Business Entity In the commodity futures markets, a qualifying business entity (STE) is a type of marketing participant authorized to make or take delivery of the commodities underlying one or more futures contracts.
Appropriate business entities may also provide commodity traders with market-making and risk management services.
Key Points To Remember Business Entity
- A qualifying business entity is a company licensed to manufacture and take delivery of commodities through commodity futures trading.
- They also act as advisors and market makers, adding liquidity to the market.
- Their requirements are conventional in the Commodity Exchange Act (CEA), and their activities are take by the Commodity Futures Trading Commission (CFTC).
How Qualifying Business Entity Work
The definition of a qualifying business entity work and the requirements for acting are usual in the Commodity Exchange Act (CEA). According to these regulations, individuals cannot become qualifying business entities or instruments of the state. Instead, qualifying business entities must be financial institutions, such as investment firms and insurance brokerage firms.
The Commodity Futures Trading Commission (CFTC)
Commodity markets, regulated by the Commodity Futures Trading Commission (CFTC), allow market participants to fix a price for a specified commodity to be delivered at a specified time in the future. This, in turn, enables consumers and commodity producers to more effectively manage their supply chains by reducing the risk that fluctuations in commodity prices will hurt their profitability in ways they cannot control. . Commodity futures markets also allow market participants to speculate on future commodity prices and hedge against their commodity exposure.
Qualifying Business Entities play a vital role in the commodity futures markets by effectively providing reliable counterparty to other market participants. They have the necessary financial and human resources to facilitate commodity trading and take delivery of commodities if necessary. In addition, qualifying business entities can play an advisory role on behalf of clients while adding liquidity to the market by acting as market makers who buy and sell futures contracts on their accounts.
Actual Example Of A Qualifying Business Entity
To illustrate how qualifying business entities can impact the market, suppose you own a commercial bakery business that sells bread across the United States. Of course, you know your equipment, personnel, and logistics costs intimately. Still, because the price of wheat fluctuates in international commodity markets. You can’t be sure what that critical price will be throughout the year.
To reduce this uncertainty, you decide to set a reasonable price for wheat by buying futures contracts with grain as the underlying commodity. These contracts are structure to mature at different times of the year, giving you the option of receiving wheat on those maturity dates or selling the futures contracts, buying wheat elsewhere using the proceeds of the sale.
To complete this transaction, you are turning to a qualifying business entity. Specifically a brokerage firm that offers expert knowledge of the wheat futures market. And advice on how best to execute the futures transaction. Once the transaction details are complete. The eligible business entity is authorize to complete the transaction on your behalf.
There are also non-commercial entities – in the strict sense of the term – whose purpose is often social or otherwise. Such as the State, local authorities, non-profit associations, etc.
In the majority of cases, the commercial entity serves as a utility function . An instrument or a mechanism to solve one or more concrete business problems : A real estate project; building infrastructure. Joint creation of a manufacturing plant; etc.
Conclusion
Business Entity In the commodity futures markets. A qualifying business entity (STE) is a type of market participant that is authorize to make or take delivery. Of the commodities underlying one or more futures contracts.
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