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Securities Lawyer Jonathan Kurta
By: Jonathan Kurta Author

What is a Futures Contract?

Futures are complex investment contracts that are not suitable for most retail investors. They are speculative investments that aim to correctly guess the future prices of securities or commodities. Before entering the futures market, investors should be armed with in-depth information, but unscrupulous brokers, advisors, and promoters may encourage investors to take risks without providing the requisite disclosures. When investors make uninformed decisions, they can, and often will, suffer significant losses. If they invest on margin— i.e., using borrowed money—investors may end up losing more than they initially invested.

Futures allow investors to bet on fluctuations in the price of an underlying asset or commodity. The futures contract gives the investor the right (and generally the obligation) to purchase the underlying asset or commodity at a specific price at a specific point in time. If the contract price is lower than the market price when the contract expires, the investor can immediately turn around and sell the underlying asset or commodity for a profit. If investors do not want to make the contracted purchase, they can sell the future before it expires. 

Companies that sell raw materials and products often use futures contracts to hedge against unfavorable price fluctuations. For retail investors, investing in futures contracts is almost purely speculative. While investors can do their best to make informed decisions, a multitude of global factors can cause sudden and unexpected swings that trigger substantial investment losses.

How Do Futures Work? 

It is not always practical for an investor to invest directly in a commodity. Commodity futures allow investors to diversify their portfolios with specific commodities, like oil or gold. With a commodity future, investors can make money based on changes in prices without having to take physical possession of the commodity.

When a futures contract nears its delivery date, the investor can replace it with a new contract with a more distant delivery date. If the new contract costs less than the old contract, the return is called the “roll yield.” If the new contract is more expensive than the original contract, the investor will suffer a loss called a “negative roll yield.”  

Futures are regulated by both the SEC and the Commodity Futures Trading Commission. This regulation adds an extra layer of protection for investors, and brokers can get into trouble for failing to register with the CFTC before recommending futures. FINRA also requires brokers to complete a continuing education course on futures if they wish to recommend them to investors. 

FINRA Fines Brokerage Firms Over Unsuitable Futures  

FINRA Regulatory Notice 10-51 reminds brokers of sales practices requirements for futures contracts. Brokers have an obligation to fully understand how these complex products work. In one Acceptance, Waiver, and Consent agreement, FINRA alleged that a firm did not adequately supervise brokers who were recommending futures at a time when the contracts were especially likely to produce a negative roll yield. As a result of this and other allegations, FINRA fined the brokerage firm $250,000.

Regulatory Notice 10-51 also warns investors that prices of commodity futures-linked securities may not necessarily reflect the commodity’s price at any given time. Depending on the market, futures contracts with later expiration dates may be more valuable than the commodity. The farther off the expiration date, the more time the market has to shift in the contract’s favor. This is one of the reasons that futures may have different prices than the current—or “spot”—price of the underlying commodity. In the regulatory notice, FINRA highlights its concern that certain investors may be under the impression that commodity futures-linked securities track the commodity’s price over time, which is not correct. 

When Can Futures Investors File Claims for Fraud?

Oftentimes, brokers will recommend investments in futures contracts because they stand to earn substantial fees and commissions. They may also fail to adequately assess or disclose the risks involved (including the risks of investing in futures contracts on margin). In any case, investors who lose money due to broker or advisor fraud can seek to recover their losses through FINRA arbitration, and they should discuss their legal rights with an attorney promptly.

Find Out if You Have a Claim for Futures Investment Fraud

Do you have a claim for futures investment fraud? Contact a securities investment fraud lawyer today to find out. To schedule a free and confidential consultation as soon as possible, call 877-600-0098 or submit your information online now.

Securities Lawyer Jonathan Kurta
Written by: Jonathan Kurta

Jonathan Kurta is an accomplished securities attorney and a founding partner at Kurta Law.