RISK DISCLOSURE STATEMENT FOR
SECURITY FUTURES CONTRACTS
This disclosure statement discusses the characteristics and risks of standardized
security futures contracts traded on regulated U.S. exchanges. At present, regulated exchanges
are authorized to list futures contracts on individual equity securities registered under the
Securities Exchange Act of 1934 (including common stock and certain exchange-traded funds
and American Depositary Receipts), futures on certain debt instruments as well as narrowbased security indices. Futures on other types of securities and options on security futurescontracts may be authorized in the future. The glossary of terms appears at the end of the
document.
Customers should be aware that the examples in this document are exclusive of fees
and commissions that may decrease their net gains or increase their net losses. The examples
also do not include tax consequences, which may differ for each customer.
Section 1 – Risks of Security Futures
1.1.

Risks of Security Futures Transactions

Trading security futures contracts may not be suitable for all investors. You may lose asubstantial amount of money in a very short period of time. The amount you may lose ispotentially unlimited and can exceed the amount you originally deposit with your broker. This isbecause futures trading is highly leveraged, with a relatively small amount of money used toestablish a position in assets having a much greater value. If you are uncomfortable with thislevel of risk, you should not trade security futures contracts.
1.2.

General Risks

Trading security futures contracts involves risk and may result in potentially unlimited losses
that are greater than the amount you deposited with your broker. As with any high risk
financial product, you should not risk any funds that you cannot afford to lose, such as yourretirement savings, medical and other emergency funds, funds set aside for purposes suchas education or home ownership, proceeds from student loans or mortgages, or funds
required to meet your living expenses.
Be cautious of claims that you can make large profits from trading security futures contracts.
Although the high degree of leverage in security futures contracts can result in large andimmediate gains, it can also result in large and immediate losses. As with any financial
product, there is no such thing as a “sure winner.”
Because of the leverage involved and the nature of security futures contract transactions,
you may feel the effects of your losses immediately. Gains and losses in security futurescontracts are credited or debited to your account, at a minimum, on a daily basis. If
movements in the markets for security futures contracts or the underlying security decrease
the value of your positions in security futures contracts, you may be required to have or
make additional funds available to your carrying firm as margin. If your account is under theminimum margin requirements set by the exchange or the brokerage firm, your position may
1 of 25

be liquidated at a loss, and you will be liable for the deficit, if any, in your account. Margin
requirements are addressed in Section 4.
Under certain market conditions, it may be difficult or impossible to liquidate a position.
Generally, you must enter into an offsetting transaction in order to liquidate a position in asecurity futures contract. If you cannot liquidate your position in a security futures contracts,
you may not be able to realize a gain in the value of your position or prevent losses frommounting. This inability to liquidate could occur, for example, if trading is halted due tounusual trading activity in either the security futures contract or the underlying security; if
trading is halted due to recent news events involving the issuer of the underlying security; ifsystems failures occur on an exchange or at the firm carrying your position; or if the positionis on an illiquid market. Even if you can liquidate your position, you may be forced to do so
at a price that involves a large loss.
Under certain market conditions, it may also be difficult or impossible to manage your risk
from open security futures positions by entering into an equivalent but opposite position inanother contract month, on another market, or in the underlying security. This inability totake positions to limit your risk could occur, for example, if trading is halted across markets
due to unusual trading activity in the security futures contract or the underlying security or
due to recent news events involving the issuer of the underlying security.
Under certain market conditions, the prices of security futures contracts may not maintaintheir customary or anticipated relationships to the prices of the underlying security or index.
These pricing disparities could occur, for example, when the market for the security futurescontract is illiquid, when the primary market for the underlying security is closed, or when thereporting of transactions in the underlying security has been delayed. For index products, it
could also occur when trading is delayed or halted in some or all of the securities that makeup the index.
You may be required to settle certain security futures contracts with physical delivery of theunderlying security. If you hold your position in a physically settled security futures contract
until the end of the last trading day prior to expiration, you will be obligated to make or takedelivery of the underlying securities, which could involve additional costs. The actual
settlement terms may vary from contract to contract and exchange to exchange. You shouldcarefully review the settlement and delivery conditions before entering into a security futurescontract. Settlement and delivery are discussed in Section 5.
You may experience losses due to systems failures. As with any financial transaction, you
may experience losses if your orders for security futures contracts cannot be executed
normally due to systems failures on a regulated exchange or at the brokerage firm carrying
your position. Your losses may be greater if the brokerage firm carrying your position does
not have adequate back-up systems or procedures.
All security futures contracts involve risk, and there is no trading strategy that can eliminate
it. Strategies using combinations of positions, such as spreads, may be as risky as outrightlong or short positions. Trading in security futures contracts requires knowledge of both thesecurities and the futures markets.

2 of 25

Day trading strategies involving security futures contracts and other products pose special
risks. As with any financial product, persons who seek to purchase and sell the same
security future in the course of a day to profit from intra-day price movements (“day traders”)
face a number of special risks, including substantial commissions, exposure to leverage, andcompetition with professional traders. You should thoroughly understand these risks
and have appropriate experience before engaging in day trading. The special risks for day
traders are discussed more fully in Section 7.
Placing contingent orders, if permitted, such as “stop-loss” or “stop-limit” orders, will notnecessarily limit your losses to the intended amount. Some regulated exchanges may permit
you to enter into stop-loss or stop-limit orders for security futures contracts, which areintended to limit your exposure to losses due to market fluctuations. However, market
conditions may make it impossible to execute the order or to get the stop price.
You should thoroughly read and understand the customer account agreement with yourbrokerage firm before entering into any transactions in security futures contracts.
You should thoroughly understand the regulatory protections available to your funds andpositions in the event of the failure of your brokerage firm. The regulatory protections
available to your funds and positions in the event of the failure of your brokerage firm mayvary depending on, among other factors, the contract you are trading and whether you are
trading through a securities account or a futures account. Firms that allow customers totrade security futures in either securities accounts or futures accounts, or both, are required
to disclose to customers the differences in regulatory protections between such accounts,
and, where appropriate, how customers may elect to trade in either type of account.

3 of 25

Section 2 – Description of a Security Futures Contract
2.1.

What is a Security Futures Contract?

