Futures contract

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Futures are standardized, legally binding contracts obligating the buyer to purchase and the seller to deliver a specified quantity and quality of an underlying asset — a commodity, financial instrument, or index — at a predetermined price on a fixed future date, traded on organized exchanges and cleared through central counterparties.

History

Origins in Agricultural Markets

The formal origins of futures trading in the United States trace back to mid-nineteenth-century Chicago, where the convergence of railroad infrastructure and canal systems made the city the dominant hub for grain commerce in the interior of the continent. Before organized markets existed, agricultural producers and consumers faced severe seasonal price volatility, unpredictable supply, and inadequate storage infrastructure. Grain would arrive in Chicago in quantities that overwhelmed buyers, driving prices to near zero at harvest, then climb to scarcity prices in winter. These conditions created strong incentives for buyers and sellers to agree in advance on forward prices for later delivery — arrangements known as forward contracts — to manage their exposure across the crop year.

In 1848, a group of Chicago grain merchants founded the Chicago Board of Trade (CBOT), initially to organize cash grain trading. The CBOT introduced standardized futures contracts in 1865, replacing ad-hoc bilateral forward agreements with uniform specifications covering quantity, quality, and delivery terms. These contracts required buyers and sellers to post performance bonds — margin payments — through a clearing association, distributing counterparty risk and providing a degree of financial guarantee absent from forward markets. The CBOT began a clearing association in 1883, though clearing was not required of all parties until the 1920s. The standardization of contracts, the specification of delivery grades, and the introduction of margin requirements collectively transformed grain markets from a collection of bespoke agreements into a liquid, price-transparent mechanism.

The model spread rapidly. The Chicago Butter and Egg Board, founded in 1898, reconstituted itself as the Chicago Mercantile Exchange (CME) in 1919 to facilitate organized trading in a broader range of agricultural products under supervised commodity trading regulations. Similar exchanges opened in New York for cotton and in other cities tied to regionally important commodities. Regulatory oversight evolved alongside market growth: federal regulation of grain futures began with the Grain Futures Act of 1922, which established federal oversight of grain futures trading following the constitutional failure of the Futures Trading Act of 1921. The Commodity Exchange Act of 1936 extended federal oversight to a broader range of commodities and tightened provisions against manipulation and fraud.

Expansion into Financial Instruments

The most consequential structural transformation in futures markets occurred in the 1970s, when exchanges began applying the futures mechanism to financial instruments rather than physical commodities. The CME introduced currency futures on the newly formed International Monetary Market exchange in 1972, making them the first exchange-traded financial futures contracts in the United States. This development was driven by the collapse of the Bretton Woods system of fixed exchange rates in 1971, which created substantial interest rate and currency volatility that market participants needed tools to manage. The CBOT followed with mortgage-backed security futures in 1975 and U.S. Treasury bond futures in 1977, the latter becoming one of the most actively traded contracts in history.

Congress responded to this expansion with the Commodity Futures Trading Commission Act of 1974, signed by President Gerald Ford on October 23, 1974. The act overhauled the Commodity Exchange Act and created the Commodity Futures Trading Commission (CFTC) as an independent federal agency with exclusive jurisdiction over futures trading across all commodities, financial and physical. The CFTC began operations in April 1975, replacing the Department of Agriculture's Commodity Exchange Authority, which had previously held regulatory authority only over a limited list of agricultural commodities. The new agency's mandate covered the full range of exchange-traded futures contracts as markets expanded into equity index futures in the 1980s — the CME launched S&P 500 index futures in 1982 — and further into energy, metals, and eventually digital asset futures in subsequent decades.

