Designated Contract Market

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A Designated Contract Market (DCM) is a board of trade or exchange that operates under the regulatory oversight of the Commodity Futures Trading Commission (CFTC) in the United States. DCMs are authorized to offer standardized futures and options contracts to the public.[1]

The Commodity Futures Modernization Act (CFMA) establishes certain common requirements for all markets, whether principally securities or futures exchanges, trading security futures products. These requirements are made applicable as required listing standards under the 1934 Act for securities exchanges trading security futures and as conditions to designated contract market for boards of trade seeking to trade security futures under the CEA.[2]

Regulatory Framework[edit]

DCMs are regulated under the Commodity Exchange Act and must comply with 23 Core Principles established by the CFTC. These principles cover areas such as:

Key Functions DCMs perform several crucial functions in the derivatives market:

  • Listing and trading of futures and options contracts
  • Providing price discovery mechanisms
  • Disseminating market data
  • Implementing and enforcing trading rules
  • Conducting market surveillance
  • Ensuring financial integrity of transactions through clearinghouses

Examples[edit]

Some well-known DCMs include:

Differences from Other Trading Venues[edit]

DCMs are distinct from other trading venues such as Swap Execution Facilities (SEFs) or Over-the-Counter (OTC) markets in terms of regulatory requirements and the types of products they can offer.

Importance[edit]

DCMs play a crucial role in the financial system by providing:

  • Standardized, regulated markets for derivatives trading
  • Price discovery for various commodities and financial instruments
  • Risk management tools for businesses and investors

The regulatory oversight of DCMs helps maintain market integrity and protect market participants.

Dodd-Frank and SEFs[edit]

Among the mandates of the Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) was the establishment of a new type of entity for the trading of swaps - the swap execution facility. According to the Act, any swap eligible for clearing must be transacted on an exchange, or on a SEF. Many existing DCMs, including CME Group and Intercontinental Exchange, plan to clear swaps within their platforms, or, depending upon the final swap rules issued by the CFTC, on a separate SEF. [3]

Criteria For Designation[edit]

To be designated as a contract market, a board of trade must demonstrate to the CFTC that the board of trade meets the criteria including the capacity to prevent market manipulation and establish and enforce trading rules to ensure fair and equitable trading.

Application Process For a Designated Contract Market[edit]

CFTC Part 38 Application Procedures

Resources[edit]

References[edit]