A security futures contract is a legally binding agreement between two parties topurchase or sell in the future a specific quantity of shares of a security or of the component
securities of a narrow-based security index, at a certain price. A person who buys a security
futures contract enters into a contract to purchase an underlying security and is said to be “long”
the contract. A person who sells a security futures contract enters into a contract to sell theunderlying security and is said to be “short” the contract. The price at which the contract trades(the “contract price”) is determined by relative buying and selling interest on a regulated
exchange.
In order to enter into a security futures contract, you must deposit funds with yourbrokerage firm equal to a specified percentage (usually at least 20 percent) of the current
market value of the contract as a performance bond. Moreover, all security futures contracts aremarked-to-market at least daily, usually after the close of trading, as described in Section 3 ofthis document. At that time, the account of each buyer and seller reflects the amount of any gainor loss on the security futures contract based on the contract price established at the end of the
day for settlement purposes (the “daily settlement price”).
An open position, either a long or short position, is closed or liquidated by entering into
an offsetting transaction (i.e., an equal and opposite transaction to the one that opened theposition) prior to the contract expiration. Traditionally, most futures contracts are liquidated prior
to expiration through an offsetting transaction and, thus, holders do not incur a settlement
obligation.
Examples:Investor A is long one September XYZ Corp. futures contract. To liquidate thelong position in the September XYZ Corp. futures contract, Investor A would sellan identical September XYZ Corp. contract.
Investor B is short one December XYZ Corp. futures contract. To liquidate theshort position in the December XYZ Corp. futures contract, Investor B would buy
an identical December XYZ Corp. contract.
Security futures contracts that are not liquidated prior to expiration must be settled inaccordance with the terms of the contract. Some security futures contracts are settled byphysical delivery of the underlying security. At the expiration of a security futures contract that issettled through physical delivery, a person who is long the contract must pay the final settlement
price set by the regulated exchange or the clearing organization and take delivery of theunderlying shares. Conversely, a person who is short the contract must make delivery of theunderlying shares in exchange for the final settlement price.
Other security futures contracts are settled through cash settlement. In this case, theunderlying security is not delivered. Instead, any positions in such security futures contracts thatare open at the end of the last trading day are settled through a final cash payment based on a

4 of 25

final settlement price determined by the exchange or clearing organization. Once this payment
is made, neither party has any further obligations on the contract.
Physical delivery and cash settlement are discussed more fully in Section 5.
2.2.

Purposes of Security Futures

Security futures contracts can be used for speculation, hedging, and risk management.
Security futures contracts do not provide capital growth or income.
Speculation
Speculators are individuals or firms who seek to profit from anticipated increases ordecreases in futures prices. A speculator who expects the price of the underlying instrument toincrease will buy the security futures contract. A speculator who expects the price of theunderlying instrument to decrease will sell the security futures contract. Speculation involves
substantial risk and can lead to large losses as well as profits.
The most common trading strategies involving security futures contracts are buying withthe hope of profiting from an anticipated price increase and selling with the hope of profitingfrom an anticipated price decrease. For example, a person who expects the price of XYZ stock
to increase by March can buy a March XYZ security futures contract, and a person who expects
the price of XYZ stock to decrease by March can sell a March XYZ security futures contract.
The following illustrates potential profits and losses if Customer A purchases the security futurescontract at $50 a share and Customer B sells the same contract at $50 a share (assuming 100
shares per contract).
Price of XYZ
at Liquidation
$55
$50
$45

Customer A
Profit/Loss

Customer B
Profit/Loss$500$0- $500- $500$0$500Speculators may also enter into spreads with the hope of profiting from an expectedchange in price relationships. Spreaders may purchase a contract expiring in one contract
month and sell another contract on the same underlying security expiring in a different month(e.g., buy June and sell September XYZ single stock futures). This is commonly referred to as a“calendar spread.”
Spreaders may also purchase and sell the same contract month in two different but
economically correlated security futures contracts. For example, if ABC and XYZ are both
pharmaceutical companies and an individual believes that ABC will have stronger growth than
XYZ between now and June, he could buy June ABC futures contracts and sell June XYZ
futures contracts. Assuming that each contract is 100 shares, the following illustrates how thisworks.

5 of 25

Opening
PositionPrice atLiquidation

Gain or
Loss

Price atLiquidation

Gain or
Loss

Buy ABC at 50
Sell XYZ at 45

$53
$46

$300
- $100

$53
$50

$300
- $500Net Gain or Loss$200

- $200Speculators can also engage in arbitrage, which is similar to a spread except that thelong and short positions occur on two different markets. An arbitrage position can be establishedby taking an economically opposite position in a security futures contract on anotherexchange, in an options contract, or in the underlying security.
Hedging
Generally speaking, hedging involves the purchase or sale of a security future to reduce
or offset the risk of a position in the underlying security or group of securities (or a close
economic equivalent). A hedger gives up the potential to profit from a favorable price change inthe position being hedged in order to minimize the risk of loss from an adverse price change.
An investor who wants to lock in a price now for an anticipated sale of the underlying
security at a later date can do so by hedging with security futures. For example, assume aninvestor owns 1,000 shares of ABC that have appreciated since he bought them. The investor
would like to sell them at the current price of $50 per share, but there are tax or other reasonsfor holding them until September. The investor could sell ten 100-share ABC futures contracts
and then buy back those contracts in September when he sells the stock. Assuming the stock
price and the futures price change by the same amount, the gain or loss in the stock will be
offset by the loss or gain in the futures contracts.
Price in
September

Value of 1,000
Shares of ABC

Gain or Losson Futures

Effective
Selling Price

$40
$50
$60

$40,000$50,000$60,000$10,000$
0-$10,000$50,000$50,000$50,000

Hedging can also be used to lock in a price now for an anticipated purchase of the stock
at a later date. For example, assume that in May a mutual fund expects to buy stocks in aparticular industry with the proceeds of bonds that will mature in August. The mutual fund canhedge its risk that the stocks will increase in value between May and August by purchasing
security futures contracts on a narrow-based index of stocks from that industry. When themutual fund buys the stocks in August, it also will liquidate the security futures position in theindex. If the relationship between the security futures contract and the stocks in the index isconstant, the profit or loss from the futures contract will offset the price change in the stocks,
and the mutual fund will have locked in the price that the stocks were selling at in May.
Although hedging mitigates risk, it does not eliminate all risk. For example, therelationship between the price of the security futures contract and the price of the underlying

6 of 25

security traditionally tends to remain constant over time, but it can and does vary somewhat.
Furthermore, the expiration or liquidation of the security futures contract may not coincide withthe exact time the hedger buys or sells the underlying stock. Therefore, hedging may not be aperfect protection against price risk.
Risk Management
Some institutions also use futures contracts to manage portfolio risks without necessarily
intending to change the composition of their portfolio by buying or selling the underlying
securities. The institution does so by taking a security futures position that is opposite to someor all of its position in the underlying securities. This strategy involves more risk than a traditional
hedge because it is not meant to be a substitute for an anticipated purchase or sale.
2.3.