Electronic Trading and Globalization

The structure of futures markets underwent a further transformation beginning in the early 1990s with the emergence of electronic trading platforms. The CME launched the Globex electronic trading system in 1992, beginning the transition from open-outcry floor trading — in which traders communicated bids and offers through hand signals and shouting in designated "pits" — to screen-based execution. The CBOT began replacing floor-based open-outcry methods in 1994. CME Group, formed by the merger of the CBOT and CME in 2007, closed most of its trading pits in 2015, completing a decades-long structural shift. Electronic platforms dramatically extended trading hours, reduced transaction costs, enabled algorithmic and high-frequency participation, and linked markets across time zones in ways that floor-based systems could not accommodate. Global average daily volume in futures and options on futures grew substantially in the decades following electronification, with CME Group reporting record volumes across multiple product lines in the 2020s.

Structure and Mechanics

A futures contract specifies the underlying asset, contract size, delivery date, acceptable delivery grades or indices, and the method of settlement — either physical delivery of the underlying commodity or cash-settled final payment based on a reference price. Exchanges set these contract specifications and may adjust them over time. Participants hold positions through margin accounts: initial margin must be posted before a position is opened, and the account is marked to market daily, with variation margin debited or credited depending on whether the position moved against or in favor of the holder. If the account falls below a maintenance margin threshold, the holder receives a margin call requiring additional collateral. This daily settlement process distinguishes futures from forward contracts, which settle only at expiration.

The exchange interposes a clearinghouse between buyer and seller on every trade, becoming the central counterparty to both sides of the contract. A contract struck between two parties is immediately replaced in the clearinghouse's records by two separate contracts — one between the buyer and the clearinghouse, and one between the seller and the clearinghouse. This novation eliminates bilateral counterparty credit risk and enables liquidity by allowing either side to offset a position by taking the opposite position with any other market participant rather than finding the original counterparty. Physical delivery, where it applies, occurs for only a small fraction of futures contracts; most participants close their positions before expiration by entering an equal-and-opposite trade.

Perpetual Futures

Perpetual futures are derivative instruments that share the economic structure of futures contracts — providing leveraged exposure to an underlying asset — but carry no expiration date. Rather than settling on a fixed delivery date, a perpetual futures contract remains open indefinitely, with positions kept aligned to the underlying spot price through a periodic funding rate mechanism. When the perpetual contract's price exceeds the spot price, long position holders pay short holders a funding rate; when the perpetual trades at a discount to spot, the payment flows in the opposite direction. This mechanism incentivizes arbitrage that keeps the perpetual price anchored near the underlying reference price without requiring physical or cash settlement at a fixed future date.

The perpetual contract was introduced by BitMEX, a cryptocurrencies derivatives exchange, on May 13, 2016. BitMEX co-founders Arthur Hayes, Ben Delo, and Samuel Reed designed the XBTUSD perpetual swap to solve a specific problem in crypto derivatives markets: in a market that trades continuously seven days a week, traditional futures contracts with fixed expiration dates required traders to roll positions on a schedule that created friction and cost in a market structurally unlike agricultural or financial commodity markets. The perpetual swap's funding mechanism, which recalibrates every eight hours, replaces the price convergence enforced by a delivery date with a continuous market-driven correction. The product became one of the most widely traded cryptocurrency derivatives in history, with total volume on BitMEX alone eventually exceeding $3 trillion, and was subsequently copied across dozens of offshore cryptocurrency exchanges. By 2025, the global trading volume of perpetual futures reached $61.7 trillion annually according to data reported by CryptoQuant.

Controversy: Regulatory Classification of Perpetual Futures

The central regulatory controversy surrounding perpetual futures in the United States concerns whether the instrument should be classified as a futures contract or as a swap under the Commodity Exchange Act. The distinction carries substantial legal and practical consequences: futures are traded on designated contract markets, are subject to CFTC oversight as futures products, and benefit from favorable tax treatment under Internal Revenue Code section 1256; swaps are subject to the regulatory framework enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which imposed mandatory central clearing, platform trading requirements, and registration obligations for swap dealers and major swap participants. The CFTC had previously treated perpetual contracts as swaps based on the view that, because they carry no fixed delivery date and are settled continuously via funding payments, they structurally resemble swaps rather than futures.

