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Description of an Eligible Contract Participant

Updated on February 23, 2012
Source

© 2012 by Aurelio Locsin.

The U.S. Commodity Exchange Act specifically defines an “eligible contract participant” as someone who can engage in transactions not normally available to retail customers. Though the Act was created in 1936 to regulate the trading of commodities such as cotton, grain, butter and eggs, it has been amended numerous times to include all trading in all commodities including energy, foreign currencies and government securities.

Contracts

Though the term “contract” applies to all kinds of legal and financial agreements, the term “eligible contract participant” only applies to certain commodity transactions involving high risk. One example is a commodity swap, which exchanges assets or liabilities for similar financial instruments. Another is the trading of certain commodities on a Derivatives Transaction Execution Facility. This type of transaction specifically excludes retail traders, unless they use futures commission merchants with net assets of at least $20 million or commodity trading advisors with at least $25 million.

Individuals

Individuals who qualify as eligible contract participants have at least one of two things in common: (1) They have the training and education to understand the technical aspects of large financial transactions. This category includes brokers and dealers, futures commission merchants, and floor brokers or traders. However, they must all be regulated by the Securities Exchange Commission. (2) They have the resources to cover the financial obligations that their transactions incur. These include individuals with assets of $10 million, or $5 million if they contractually agree to manage the risk associated with the transaction. Agents or representatives of these individuals can also qualify as eligible contract participants if they can be regulated by the government.

Organizations

Organizations can also qualify as eligible contract participants if they similarly have the technical knowledge required by their businesses or sufficient assets to cover obligations. Examples of the former include financial institutions, insurance companies regulated by a government entities or investment companies. Examples of the latter are commodity pools with assets over $5 million; employee benefit plans with assets over $5 million; or corporations, organizations or partnerships with assets over $10 million. In addition, these organizations must be subject to regulation either by the U.S. or foreign governments.

Government Entities

Government entities can also qualify as eligible contract participants but require no special prerequisites. These include the U.S. federal government, any foreign government, or political subdivisions of these entities such as states and cities. Multinational agencies such as the United Nations or the World Trade Organization also qualify. Note that these definitions come from American law and apply to transactions that the U.S. can regulate. Other countries may have entirely different qualifications for eligible contract participants, making the international definition more complicated. These foreign qualifications become important only if part or all of a transaction is also regulated by a foreign entity.

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    • Brett.Tesol profile image

      Brett Caulton 

      5 years ago from Thailand

      Well, going by those requirements, I doubt I will ever become a eligible contract participant! lol

      Sharing, up, interesting, and tweeted.

    • Peggy W profile image

      Peggy Woods 

      5 years ago from Houston, Texas

      This was interesting to read but way over my head as far as knowledge or enough financial clout to become an eligible contract participant. Like teaches said, it is interesting that governments do not require prerequisites.

    • alocsin profile imageAUTHOR

      alocsin 

      6 years ago from Orange County, CA

      The article was actually rejected from a small business site, because the topic didn't apply to the small business type. I doubt it will appeal to anyone on hubpages, but maybe a Fortune 500 exec will find it through Google. Thanks for stopping by.

    • teaches12345 profile image

      Dianna Mendez 

      6 years ago

      Very interesting topic on a complex subject. I do not qualify for this as I my expertise in financial transactions is limited (I leave that to my financial- expert husband who loves this stuff!)and currently do not have such high assets. How interesting to know that governments do not require prerequisites. I am sure your hub will benefit those who deal in such transactions.

    • alocsin profile imageAUTHOR

      alocsin 

      6 years ago from Orange County, CA

      Thank you all for slogging through this complex hub. Given the high technical knowledge and money required by eligible contract participants, the hub is really meant for Fortune 500 types, and not really the average person like you and me. Appreciate you're stopping by though.

    • Nell Rose profile image

      Nell Rose 

      6 years ago from England

      I read this a couple of times before I understood it, lol! I am not that familiar with investing and contracts, but of course this is for the higher echelons of society, in other words lots of money, but it was interesting to read, thanks for sharing!

    • thelyricwriter profile image

      Richard Ricky Hale 

      6 years ago from West Virginia

      Voted up, useful, and interesting Alocsin. I am unfamiliar with investments and everything to do with them. I couldn't imagine risking millions though. Very interesting article and as always, very well written. Thanks for sharing this info pal. Have a great day!

    • cclitgirl profile image

      Cynthia Calhoun 

      6 years ago from Western NC

      Drawing up contracts always gives me the "willies." I'm always worried about legal loopholes. Thanks for defining this better.

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