Where Security Futures Trade

By law, security futures contracts must trade on a regulated U.S. exchange. Eachregulated U.S. exchange that trades security futures contracts is subject to joint regulation by
the Securities and Exchange Commission (SEC) and the Commodity Futures Trading
Commission (CFTC).
A person holding a position in a security futures contract who seeks to liquidate theposition must do so either on the regulated exchange where the original trade took place or on
another regulated exchange, if any, where a fungible security futures contract trades. (A person
may also seek to manage the risk in that position by taking an opposite position in a comparable
contract traded on another regulated exchange.)
Security futures contracts traded on one regulated exchange might not be fungible withsecurity futures contracts traded on another regulated exchange for a variety of reasons.
Security futures traded on different regulated exchanges may be non-fungible because they
have different contract terms (e.g., size, settlement method), or because they are cleared
through different clearing organizations. Moreover, a regulated exchange might not permit its
security futures contracts to be offset or liquidated by an identical contract traded on anotherregulated exchange, even though they have the same contract terms and are cleared throughthe same clearing organization. You should consult your broker about the fungibility of thecontract you are considering purchasing or selling, including which exchange(s), if any, on
which it may be offset.
Regulated exchanges that trade security futures contracts are required by law toestablish certain listing standards. Changes in the underlying security of a security futurescontract may, in some cases, cause such contract to no longer meet the regulated exchange’s
listing standards. Each regulated exchange will have rules governing the continued trading of
security futures contracts that no longer meet the exchange’s listing standards. These rules
may, for example, permit only liquidating trades in security futures contracts that no longer
satisfy the listing standards.

7 of 25

2.4.

How Security Futures Differ from the Underlying Security

Shares of common stock represent a fractional ownership interest in the issuer of that
security. Ownership of securities confers various rights that are not present with positions insecurity futures contracts. For example, persons owning a share of common stock may beentitled to vote in matters affecting corporate governance. They also may be entitled to receive
dividends and corporate disclosure, such as annual and quarterly reports.
The purchaser of a security futures contract, by contrast, has only a contract for futuredelivery of the underlying security. The purchaser of the security futures contract is not entitled
to exercise any voting rights over the underlying security and is not entitled to any dividends that
may be paid by the issuer. Moreover, the purchaser of a security futures contract does notreceive the corporate disclosures that are received by shareholders of the underlying security,
although such corporate disclosures must be made publicly available through the SEC’s
EDGAR system, which can be accessed at www.sec.gov. You should review such disclosures
before entering into a security futures contract. See Section 8.1 for further discussion of the
impact of corporate events on a security futures contract.
All security futures contracts are marked-to-market at least daily, usually after the closeof trading, as described in Section 3 of this document. At that time, the account of each buyer
and seller is credited with the amount of any gain, or debited by the amount of any loss, on the
security futures contract, based on the contract price established at the end of the day forsettlement purposes (the “daily settlement price”). By contrast, the purchaser or seller of theunderlying instrument does not have the profit and loss from his or her investment credited ordebited until the position in that instrument is closed out.
Naturally, as with any financial product, the value of the security futures contract and of
the underlying security may fluctuate. However, owning the underlying security does not require
an investor to settle his or her profits and losses daily. By contrast, as a result of the mark-tomarket requirements discussed above, a person who is long a security futures contract often will
be required to deposit additional funds into his or her account as the price of the security futurescontract decreases. Similarly, a person who is short a security futures contract often will be
required to deposit additional funds into his or her account as the price of the security futurescontract increases.
Another significant difference is that security futures contracts expire on a specific date.
Unlike an owner of the underlying security, a person cannot hold a long position in a security
futures contract for an extended period of time in the hope that the price will go up. If you do notliquidate your security futures contract, you will be required to settle the contract when it expires,
either through physical delivery or cash settlement. For cash-settled contracts in particular, upon
expiration, an individual will no longer have an economic interest in the securities underlying thesecurity futures contract.
2.5.

Comparison to Options

Although security futures contracts share some characteristics with options on securities(options contracts), these products are also different in a number of ways. Below are some of
the important distinctions between equity options contracts and security futures contracts.
8 of 25

If you purchase an options contract, you have the right, but not the obligation, to buy orsell a security prior to the expiration date. If you sell an options contract, you have the obligation
to buy or sell a security prior to the expiration date. By contrast, if you have a position in asecurity futures contract (either long or short), you have both the right and the obligation to buy
or sell a security at a future date. The only way that you can avoid the obligation incurred by the
security futures contract is to liquidate the position with an offsetting contract.
A person purchasing an options contract runs the risk of losing the purchase price(premium) for the option contract. Because it is a wasting asset, the purchaser of an options
contract who neither liquidates the options contract in the secondary market nor exercises it ator prior to expiration will necessarily lose his or her entire investment in the options contract.
However, a purchaser of an options contract cannot lose more than the amount of the premium.
Conversely, the seller of an options contract receives the premium and assumes the risk that heor she will be required to buy or sell the underlying security on or prior to the expiration date, inwhich event his or her losses may exceed the amount of the premium received. Although theseller of an options contract is required to deposit margin to reflect the risk of its obligation, he or
she may lose many times his or her initial margin deposit.
By contrast, the purchaser and seller of a security futures contract each enter into anagreement to buy or sell a specific quantity of shares in the underlying security. Based upon the
movement in prices of the underlying security, a person who holds a position in a security
futures contract can gain or lose many times his or her initial margin deposit. In this respect, thebenefits of a security futures contract are similar to the benefits of purchasing an option, while
the risks of entering into a security futures contract are similar to the risks of selling an option.
Both the purchaser and the seller of a security futures contract have daily margin
obligations. At least once each day, security futures contracts are marked-to-market and theincrease or decrease in the value of the contract is credited or debited to the buyer and theseller. As a result, any person who has an open position in a security futures contract may becalled upon to meet additional margin requirements or may receive a credit of available funds.
Example:Assume that Customers A and B each anticipate an increase in the market priceof XYZ stock, which is currently $50 a share. Customer A purchases an XYZ 50
call (covering 100 shares of XYZ at a premium of $5 per share). The option
premium is $500 ($5 per share X 100 shares). Customer B purchases an XYZ
security futures contract (covering 100 shares of XYZ). The total value of thecontract is $5000 ($50 share value X 100 shares). The required margin is $1000(or 20% of the contract value).
Price of
XYZ atexpiration
65
60
55
50

CustomerA
Profit/Loss
1000
500
0
-500

9 of 25

CustomerB
Profit/Loss
1500
1000
500
0

45
40
35

-500
-500
-500

-500
-1000
-1500

The most that Customer A can lose is $500, the option premium. Customer A
breaks even at $55 per share, and makes money at higher prices. Customer B
may lose more than his initial margin deposit. Unlike the options premium, themargin on a futures contract is not a cost but a performance bond. The losses for
Customer B are not limited by this performance bond. Rather, the losses or gains
are determined by the settlement price of the contract, as provided in theexample above. Note that if the price of XYZ falls to $35 per share, Customer A
loses only $500, whereas Customer B loses $1500.
2.6.

