What Is an Eligible Contract Participant?
An eligible contract participant (ECP) is an entity or specific individual allowed to interact in positive financial transactions that are not open to the everyday investor. ECPs are incessantly companies, partnerships, organizations, trusts, brokerage companies, or consumers that have general assets inside the hundreds of thousands. There are very stringent prerequisites prior to 1 can achieve eligible contract participant status.
Key Takeaways
- An eligible contract participant is allowed to invest in a variety of markets that are not typically available to the everyday investor.
- Financial institutions, insurance policy companies, broker-dealers, and consumers with more than $10 million in assets can become ECPs
- The prerequisites are fewer if the main technique of the ECP is hedging: $5 million in assets if hedging investment chance and $1 million if hedging commercial chance
- The fitting guidelines for ECPs are spelled out in Segment 1a(18) of the Commodity Trade Act.
Figuring out Eligible Contract Individuals
The Commodity Trade Act outlines the {{qualifications}} for ECP eligibility (in Segment 1a(18) of the CEA). Eligible contract individuals—like financial institutions, insurance policy companies, and investment regulate companies—have sufficient regulatory status, alternatively others can become ECPs as well. The ones are typically execs and investing more than $10 million (on a discretionary basis) on behalf of customers.
Eligible contract individuals can use margin, which can be used for hedging purposes or in an try to achieve higher returns.
While the minimum for other folks, partnerships, and corporations to become an ECP is $10 million in assets, that resolve drops to $5 million if the ECP contract is being used to hedge chance. Government entities, broker-dealers, and commodity swimming swimming pools (with more than $5 million of assets under regulate) are each and every so ceaselessly eligible contract individuals as well.
ECPs are allowed to use margin after meeting positive prerequisites. First, the amount invested, on a discretionary basis, will have to exceed $5 million. second, the purpose of margin purchasing and promoting is to control the risk of an provide asset or criminal duty.
An ECP typically uses margin, not to fortify returns, alternatively to reduce the risk of an provide asset or position. That is, the ECP is the use of margin to create protective positions or hedges that reduce risks comparable to offer holdings.
Advantages and Disadvantages of ECPs
The Dodd-Frank Wall Side road Reform and Client Protection Act, which was once enacted consistent with the financial crisis in 2008, prohibits non-ECPs from engaging in positive over-the-counter spinoff transactions. The prerequisites had been put in place as part of a broader effort intended to help prevent a repeat of the financial crisis, which was once partly blamed on the emerging use of derivatives. An eligible contract participant, alternatively, is allowed to interact inside the derivatives market for different purposes, along with to hedge or arrange chance.
In sum, an eligible contract participant has a much wider range of investment conceivable possible choices and monetary possible choices compared to an ordinary investor. An ECP can have interaction in sophisticated stock or futures transactions similar to hedging, block trades, structured products, excluded commodities (with out a cash market), and other spinoff transactions.
