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Commodities & Futures

The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience representing investors in cases involving commodities futures and options on futures, as well as over-the-counter (OTC) derivatives, including class cases in which plaintiffs have recovered millions of dollars. See In re Amaranth Natural Gas Commodities Litigation, 711 F. Supp. 2d 301 (S.D.N.Y. 2010) (attaching $72.4 million in assets of hedge fund in action alleging manipulation of natural gas commodities futures by hedge fund) 269 F.R.D. 366 (S.D.N.Y. 2010) (certifying class); 612 F. Supp. 2d 376 (S.D.N.Y. 2008) (denying in substantial part defendants’ motions to dismiss complaint); In re Platinum and Palladium Commodities Litigation, No. 10-CV-3617 (WHP), 2014 U.S. Dist. LEXIS 96457 (S.D.N.Y. Jul. 15, 2014) (approving settlements on behalf of futures and physical platinum and palladium purchasers for total cash consideration of $57.7 million); 2015 U.S. Dist. LEXIS 98691 (approving physical purchaser plaintiffs’ fee request of $4,029,300 in its entirety based on “public policy and the high quality of representation”).

We also have significant experience representing investors in arbitration cases against introducing brokers (IBs) and futures commission merchants (FCMs) before the National Futures Association (“NFA”).

Background on Commodities

A commodity is a raw material or agricultural product for which demand exists. As uniform products, commodities are the same no matter where they originate (e.g., wheat grown in one location is essentially the same as wheat grown elsewhere and can be put to the same end use). A commodity’s price is determined as a function of the overall market in which it trades. Well-established commodities maintain active spot and derivative markets.

Trading and dealing in commodities dates to ancient civilizations trading various goods ranging from seashells to spices. Today’s investor seeking exposure to commodities has a range of choices through which to accomplish this goal:

  • Direct investment in physical commodity: an investor who wishes to own gold, for example, may choose to purchase physical gold bullion;

    • For many investors, however, it is inconvenient or altogether impractical to purchase, hold and insure a commodity (e.g., purchasing barrels of crude oil).

  • Investment in real productive assets: an investor may choose to invest in ‘real assets’ such as timberland or farmland;

    • The purchase of timberland or farmland would likely require a sizeable up-front investment, and further, may require active management of the asset in order to secure production.

  • Investment in the equity of public companies: an investor seeking commodities exposure might choose to purchase publicly traded stock tied to a particular commodity (e.g., oil companies, paper companies with forest holdings, or mining companies);

    • For many investors, however, their motivation to invest in commodities is based, at least in part, on diversifying away from the risk / return profile associated with investing in the stock market.

  • Investment in commodity derivatives (futures, options on futures and swaps): because the above investment choices are all subject to certain limitations and constraints, most investors today seeking commodities exposure choose to invest in certain derivatives, including futures contracts, options on futures, and swaps.

For investment purposes, commodities are typically divided into the following categories:

  • Agricultural commodities: includes livestock such as cattle and hogs, as well as crops such as soybeans, wheat, corn, etc.;
  • Energy commodities: includes crude oil, heating oil, natural gas, and gasoline;
  • Industrial/base metals: includes aluminum, copper, nickel, zinc, etc.;
  • Precious metals: includes gold, silver, palladium, platinum, etc.
About Futures Contracts and Futures Markets

An Overview of Futures Contracts:

A futures contract is an agreement to purchase or sell a specific amount of a commodity for a certain price and at a fixed future date. Because it is a function of an underlying commodity, a futures contract is considered a derivative product. Futures contracts are negotiated on the floor of a futures exchange.

In today’s investment environment, retail investors are increasingly being presented with opportunities to invest in asset classes beyond the more traditional universe of stocks and bonds. Some retail investors seeking to diversify their portfolios and spread risk are wading into commodities through investing in futures contracts, in addition to options on futures.

However, investors should be cautioned that futures contracts, by their very nature, are extremely speculative, volatile, and complex investments that typically carry a significant degree of leverage. Because of these risks, investing in futures is rarely suitable for the individual investor, or average retail customer.

An Overview of Futures Markets and Options on Futures:

In the United States, the largest commodities exchanges have been merged into those run by the CME Group, which includes the Chicago Board of Trade (“CBOT”), the Chicago Mercantile Exchange (“CME”), the New York Mercantile Exchange (“NYMEX”), and the Commodity Exchange Inc. (“COMEX”).

These futures markets operate as exchanges where futures contracts and options on futures contracts are traded. Various exchanges often specialize in particular commodities and types of contracts. Commodities futures contracts include futures on metals, grains, foods, as well as certain financial instruments (e.g., currencies trade on FOREX, which acts as an over-the-counter market for buyers and sellers to conduct foreign exchange transactions).

The majority of futures contracts will have associated options. Purchasing options on futures is not unlike putting a deposit down on a potential purchase – it gives the option holder the right, but not the obligation, to later follow through on the transaction. This is very important when it comes to commodities because the futures contract itself requires physical delivery of the commodity at expiration, whereas an option does not. In addition, options on futures contracts provide an investor with some ability to limit or hedge the extreme volatility associated with a futures contract.

Regulation of Commodity Futures & Arbitration of Customer Disputes

In the United States, commodity futures have been subject to federal regulation since the 1920’s. Since its creation in 1974, the Commodity Futures Trading Commission (“CFTC”) has been charged with regulation of the commodity futures industry.

As part of its mission to ensure fair and transparent markets, and prevent fraud, manipulation and other abuses, the CFTC has designated the NFA (National Futures Association) as a “registered futures association.” Accordingly, the NFA seeks to develop and enforce rules aimed at safeguarding the integrity of the markets and, where necessary, taking disciplinary action against members firms and/or their employees.

For commodity futures investors who believe they have been aggrieved, whether through fraud or other misconduct, the NFA provides a dispute resolution forum through customer arbitration. Investors may also file a reparations claim before the CFTC. Investors who wish to inquire about the possibility of commencing an arbitration or a reparations case may contact us via the contact form on this website, at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.