Components of a Security Futures Contract

Each regulated exchange can choose the terms of the security futures contracts it lists,
and those terms may differ from exchange to exchange or contract to contract. Some of thosecontract terms are discussed below. However, you should ask your broker for a copy of thecontract specifications before trading a particular contract.
2.6.1. Each security futures contract has a set size. The size of a security futures contract isdetermined by the regulated exchange on which the contract trades. For example, a security
futures contract for a single stock may be based on 100 shares of that stock. If prices arereported per share, the value of the contract would be the price times 100. For narrow-based
security indices, the value of the contract is the price of the component securities times themultiplier set by the exchange as part of the contract terms.
2.6.2. Security futures contracts expire at set times determined by the listing exchange. For
example, a particular contract may expire on a particular day, e.g., the third Friday of the
expiration month. Up until expiration, you may liquidate an open position by offsetting yourcontract with a fungible opposite contract that expires in the same month. If you do not liquidate
an open position before it expires, you will be required to make or take delivery of the underlying
security or to settle the contract in cash after expiration.
2.6.3. Although security futures contracts on a particular security or a narrow-based security
index may be listed and traded on more than one regulated exchange, the contract
specifications may not be the same. Also, prices for contracts on the same security or index
may vary on different regulated exchanges because of different contract specifications.
2.6.4. Prices of security futures contracts are usually quoted the same way prices are quoted in
the underlying instrument. For example, a contract for an individual security would be quoted indollars and cents per share. Contracts for indices would be quoted by an index number, usuallystated to two decimal places.
2.6.5. Each security futures contract has a minimum price fluctuation (called a tick), which may
differ from product to product or exchange to exchange. For example, if a particular security
futures contract has a tick size of 1¢, you can buy the contract at $23.21 or $23.22 but not at$23.215.

10 of 25

2.7.

Trading Halts

The value of your positions in security futures contracts could be affected if trading ishalted in either the security futures contract or the underlying security. In certain circumstances,
regulated exchanges are required by law to halt trading in security futures contracts. For
example, trading on a particular security futures contract must be halted if trading is halted on
the listed market for the underlying security as a result of pending news, regulatory concerns, ormarket volatility. Similarly, trading of a security futures contract on a narrow-based security
index must be halted under such circumstances if trading is halted on securities accounting forat least 50 percent of the market capitalization of the index. In addition, regulated exchanges are
required to halt trading in all security futures contracts for a specified period of time when
the S&P 500 Index experiences one-day declines of seven-, 13- and 20- percent. The regulated
exchanges may also have discretion under their rules to halt trading in other circumstances –such as when the exchange determines that the halt would be advisable in maintaining a fairand orderly market.
A trading halt, either by a regulated exchange that trades security futures or an
exchange trading the underlying security or instrument, could prevent you from liquidating a
position in security futures contracts in a timely manner, which could prevent you fromliquidating a position in security futures contracts at that time.
2.8.

Trading Hours

Each regulated exchange trading a security futures contract may open and close fortrading at different times than other regulated exchanges trading security futures contracts ormarkets trading the underlying security or securities. Trading in security futures contracts prior
to the opening or after the close of the primary market for the underlying security may be lessliquid than trading during regular market hours.

11 of 25

Section 3 – Clearing Organizations and Mark-to-Market Requirements
Every regulated U.S. exchange that trades security futures contracts is required to havea relationship with a clearing organization that serves as the guarantor of each security futurescontract traded on that exchange. A clearing organization performs the following functions:matching trades; effecting settlement and payments; guaranteeing performance; and facilitating
deliveries.
Throughout each trading day, the clearing organization matches trade data submitted byclearing members on behalf of their customers or for the clearing member’s proprietaryaccounts. If an account is with a brokerage firm that is not a member of the clearingorganization, then the brokerage firm will carry the security futures position with anotherbrokerage firm that is a member of the clearing organization. Trade records that do not match,either because of a discrepancy in the details or because one side of the transaction is missing,are returned to the submitting clearing members for resolution. The members are required toresolve such “out trades” before or on the open of trading the next morning.
When the required details of a reported transaction have been verified, the clearingorganization assumes the legal and financial obligations of the parties to the transaction. One
way to think of the role of the clearing organization is that it is the “buyer to every seller and theseller to every buyer.” The insertion or substitution of the clearing organization as thecounterparty to every transaction enables a customer to liquidate a security futures position
without regard to what the other party to the original security futures contract decides to do.
The clearing organization also effects the settlement of gains and losses from security
futures contracts between clearing members. At least once each day, clearing member
brokerage firms must either pay to, or receive from, the clearing organization the difference
between the current price and the trade price earlier in the day, or for a position carried overfrom the previous day, the difference between the current price and the previous day’s
settlement price. Whether a clearing organization effects settlement of gains and losses on adaily basis or more frequently will depend on the conventions of the clearing organization andmarket conditions. Because the clearing organization assumes the legal and financial
obligations for each security futures contract, you should expect it to ensure that payments are
made promptly to protect its obligations.
Gains and losses in security futures contracts are also reflected in each customer’s
account on at least a daily basis. Each day’s gains and losses are determined based on a daily
settlement price disseminated by the regulated exchange trading the security futures contract or
its clearing organization. If the daily settlement price of a particular security futures contract
rises, the buyer has a gain and the seller a loss. If the daily settlement price declines, the buyer
has a loss and the seller a gain. This process is known as “marking-to-market” or daily
settlement. As a result, individual customers normally will be called on to settle daily.
The one-day gain or loss on a security futures contract is determined by calculating thedifference between the current day’s settlement price and the previous day’s settlement price.

