Futures Contracts: Pricing, Margin and Settlement

Direct Answer

A futures contract is a standardized exchange-traded agreement to buy or sell a defined quantity of an underlying commodity or reference at a price set today for a date in the future. The Commodity Futures Trading Commission describes it as an agreement priced at initiation, binding on both parties, used to assume or shift price risk, and capable of being satisfied either by delivery or by offset. Almost everything else about futures follows from that one definition: why the price tracks but does not equal the cash market, why collateral is posted and adjusted daily instead of paid up front, and why the last trading day is a hard deadline rather than a soft one.

This page is the connective guide for the Futures hub. It covers the contract itself, the relationship between futures prices and cash prices, the collateral system, daily settlement, expiry and the United States tax category futures fall into. Where a topic has its own deeper guide, the section links to it rather than repeating it.

What does a futures contract actually obligate?

A futures contract obligates both sides. The buyer, called the long, is committed to take the contract quantity at the agreed price on the agreed terms. The seller, called the short, is committed to deliver it. The CFTC's own glossary sets out four properties that together define the instrument: the price is determined when the contract is entered into, both parties are obliged to perform at that price, the contract is used to assume or shift price risk, and it can be satisfied either by delivery or by offset.

That last property does most of the practical work. Offset means entering the opposite contract in the same delivery month, which cancels the obligation and leaves only the accumulated gain or loss. The CFTC notes that most contracts are liquidated before the delivery date, so for the large majority of positions the delivery clause is a deadline that shapes behaviour rather than an event that happens.

Standardization is what makes offset possible. Because every contract in a delivery month has identical terms, a contract bought from one counterparty can be closed against a contract sold to a completely different one. The exchange's clearing organization stands between the two, which is why a futures position is a claim on a clearinghouse rather than on the person who took the other side.

The contract specification is the product

Two futures contracts on the same underlying can behave completely differently because their specifications differ. The specification is a published document, maintained by the exchange, and it defines at minimum:

• Contract size. The CFTC glossary defines this as the actual amount of the commodity represented in one contract. It is the number that converts a price quote into money.
• Minimum price fluctuation. The smallest increment the price is allowed to move, and the cash value of that increment.
• Delivery month. Which months trade, and which one is nearest to expiry.
• Last trading day. The point after which the position can no longer be closed by trading.
• Settlement method. Physical delivery or cash settlement, and for deliverable contracts, the deliverable grade and location.

Contract sizes, tick values and margin levels are set per contract by the exchange and change over time, so they are not reproduced here. They are published on the exchange's own contract specification page for each product, which is the only version that is current on the day it is read. Swoopr's guide on how to read a futures contract walks through the fields in the order they matter.

How is a futures price related to the cash price?

A futures price is not a forecast of where the cash price will be. It is the cash price adjusted for what it costs to hold the underlying until the contract expires. Those holding costs are what the CFTC glossary calls carrying charges, also called cost of carry: the cost of storing a physical commodity or holding a financial instrument over a period of time, including insurance, storage, interest on the deposited funds and other incidental costs. Which of those items actually apply depends on the underlying, because a warehoused commodity and a financial instrument do not incur the same set.

The gap between the two prices has a name. Basis, in the CFTC's definition, is the difference between the spot or cash price of a commodity and the price of the nearest futures contract for the same or a related commodity, typically calculated as cash minus futures. Basis is what a hedger is actually exposed to once the outright price move has been offset by the futures position, which is why a hedge does not eliminate risk so much as exchange price risk for basis risk.

Convergence

Basis is not stable, but it is anchored. The CFTC defines convergence as the tendency for prices of physicals and futures to approach one another, usually during the delivery month. The mechanism is the delivery clause itself: if the futures price sat far from the cash price at expiry, the party able to deliver or take delivery would have a riskless gain, and the trading that removes that gain is what pulls the two prices together.

Contango and backwardation

Prices for the same underlying in different delivery months form a curve, and the shape of that curve has two names in the CFTC's glossary. Contango is the market situation in which prices in succeeding delivery months are progressively higher than in the nearest delivery month. Backwardation is the opposite: futures prices are progressively lower in the more distant months.

Curve shape matters to anyone holding a futures position for longer than a single contract's life, because the position has to be moved forward. Selling an expiring contract and buying a more distant one in a contango market means selling the cheaper contract and buying the dearer one, and doing that repeatedly is a recurring cost that has nothing to do with whether the underlying price rose. In backwardation the arithmetic runs the other way. Neither shape is a prediction, and neither is a reason on its own to hold or avoid a position.

