The purpose of this study is to give a detailed overview on the workings of futures markets, including sugar, and the participation of funds in markets. 

Futures have played an important role in the market for over a century, and have gone through a number of evolutions during that time. Throughout, the futures market has remained an important risk management tool for commercial users. However, recently, the make-up of market participants has made the use of futures markets by commercial traders more challenging. Instead of producers/consumers or traders holding a pivotal position, either through better contacts or through a more-nuanced insight into the fundamental dynamics, it has become the domain of financially more robust, and frequently data-focused, operators. These operators are generally grouped together under the heading of funds. This MECAS study will focus on their activities and impact on financial markets including sugar. 

The failure of financial markets during the 2008 crash has advanced the importance of market regulation. For financial markets based in the US, the sole authority is the Commodity Futures Trading Commission. It holds both a central oversight role as well as a data collection and dissemination function. The CFTC’s Commitment of Traders report is a unique source for extracting positional and participation information of funds on an aggregate, but commodity-specific, level. 

Another piece of today’s market structure and activity level on financial markets is the operation and evolution of the exchanges, which manage the futures markets. The corporate objectives and the key metrics, along which the exchange operates, are briefly reviewed to complete the overview. Lastly, we will pull together the reported insights and conclude by surmising the impact of fund activity in the sugar market. 

There were two previous studies on "Funds". The most recent was in 2008, which focused predominantly on the impact that investment funds were having in the expansion on the Brazil sugarcane industry at that time. The other paper, dated in 2000, was a copy of a speech by Jonathan Kingsman to the ISO seminar. But those were historic days, when traders dominated markets and funds dipped in-and-out.

Contents:

Introduction 

1   Futures Market Environment 
     Intended Users 
     Operational Aspects 
     Dynamics in and around the Market 
     Alternative Market Structures 
     Implications for the Sugar Market 

2   The CFTC Reporting System 
     Statutory Control over Financial Markets 
     Structural Issue with the CFTC Reports 
     Markets Covered / Data Handled 

3   Participants in the Futures Market 
     Do Traders Speculate? 
     Banks / Swap Dealers 
     What is a Fund 
     HFT / Algos 
     HFT Impact on Sugar Market 
     The Broader Market Impact 
     How Things have changed in Sugar 

4   The Exchanges 
     Market Proliferation 
     Fee Structure on ICE 
     Volume Expansion 
     The Need for Speed 
     Reliance on Clearing Members 

5   Sugar implications 

Conclusion