12 of 25

For example, assume a security futures contract is purchased at a price of $120.
If the daily settlement price is either $125 (higher) or $117 (lower), the effects
would be as follows:(1 contract representing 100 shares)
Daily
Settlement
Value

Buyer’s
Account

Seller’s
Account$125$500 gain(credit)$500 loss(debit)$117$300 loss(debit)$300 gain(credit)

The cumulative gain or loss on a customer’s open security futures positions is generally
referred to as “open trade equity” and is listed as a separate component of account equity on
your customer account statement.
A discussion of the role of the clearing organization in effecting delivery is discussed in
Section 5.

13 of 25

Section 4 – Margin and Leverage
When a broker-dealer lends a customer part of the funds needed to purchase a security
such as common stock, the term “margin” refers to the amount of cash, or down payment, thecustomer is required to deposit. By contrast, a security futures contract is an obligation and not
an asset. A security futures contract has no value as collateral for a loan. Because of thepotential for a loss as a result of the daily marked-to-market process, however, a margin deposit
is required of each party to a security futures contract. This required margin deposit also isreferred to as a “performance bond.”
In the first instance, margin requirements for security futures contracts are set by theexchange on which the contract is traded, subject to certain minimums set by law. The basic
margin requirement is 20% of the current value of the security futures contract, although somestrategies may have lower margin requirements. Requests for additional margin are known as“margin calls.” Both buyer and seller must individually deposit the required margin to theirrespective accounts.
It is important to understand that individual brokerage firms can, and in many cases do,
require margin that is higher than the exchange requirements. Additionally, margin requirements
may vary from brokerage firm to brokerage firm. Furthermore, a brokerage firm can increase its“house” margin requirements at any time without providing advance notice, and such increases
could result in a margin call.
For example, some firms may require margin to be deposited the business day following
the day of a deficiency, or some firms may even require deposit on the same day. Some firms
may require margin to be on deposit in the account before they will accept an order for a security
futures contract. Additionally, brokerage firms may have special requirements as to how
margin calls are to be met, such as requiring a wire transfer from a bank, or deposit of a certified
or cashier’s check. You should thoroughly read and understand the customer agreement withyour brokerage firm before entering into any transactions in security futures contracts.
If through the daily cash settlement process, losses in the account of a security futurescontract participant reduce the funds on deposit (or equity) below the maintenance margin level(or the firm’s higher “house” requirement), the brokerage firm will require that additional funds
be deposited.
If additional margin is not deposited in accordance with the firm’s policies, the firm canliquidate your position in security futures contracts or sell assets in any of your accounts at thefirm to cover the margin deficiency. You remain responsible for any shortfall in the account after
such liquidations or sales. Unless provided otherwise in your customer agreement or by
applicable law, you are not entitled to choose which futures contracts, other securities or otherassets are liquidated or sold to meet a margin call or to obtain an extension of time to meet amargin call.
Brokerage firms generally reserve the right to liquidate a customer’s security futurescontract positions or sell customer assets to meet a margin call at any time without contacting
the customer. Brokerage firms may also enter into equivalent but opposite positions for youraccount in order to manage the risk created by a margin call. Some customers mistakenly

14 of 25believe that a firm is required to contact them for a margin call to be valid, and that the firm is
not allowed to liquidate securities or other assets in their accounts to meet a margin call unlessthe firm has contacted them first. This is not the case. While most firms notify their customers ofmargin calls and allow some time for deposit of additional margin, they are not required to doso. Even if a firm has notified a customer of a margin call and set a specific due date for a
margin deposit, the firm can still take action as necessary to protect its financial interests,
including the immediate liquidation of positions without advance notification to the customer.
Here is an example of the margin requirements for a long security futures position.
A customer buys 3 July EJG security futures at 71.50. Assuming each contract
represents 100 shares, the nominal value of the position is $21,450 (71.50 x 3 contracts x 100
shares). If the initial margin rate is 20% of the nominal value, then the customer’s initial margin
requirement would be $4,290. The customer deposits the initial margin, bringing the equity inthe account to $4,290.
First, assume that the next day the settlement price of EJG security futures falls to
69.25. The marked-to-market loss in the customer’s equity is $675 (71.50 – 69.25 x 3 contacts x
100 shares). The customer’s equity decreases to $3,615 ($4,290 – $675). The new nominal
value of the contract is $20,775 (69.25 x 3 contracts x 100 shares). If the maintenance marginrate is 20% of the nominal value, then the customer’s maintenance margin requirement would
be $4,155. Because the customer’s equity had decreased to $3,615 (see above), the customer
would be required to have an additional $540 in margin ($4,155 – $3,615).
Alternatively, assume that the next day the settlement price of EJG security futures rises
to 75.00. The mark-to-market gain in the customer’s equity is $1,050 (75.00 – 71.50 x 3
contacts x 100 shares). The customer’s equity increases to $5,340 ($4,290 + $1,050). The newnominal value of the contract is $22,500 (75.00 x 3 contracts x 100 shares). If the maintenancemargin rate is 20% of the nominal value, then the customer’s maintenance margin requirement
would be $4,500. Because the customer’s equity had increased to $5,340 (see above), thecustomer’s excess equity would be $840.
The process is exactly the same for a short position, except that margin calls are
generated as the settlement price rises rather than as it falls. This is because the customer's
equity decreases as the settlement price rises and increases as the settlement price falls.
Because the margin deposit required to open a security futures position is a fraction of
the nominal value of the contracts being purchased or sold, security futures contracts are said tobe highly leveraged. The smaller the margin requirement in relation to the underlying value ofthe security futures contract, the greater the leverage. Leverage allows exposure to a given
quantity of an underlying asset for a fraction of the investment needed to purchase that quantity
outright. In sum, buying (or selling) a security futures contract provides the same dollar andcents profit and loss outcomes as owning (or shorting) the underlying security. However, as apercentage of the margin deposit, the potential immediate exposure to profit or loss is muchhigher with a security futures contract than with the underlying security.
For example, if a security futures contract is established at a price of $50, the contract
has a nominal value of $5,000 (assuming the contract is for 100 shares of stock). The margin

15 of 25

requirement may be as low as 20%. In the example just used, assume the contract price rises
from $50 to $52 (a $200 increase in the nominal value). This represents a $200 profit to thebuyer of the security futures contract, and a 20% return on the $1,000 deposited as margin. The
reverse would be true if the contract price decreased from $50 to $48. This represents a $200
loss to the buyer, or 20% of the $1,000 deposited as margin. Thus, leverage can either benefit
or harm an investor.
Note that a 4% decrease in the value of the contract resulted in a loss of 20% of themargin deposited. A 20% decrease would wipe out 100% of the margin deposited on the
security futures contract.