On April 21, 2025, the CFTC opened public comment on over a dozen policy questions regarding whether perpetual contracts should be available in the United States, including whether they should be classified as swaps or futures. The agency received more than 150 comments but did not issue a final rule in response. On May 29, 2026, CFTC Chairman Michael S. Selig — acting as the sole confirmed commissioner of the five-member body — issued an order approving Kalshi's application to list a bitcoin perpetual futures contract (BTCPERP) as a futures product. The accompanying policy statement authorized any designated contract market to self-certify similar digital commodity perpetual contracts as futures without individual CFTC approval. Within days of the order, Kalshi self-certified over a dozen additional cryptocurrency perpetual contracts, and the products crossed $1 billion in trading volume within one week of launch.

On June 18, 2026, CME Group filed suit against the CFTC and Chairman Selig in the United States District Court for the District of Columbia, case number 1:26-cv-02157. CME argued that perpetual contracts structurally meet the definition of swaps under the Dodd-Frank Act — providing for the exchange of payments based on an underlying commodity's value, transferring price risk between parties, and doing so without conveying ownership or providing for a fixed future delivery date — and that the CFTC's order therefore violated the Commodity Exchange Act. CME further alleged that the order violated the Administrative Procedure Act by reversing the agency's established prior position without sufficient explanation, having been issued without public comment and by a single commissioner rather than a quorum. CME characterized the CFTC's decision as causing a "textbook competitive injury" by allowing Kalshi, Coinbase, and other venues to compete for CME's retail customer base under a less stringent regulatory regime. The CFTC described the lawsuit as "frivolous." Kalshi was not named as a defendant.

Swaps and the Differences Between Futures and Swaps

Swaps are bilateral derivative agreements in which two parties exchange cash flows based on the value of an underlying reference — most commonly an interest rate, currency exchange rate, credit event, or commodity price — over a defined period. Unlike futures, swaps are privately negotiated contracts and were historically traded and settled over-the-counter without centralized clearing or exchange execution. The most common form is the plain vanilla interest rate swap, in which one counterparty pays a fixed rate and the other pays a floating rate, typically benchmarked to a reference rate such as SOFR, RONIA, or EURONIA, calculated on a notional principal amount that is never itself exchanged.

The structural differences between futures and swaps are material across several dimensions. Futures are standardized — the exchange defines all contract specifications including size, expiration, and delivery terms, leaving price as the only negotiated variable — while swaps are customizable, with all economic terms negotiated bilaterally. Futures trade on designated exchanges using time/price priority or other defined match engine rules, while swaps historically traded through voice or electronic networks without centralized price discovery. Futures are cleared through central counterparties from the moment of execution, with the clearinghouse as the counterparty to both sides, while swaps were predominantly bilateral until mandatory clearing requirements imposed by Dodd-Frank in 2010 began phasing in from 2013 for certain standardized interest rate and credit default swap classes. Futures positions are marked to market and margined daily through variation margin payments; uncleared swaps may use different collateral arrangements, and cleared swaps use margin methodology that differs from futures margin models in key respects, including how initial margin is calculated and collected.

Tax treatment also diverges. In the United States, futures contracts that qualify under Internal Revenue Code section 1256 are subject to a blended 60/40 tax treatment — 60% of gains treated as long-term capital gains and 40% as short-term regardless of holding period — and must be marked to market at year end. Swaps do not generally qualify for section 1256 treatment and are instead taxed as ordinary income or as capital gains based on the nature of the swap and the holder's tax status. This distinction became a central argument in the CME Group litigation against the CFTC in 2026 over the classification of perpetual futures: CME argued that the CFTC's reclassification of perpetual contracts as futures rather than swaps afforded them favorable tax treatment Congress had not intended for instruments of that structure.

Key Users

Futures markets serve a broad range of participant types whose purposes span hedging, price discovery, and speculative positioning. Commercial producers and consumers — including agricultural firms, energy companies, mining operations, and manufacturing corporations — use futures to lock in forward prices for inputs or outputs, reducing exposure to adverse price movements that could affect operating margins or capital planning. Banks and other financial institutions employ futures to manage interest rate, currency, and credit exposure in both their own books and on behalf of clients.