Why is futures margin not a down payment?

This is the single most commonly misunderstood mechanic in the product. The CFTC glossary is explicit: margin is the amount of money or collateral deposited by a customer with a broker, by a broker with a clearing member, or by a clearing member with a clearing organization, and the margin is not partial payment on a purchase. It is also called a performance bond, which is a better name for what it does.

Two levels apply to an open position. Initial margin is the amount required by the broker when the position is opened. Maintenance margin is the amount that must be kept on deposit at all times; if account equity falls to or below that level because of adverse price movement, a call for additional funds follows. The glossary defines a margin call in exactly those terms: a request from a brokerage firm to bring margin deposits back up to initial levels.

Two further points from the same source are worth holding onto. Exchanges specify initial and maintenance levels for each contract, but futures commission merchants may require their customers to post margin at higher levels than the exchange specifies. And futures margin is determined by a portfolio-based margining system that takes into account all positions in a customer's portfolio, so the requirement for a set of positions is not simply the sum of the requirements for each one. Swoopr's dedicated guide to futures margin works through initial, maintenance and margin calls with a numeric example.

Daily mark-to-market moves real cash

Futures do not accumulate an unrealized gain that is settled once at the end. The CFTC describes mark-to-market as part of the daily cash flow system used by United States futures exchanges: the gain or loss on each contract position resulting from the day's price change is calculated at the end of each trading session, and those amounts are added to or subtracted from each account balance. The CFTC's education material makes the same point in plain terms, describing customer accounts being adjusted to reflect each trading day's current market value at the close.

The payment that carries out that adjustment is variation margin. It is a genuine transfer rather than a deposit held aside, which is the practical difference that catches people out: a losing day removes cash, and only a later gain puts cash back. The reference price for the calculation is the contract's settlement price, which the CFTC glossary describes as determined pursuant to a procedure specified by the exchange. That procedure is part of the product's published rules, so it is knowable in advance rather than discovered after a bad session.

The consequence is that a futures position has a funding requirement that is separate from whether the trade is eventually right. A position can be correct about direction over its life and still be closed out along the way because the account could not fund an interim adverse run. That is a cash management problem, not a forecasting problem, and it is not solved by having a strong view.

A hypothetical example of how leverage compresses the margin

The figures below are illustrative and are not any real contract's size or requirement. They exist to expose the arithmetic.

Assume a position carries $200,000 of notional exposure and the account has posted $15,000 of margin against it. The underlying then moves 2% against the position.

• Loss on the position: 2% of $200,000, which is $4,000, before commissions and fees.
• That $4,000 is about 27% of the $15,000 posted, from a 2% move in the underlying.
• The ratio between the two is set entirely by the notional-to-margin relationship, which here is roughly 13 to 1.

Nothing unusual happened in that example. A 2% daily move is ordinary in many markets. What the arithmetic shows is that the margin requirement describes the exchange's and the broker's tolerance for the position, not the amount of risk an account is taking. Notional exposure is the figure that scales with the market; margin is the figure that scales with the collateral rules. Sizing from the second while thinking about the first is the error, and Swoopr's guide to futures risk management takes the sizing question further.

The CFTC's own investor education states the outcome plainly for retail participants: many individuals lose all of their money, and can be required to pay more than they invested initially. A futures account balance is not a floor on the loss.

Settlement: delivery or cash

Every contract resolves in one of two ways, and the specification decides which.

Physical delivery means the short delivers the actual commodity and the long pays for and receives it, against the contract's stated grade, quantity and location. The CFTC notes that most contracts contemplate fulfilment by actual delivery of the commodity, even though most positions are closed before that point.

Cash settlement replaces delivery with a payment. In the CFTC's definition it is a method of settling futures, options and other derivatives whereby the seller pays the buyer the cash value of the underlying commodity, or a cash amount based on the level of an index or price, according to a procedure specified in the contract. It is also called financial settlement. It is the only workable method where the underlying cannot be delivered, which is why index contracts are settled this way.

Both facts are fixed in the specification before any position exists, so which method applies and when the last trading day falls are knowable at entry rather than during expiry week. A trader who intends only to take a price view and has no capacity to make or take delivery is relying on closing the position in time, and that is a calendar obligation rather than a discretionary decision.

Rolling instead of expiring

An exposure that is meant to last longer than one contract has to be rolled: the expiring contract is offset and a position is opened in a later delivery month. Three things change at that moment and none of them is the underlying price.