16 of 25

Section 5 – Settlement
If you do not liquidate your position prior to the end of trading on the last day before theexpiration of the security futures contract, you are obligated to either 1) make or accept a cash
payment (“cash settlement”) or 2) deliver or accept delivery of the underlying securities inexchange for final payment of the final settlement price (“physical delivery”). The terms of thecontract dictate whether it is settled through cash settlement or by physical delivery.
The expiration of a security futures contract is established by the exchange on which thecontract is listed. On the expiration day, security futures contracts cease to exist. Typically, thelast trading day of a security futures contract will be the third Friday of the expiring contract
month, and the expiration day will be the following Saturday. This follows the expiration
conventions for stock options and broad-based stock indexes. Please keep in mind that the
expiration day is set by the listing exchange and may deviate from these norms.
5.1.

Cash settlement

In the case of cash settlement, no actual securities are delivered at the expiration of the
security futures contract. Instead, you must settle any open positions in security futures bymaking or receiving a cash payment based on the difference between the final settlement priceand the previous day’s settlement price. Under normal circumstances, the final settlement pricefor a cash-settled contract will reflect the opening price for the underlying security. Once thispayment is made, neither the buyer nor the seller of the security futures contract has any further
obligations on the contract.
5.2.

Settlement by physical delivery

Settlement by physical delivery is carried out by clearing brokers or their agents with
National Securities Clearing Corporation (NSCC), an SEC-regulated securities clearing
agency. Such settlements are made in much the same way as they are for purchases and salesof the underlying security. Promptly after the last day of trading, the regulated exchange’s
clearing organization will report a purchase and sale of the underlying stock at the previous
day’s settlement price (also referred to as the “invoice price”) to NSCC. In general, if NSCC
does not reject the transaction by a time specified in its rules, settlement is effected pursuant to
the rules of the exchange and NSCC's Rules and Procedures within the normal clearance andsettlement cycle for securities transactions, which currently is two business days. However,settlement may be effected on a shorter timeframe based on the rules of the exchange andsubject to NSCC's Rules and Procedures.
If you hold a short position in a physically settled security futures contract to expiration,
you will be required to make delivery of the underlying securities. If you already own the
securities, you may tender them to your brokerage firm. If you do not own the securities, you will
be obligated to purchase them. Some brokerage firms may not be able to purchase thesecurities for you. If your brokerage firm cannot purchase the underlying securities on yourbehalf to fulfill a settlement obligation, you will have to purchase the securities through adifferent firm.

17 of 25

Section 6 – Customer Account Protections
Positions in security futures contracts may be held either in a securities account or in a
futures account. Your brokerage firm may or may not permit you to choose the types of accountin which your positions in security futures contracts will be held. The protections for funds
deposited or earned by customers in connection with trading in security futures contracts differ
depending on whether the positions are carried in a securities account or a futures account. If
your positions are carried in a securities account, you will not receive the protections available
for futures accounts. Similarly, if your positions are carried in a futures account, you will notreceive the protections available for securities accounts. You should ask your broker which ofthese protections will apply to your funds.
You should be aware that the regulatory protections applicable to your account are notintended to insure you against losses you may incur as a result of a decline or increase in theprice of a security futures contract. As with all financial products, you are solely responsible forany market losses in your account.
Your brokerage firm must tell you whether your security futures positions will be held in asecurities account or a futures account. If your brokerage firm gives you a choice, it must tell
you what you have to do to make the choice and which type of account will be used if you fail todo so. You should understand that certain regulatory protections for your account will depend onwhether it is a securities account or a futures account.
6.1.

Protections for Securities Accounts

If your positions in security futures contracts are carried in a securities account, they arecovered by SEC rules governing the safeguarding of customer funds and securities. These rules
prohibit a broker-dealer from using customer funds and securities to finance its business. As aresult, the broker-dealer is required to set aside funds equal to the net of all its excess payables
to customers over receivables from customers. The rules also require a broker-dealer tosegregate all customer fully paid and excess margin securities carried by the broker-dealer forcustomers.
The Securities Investor Protection Corporation (SIPC) also covers positions held insecurities accounts. SIPC was created in 1970 as a non-profit, non-government, membershipcorporation, funded by member broker-dealers. Its primary role is to return funds and securities
to customers if the broker-dealer holding these assets becomes insolvent. SIPC coverageapplies to customers of current (and in some cases former) SIPC members. Most broker-dealersregistered with the SEC are SIPC members; those few that are not must disclose this fact totheir customers. SIPC members must display an official sign showing their membership. To
check whether a firm is a SIPC member, go to www.sipc.org, call the SIPC Membership
Department at (202) 371-8300, or write to SIPC Membership Department, Securities Investor
Protection Corporation, 1667 K Street NW, Suite 1000, Washington, DC 20006-1620.

18 of 25

SIPC coverage is limited to $500,000 per customer, including up to $250,000 for cash.
For example, if a customer has 1,000 shares of XYZ stock valued at $200,000 and $10,000
cash in the account, both the security and the cash balance would be protected. However, if thecustomer has shares of stock valued at $500,000 and $250,000 in cash, only a total of$500,000 of those assets will be protected.
For purposes of SIPC coverage, customers are persons who have securities or cash on
deposit with a SIPC member for the purpose of, or as a result of, securities transactions. SIPC
does not protect customer funds placed with a broker-dealer just to earn interest. Insiders of thebroker-dealer, such as its owners, officers, and partners, are not customers for purposes of
SIPC coverage.
6.2.

Protections for Futures Accounts

If your security futures positions are carried in a futures account, they must be
segregated from the brokerage firm's own funds and cannot be borrowed or otherwise used forthe firm’s own purposes. If the funds are deposited with another entity (e.g., a bank, clearing
broker, or clearing organization), that entity must acknowledge that the funds belong tocustomers and cannot be used to satisfy the firm’s debts. Moreover, although a brokerage firm
may carry funds belonging to different customers in the same bank or clearing account, it may
not use the funds of one customer to margin or guarantee the transactions of another customer.
As a result, the brokerage firm must add its own funds to its customers’ segregated funds tocover customer debits and deficits. Brokerage firms must calculate their segregation
requirements daily.
You may not be able to recover the full amount of any funds in your account if thebrokerage firm becomes insolvent and has insufficient funds to cover its obligations to all of its
customers. However, customers with funds in segregation receive priority in bankruptcy
proceedings. Furthermore, all customers whose funds are required to be segregated have thesame priority in bankruptcy, and there is no ceiling on the amount of funds that must be
segregated for or can be recovered by a particular customer.
Your brokerage firm is also required to separately maintain funds invested in security
futures contracts traded on a foreign exchange. However, these funds may not receive thesame protections once they are transferred to a foreign entity (e.g., a foreign broker, exchangeor clearing organization) to satisfy margin requirements for those products. You should ask yourbroker about the bankruptcy protections available in the country where the foreign exchange (orother entity holding the funds) is located.