Asset managers, including pension funds, mutual funds, and sovereign wealth funds, use futures for portfolio hedging, efficient market exposure without purchasing the underlying asset (a technique sometimes called beta replication), and tactical asset allocation changes that can be executed more quickly and cheaply than equivalent cash market transactions. Proprietary trading firms, hedge funds, and CTAs use futures as primary speculative and liquidity provision vehicles, contributing the majority of volume on most major futures exchanges. Institutional investors also use futures for VWAP execution strategies and to manage transition risk during large portfolio reallocations. In energy and agricultural markets, the client base has shifted substantially in recent decades, with fund-oriented participants — hedge funds, CTAs, and other financial players — now representing a larger share of open interest and block volume relative to the commercial producers and consumers who historically dominated those markets.

Risk Management

Risk management in futures markets operates at multiple levels: the individual position level, the clearinghouse level, and the systemic level. At the position level, initial and variation margin requirements provide a buffer against the accumulation of losses that could lead to default. Daily mark-to-market settlement means that losses are recognized and collected continuously rather than accumulating to a terminal settlement date, substantially reducing the credit exposure a clearinghouse must manage relative to a system where losses settle only at expiration. Clearinghouses also maintain default funds — contributions from clearing members that can be mutualized to cover losses from a member default — and hold authority to liquidate defaulting members' positions in an orderly manner.

The shift away from the SPAN margin methodology toward more risk-sensitive margin models, which several major clearinghouses undertook in the 2020s, changed the economics of futures trading for clearing members and their clients. The newer models calculate margin requirements with greater granularity across portfolio positions, potentially reducing the collateral required for hedged or diversified portfolios relative to SPAN while maintaining aggregate risk coverage for the clearinghouse. The CFTC maintains oversight of clearinghouse margin models through its regulation of derivatives clearing organizations (DCOs) and has authority to require changes to margin methodologies that it determines are inadequate to cover risk under stressed conditions.

Controversies

The most significant ongoing controversy in futures markets in the mid-2020s concerns the regulation of perpetual futures and whether the CFTC's approval of those instruments as futures rather than swaps was legally and procedurally sound. As described above, CME Group filed a federal lawsuit against the CFTC in June 2026, alleging violations of both the Commodity Exchange Act and the Administrative Procedure Act. The case turns on questions with broad structural implications: whether a derivative with no fixed delivery date can qualify as a futures contract under the legal definition; whether a single commissioner can reverse established agency policy without a quorum vote or a notice-and-comment rulemaking; and whether the policy statement accompanying the approval unlawfully permits exchanges to self-certify an entire class of instruments as futures without individual CFTC review. The outcome of the litigation, Chicago Merchantile Exchange Inc. v. CFTC, 1:26-cv-02157, will carry regulatory and commercial consequences for the classification and oversight of perpetual contracts across the U.S. derivatives industry.

Historically, futures markets have also been subject to periodic manipulation concerns, most notably through "cornering" schemes in which a trader acquires a dominant long position in a futures contract and simultaneously corners the available deliverable supply, forcing short holders to settle at artificial prices. The CBOT formally prohibited cornering in 1868, though manipulation attempts continued. The Commodity Exchange Act of 1936 and subsequent CFTC enforcement actions addressed manipulation in physical commodity markets, with notable cases involving silver and grain markets through the twentieth century. In cryptocurrency perpetual futures specifically, the risk of manipulating the settlement or reference price — a concern that prompted product designers such as Kalshi to use time-weighted average prices across multiple exchanges rather than a single closing price to determine bitcoin contract settlement — has been a subject of debate among practitioners and regulators.

VIDEO: What is a Futures Contract?

An animated video from MarketsWiki explaining the basics of futures contracts.

See Also

• CME Group
• Chicago Board of Trade
• Chicago Mercantile Exchange
• Commodity Futures Trading Commission
• Options
• Swaps
• Hedging
• Settlement
• Central Counterparties
• Electronic Trading