The Rights of Account Holders
Chapter 11: Commodity transfers, finality and security interests
Assets such as funds and securities circulate in the marketplace and between accounts. Funds have relatively unlimited longevity and their existence is not terminated when they are transferred between bank accounts. Such transfers cause only a modification in the claims of depositors. Securities also have a relatively long life-span. Bonds may have limited maturities (e.g., a 5-year bond) but shares may exist indefinitely until the company goes bankrupt, decides to repurchase them or transforms into a privately held company. Transfers do not terminate securities and, like funds transfers, they only modify rights of account holders against their intermediaries. Accordingly, both funds and securities do not cease to exist when they are transferred from one account to another. In contrast to funds and securities, commodity contracts have limited longevity. The life of a futures contract essentially involves only two phases: 1) when an investor enters into a futures contract and the intermediary credits his commodity account; and 2) when the investor acquires another futures contract that offsets the original futures contract. The second stage thus terminates the existence of both futures contracts, which offset one another. This process of offsetting commodity contracts is also known as 'close out'. The other form of settling a commodity contract is by delivery of the underlying commodity. Rules governing the operation of commodity exchanges and associated clearinghouses typically provide for the possibility to settle a commodity contract either in cash or by delivery.
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