19 of 25

Section 7 – Special Risks for Day Traders
Certain traders who pursue a day trading strategy may seek to use security futurescontracts as part of their trading activity. Whether day trading in security futures contracts orother securities, investors engaging in a day trading strategy face a number of risks.
Day trading in security futures contracts requires in-depth knowledge of the securities andfutures markets and of trading techniques and strategies. In attempting to profit through day
trading, you will compete with professional traders who are knowledgeable andsophisticated in these markets. You should have appropriate experience before engaging in
day trading.
Day trading in security futures contracts can result in substantial commission charges, even
if the per trade cost is low. The more trades you make, the higher your total commissions
will be. The total commissions you pay will add to your losses and reduce your profits. For
instance, assuming that a round-turn trade costs $16 and you execute an average of 29
round-turn transactions per day each trading day, you would need to generate an annual
profit of $111,360 just to cover your commission expenses.
Day trading can be extremely risky. Day trading generally is not appropriate for someone oflimited resources and limited investment or trading experience and low risk tolerance. You
should be prepared to lose all of the funds that you use for day trading. In particular, you
should not fund day trading activities with funds that you cannot afford to lose.

20 of 25

Section 8 – Other
8.1.

Corporate Events

As noted in Section 2.4, an equity security represents a fractional ownership interest in
the issuer of that security. By contrast, the purchaser of a security futures contract has only acontract for future delivery of the underlying security. Treatment of dividends and othercorporate events affecting the underlying security may be reflected in the security futurescontract depending on the applicable clearing organization rules. Consequently, individuals
should consider how dividends and other developments affecting security futures in which theytransact will be handled by the relevant exchange and clearing organization. The specificadjustments to the terms of a security futures contract are governed by the rules of theapplicable clearing organization. Below is a discussion of some of the more common types ofadjustments that you may need to consider.
Corporate issuers occasionally announce stock splits. As a result of these splits, ownersof the issuer’s common stock may own more shares of the stock, or fewer shares in the case ofa reverse stock split. The treatment of stock splits for persons owning a security futures contract
may vary according to the terms of the security futures contract and the rules of the clearingorganization. For example, the terms of the contract may provide for an adjustment in thenumber of contracts held by each party with a long or short position in a security future, or for an
adjustment in the number of shares or units of the instrument underlying each contract, or both.
Corporate issuers also occasionally issue special dividends. A special dividend is anannounced cash dividend payment outside the normal and customary practice of a corporation.
The terms of a security futures contract may be adjusted for special dividends. The adjustments,
if any, will be based upon the rules of the exchange and clearing organization. In general, there
will be no adjustments for ordinary dividends as they are recognized as a normal and customary
practice of an issuer and are already accounted for in the pricing of security futures. However,adjustments for ordinary dividends may be made for a specified class of security futurescontracts based on the rules of the exchange and the clearing organization.
Corporate issuers occasionally may be involved in mergers and acquisitions. Such
events may cause the underlying security of a security futures contact to change over thecontract duration. The terms of security futures contracts may also be adjusted to reflect othercorporate events affecting the underlying security.
8.2.

Position Limits and Large Trader Reporting

All security futures contracts trading on regulated exchanges in the United States are
subject to position limits or position accountability limits. Position limits restrict the number of
security futures contracts that any one person or group of related persons may hold or control
in a particular security futures contract. In contrast, position accountability limits permit theaccumulation of positions in excess of the limit without a prior exemption. In general, position
limits and position accountability limits are beyond the thresholds of most retail investors.
Whether a security futures contract is subject to position limits, and the level for such limits,
depends upon the trading activity and market capitalization of the underlying security of the
security futures contract.

21 of 25

Position limits are required for security futures contracts on a security. Position limits
also apply only to an expiring security futures contract during its last three trading days. A
regulated exchange must establish a default position limit on a security futures contract that is
no greater than 25,000 100-share contracts (or the equivalent if the contract size is different
than 100 shares), either net or on the same side of the market, unless the underlying security
exceeds 20 million shares of estimated deliverable supply, in which case the limit may be set at
a level no greater than 12.5 percent of the estimated deliverable supply of the underlying
security, either net or on the same side of the market.
For a security futures contract on a security with a six-month total trading volume ofmore than 2.5 billion shares and there are more than 40 million shares of estimated deliverable
supply, a regulated exchange may adopt a position accountability rule in lieu of a position limit,
either net or on the same side of the market. Under position accountability rules, a trader holding
a position in a security futures contract that exceeds 25,000 100-share contracts (or theequivalent if the contract size is different than 100 shares) or such lower level specified under
the rules of the exchange, must agree to provide information regarding the position and consent
to halt increasing that position if requested by the exchange.
Brokerage firms must also report large open positions held by one person (or by several
persons acting together) to the CFTC as well as to the exchange on which the positions areheld. The CFTC’s reporting requirements are 1,000 contracts for security futures positions on
individual equity securities and 200 contracts for positions on a narrow-based index. However,individual exchanges may require the reporting of large open positions at levels less than thelevels required by the CFTC. In addition, brokerage firms must submit identifying information on
the account holding the reportable position (on a form referred to as either an “Identification ofSpecial Accounts Form” or a “Form 102”) to the CFTC and to the exchange on which thereportable position exists no later than the following business day when a reportable position is
first established.
8.3.

Transactions on Foreign Exchanges

U.S. customers may not trade security futures on foreign exchanges until authorized by
U.S. regulatory authorities. U.S. regulatory authorities do not regulate the activities of foreignexchanges and may not, on their own, compel enforcement of the rules of a foreign exchange or
the laws of a foreign country. While U.S. law governs transactions in security futures contracts
that are effected in the U.S., regardless of the exchange on which the contracts are listed, thelaws and rules governing transactions on foreign exchanges vary depending on the country inwhich the exchange is located.
8.4.

