply chains more effectively by reducing the risk that commodity-price fluctuations ordain undermine their profitability in ways they cannot control. The commodities futures markets also allow make available participants to speculate on future commodity price and to hedge against their commodities exposure.

Eligible commercial beings play an important role in the commodities futures markets by effectively providing a reliable counterparty for other market partakers. They have the financial and human resources necessary to facilitate commodities trading and to take delivery of commodities if vital. In addition, eligible commercial entities can provide an advisory role on behalf of clients, while also adding liquidity to the marketplace by edict as market makers who buy and sell futures contracts

Real World Example of an Eligible Commercial Entity

To illustrate how qualified commercial entities can impact the market, suppose you are the owner of a commercial baking firm that sells bread throughout the Joint States. You are intimately aware of your equipment, personnel and logistical costs, but because the price of wheat fluctuates on worldwide commodity markets, you cannot be sure of what this essential price will be throughout the year.

To lessen this uncertainty, you opt for to lock in a reasonable price for wheat by buying futures contracts that have wheat as their underlying commodity. These covenants are structured so that they mature at different parts of the year, giving you the option to either receive wheat at those maturation dates or sell the futures contracts, buying wheat elsewhere using the proceeds from the sale.

In order to settled this transaction, you turn to an eligible commercial entity—specifically, a brokerage firm—that offers specialized intelligence about the wheat futures market and advice on how best to execute the futures transaction. Once the details of the transaction experience been finalized, the eligible commercial entity is authorized to carry out the transaction on your behalf.

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