1. The price paid is a different contract's price. The gap between the two months is the curve shape described above, and it is realized as a real cost or credit at each roll rather than showing up as a price move.
2. Liquidity shifts. Open interest, defined by the CFTC as the total number of contracts entered into and not yet liquidated or fulfilled by delivery, migrates from the expiring month to the next one. Rolling too late means transacting in a month that is thinning out.
3. Margin can change. Requirements are set per contract, and holding two legs briefly during the roll is a different portfolio than holding one.

A long-held futures exposure is therefore a sequence of contracts with a recurring cost attached, not one continuous instrument. Any comparison against holding the underlying asset outright that ignores the roll is comparing two different things.

Where the money sits: FCMs and segregation

A retail futures position is carried by a futures commission merchant, and the account's cash sits with that firm rather than with the exchange. The CFTC requires that all customer funds for trading on designated contract markets be kept apart, or segregated, from the FCM's own funds. That covers cash deposits and any securities or other property deposited to margin or guarantee futures trading. Segregated accounts must be titled for the benefit of the firm's customers.

Segregation is a protection with a defined shape rather than a guarantee of return of funds. The CFTC states that customer funds in segregation have a bankruptcy preference in the event of FCM insolvency, and that acknowledgements must be provided which would preclude a bank or clearinghouse from recognizing a right of offset against the account for the FCM's own debts. It also states the limit of that protection directly: to the extent customer funds are not sufficient to pay customer claims, the remainder of what customers are owed participates pro rata in the distributions to unsecured creditors of the bankrupt FCM.

The practical reading is that intermediary failure is a distinct risk from market risk, it is regulated rather than absent, and it is worth understanding before it is relevant rather than during it.

United States tax treatment: section 1256 and Form 6781

This section describes general mechanics in the United States as published by the IRS. It is not tax advice, individual circumstances differ, and the position of any particular contract should be confirmed with the current IRS text or a qualified tax professional.

IRS Publication 550, Investment Income and Expenses, treats regulated futures contracts as one category of section 1256 contract, alongside foreign currency contracts, nonequity options, dealer equity options and dealer securities futures contracts. Section 1256 contracts are subject to a mark-to-market rule, which is why the relevant part of the reporting form is headed "Section 1256 Contracts Marked to Market".

The reporting arithmetic is visible on the form itself. Form 6781, Gains and Losses From Section 1256 Contracts and Straddles, nets the year's section 1256 gains and losses and then splits the result on two lines: the net figure multiplied by 40% is entered as short-term capital gain or loss, and the net figure multiplied by 60% is entered as long-term capital gain or loss, each carried to Schedule D or Form 8949. That fixed split is where the familiar description of 60/40 treatment comes from.

Three points follow from the mechanics rather than from any planning objective. The split is a rule of the category, not something chosen at the account level. Because the treatment attaches to the contract type, an instrument that looks economically similar but is not a section 1256 contract does not inherit it. And because the rule marks positions at year end, a gain can be reportable in a year in which nothing was sold. Swoopr's taxes and rules section covers the wider United States framework these categories sit inside.

What goes wrong

• Sizing from the margin requirement. The requirement measures collateral adequacy for the clearing system, not the exposure the account has taken on.
• Treating an unrealized loss as unrealized. Daily settlement makes it cash, and a position can be funded out of existence before it is proved right or wrong.
• Discovering the last trading day during expiry week. Both the date and the settlement method are in the specification and are knowable before entry.
• Ignoring the roll. A multi-month exposure carries a recurring cost or credit set by curve shape, independent of the underlying price.
• Assuming a hedge removes risk. It converts price risk into basis risk, and basis moves.
• Assuming exchange minimums are the requirement. An FCM may require more, and may raise its requirement on a position already held.
• Applying one contract's tax or specification assumptions to another. Both are set per contract type.

Related reading

• Futures hub: the full set of guides in this section.
• Futures basics: the vocabulary and the shape of a position, if this page assumed too much.
• How to read a futures contract: the specification field by field.
• Futures margin: initial, maintenance and margin calls in depth.
• Futures risk management: sizing, rollover, gap risk and concentration.

References

• CFTC: Futures Market Basics
• CFTC: Basics of Futures Trading
• CFTC: Futures Glossary
• CFTC: Futures Commission Merchants (FCMs)
• CFTC: Learning Resources
• IRS: Publication 550, Investment Income and Expenses
• IRS: About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles

Sources verified August 25, 2026. Tax and regulatory material is jurisdiction-specific and changes; confirm the current text at the source before relying on it.

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