Tax Consequences

For most taxpayers, security futures contracts are not treated like other futures contracts.
Instead, the tax consequences of a security futures transaction depend on the status of the
taxpayer and the type of position (e.g., long or short, covered or uncovered). Because of theimportance of tax considerations to transactions in security futures, readers should consult theirtax advisors as to the tax consequences of these transactions.

22 of 25

Section 9 – Glossary of Terms
This glossary is intended to assist customers in understanding specialized terms used in
the futures and securities industries. It is not inclusive and is not intended to state or suggest thelegal significance or meaning of any word or term.
Arbitrage – taking an economically opposite position in a security futures contract on anotherexchange, in an options contract, or in the underlying security.
Broad-based security index – a security index that does not fall within the statutory definitionof a narrow-based security index (see Narrow-based security index). A future on a broad-based
security index is not a security future. This risk disclosure statement applies solely to security
futures and generally does not pertain to futures on a broad-based security index. Futures on abroad-based security index are under exclusive jurisdiction of the CFTC.
Cash settlement – a method of settling certain futures contracts by having the buyer (or long)
pay the seller (or short) the cash value of the contract according to a procedure set by theexchange.
Clearing broker – a member of the clearing organization for the contract being traded. All
trades, and the daily profits or losses from those trades, must go through a clearing broker.
Clearing organization – a regulated entity that is responsible for settling trades, collecting
losses and distributing profits, and handling deliveries.
Contract – 1) the unit of trading for a particular futures contract (e.g., one contract may be 100
shares of the underlying security), 2) the type of future being traded (e.g., futures on ABC
stock).
Contract month – the last month in which delivery is made against the futures contract or thecontract is cash-settled. Sometimes referred to as the delivery month.
Day trading strategy – an overall trading strategy characterized by the regular transmission bya customer of intra-day orders to effect both purchase and sale transactions in the same
security or securities.
EDGAR – the SEC's Electronic Data Gathering, Analysis, and Retrieval system maintains
electronic copies of corporate information filed with the agency. EDGAR submissions may beaccessed through the SEC’s Web site, www.sec.gov.
Futures contract – a futures contract is (1) an agreement to purchase or sell a commodity fordelivery in the future; (2) at a price determined at initiation of the contract; (3) that obligates eachparty to the contract to fulfill it at the specified price; (4) that is used to assume or shift risk;and (5) that may be satisfied by delivery or offset.
Hedging – the purchase or sale of a security future to reduce or offset the risk of a position in
the underlying security or group of securities (or a close economic equivalent).
Illiquid market – a market (or contract) with few buyers and/or sellers. Illiquid markets havelittle trading activity and those trades that do occur may be done at large price increments.
23 of 25

Liquidation – entering into an offsetting transaction. Selling a contract that was previously
purchased liquidates a futures position in exactly the same way that selling 100 shares of aparticular stock liquidates an earlier purchase of the same stock. Similarly, a futures contractthat was initially sold can be liquidated by an offsetting purchase.
Liquid market – a market (or contract) with numerous buyers and sellers trading at small priceincrements.
Long – 1) the buying side of an open futures contact, 2) a person who has bought futurescontracts that are still open.
Margin – the amount of money that must be deposited by both buyers and sellers to ensure
performance of the person’s obligations under a futures contract. Margin on security futurescontracts is a performance bond rather than a down payment for the underlying securities.
Mark-to-market – to debit or credit accounts daily to reflect that day’s profits and losses.
Narrow-based security index – in general, and subject to certain exclusions, an index that has
any one of the following four characteristics: (1) it has nine or fewer component securities; (2)any one of its component securities comprises more than 30% of its weighting; (3) the fivehighest weighted component securities together comprise more than 60% of its weighting; or (4)the lowest weighted component securities comprising, in the aggregate, 25% of the index’s
weighting have an aggregate dollar value of average daily trading volume of less than $50
million (or in the case of an index with 15 or more component securities, $30 million). A security
index that is not narrow-based is a “broad based security index.” (See Broad-based security
index).
Nominal value – the face value of the futures contract, obtained by multiplying the contract
price by the number of shares or units per contract. If XYZ stock index futures are trading at$50.25 and the contract is for 100 shares of XYZ stock, the nominal value of the futures contract
would be $5025.00.
Offsetting – liquidating open positions by either selling fungible contracts in the same contract
month as an open long position or buying fungible contracts in the same contract month as anopen short position.
Open interest – the total number of open long (or short) contracts in a particular contract
month.
Open position – a futures contract position that has neither been offset nor closed by cash
settlement or physical delivery.
Performance bond – another way to describe margin payments for futures contracts, which aregood faith deposits to ensure performance of a person’s obligations under a futures contract
rather than down payments for the underlying securities.
Physical delivery – the tender and receipt of the actual security underlying the security futurescontract in exchange for payment of the final settlement price.
24 of 25

Position – a person’s net long or short open contracts.
Regulated exchange – a registered national securities exchange, a national securities
association registered under Section 15A(a) of the Securities Exchange Act of 1934, a
designated contract market, a registered derivatives transaction execution facility, or analternative trading system registered as a broker or dealer.
Security futures contract – a legally binding agreement between two parties to purchase or
sell in the future a specific quantify of shares of a security (such as common stock, an
exchange-traded fund, or ADR) or a narrow-based security index, at a specified price.
Settlement price – 1) the daily price that the clearing organization uses to mark open positions
to market for determining profit and loss and margin calls, 2) the price at which open cash
settlement contracts are settled on the last trading day and open physical delivery contracts are
invoiced for delivery.
Short – 1) the selling side of an open futures contract, 2) a person who has sold futurescontracts that are still open.
Speculating – buying and selling futures contracts with the hope of profiting from anticipatedprice movements.
Spread – 1) holding a long position in one futures contract and a short position in a related
futures contract or contract month in order to profit from an anticipated change in the pricerelationship between the two, 2) the price difference between two contracts or contract months.
Stop limit order – an order that becomes a limit order when the market trades at a specified
price. The order can only be filled at the stop limit price or better.
Stop loss order – an order that becomes a market order when the market trades at a specified
price. The order will be filled at whatever price the market is trading at. Also called a stop order.
Tick – the smallest price change allowed in a particular contract.
Trader – a professional speculator who trades for his or her own account.
Underlying security – the instrument on which the security futures contract is based. This
instrument can be an individual equity security (including common stock and certain exchangetraded funds and American Depositary Receipts) or a narrow-based index.
Volume – the number of contracts bought or sold during a specified period of time. This figure
includes liquidating transactions.

Revised December 2002; December 2007; October 2010; April 2015; October 2018; and August 2020.

25 of 25