SteelCityCopper wrote:I think one of Theo's questions here is key and was not addressed "... shouldn't every participant be confident that they could obtain the physical asset IF THEY WANTED?" I get the fact that the exchange does not require the contracts to be fully backed by physical because the futures market was not designed to be a procurement vehicle (to quote JFF), however, it seems like they should back it or they shouldn't... everything else appears as though the exchange is trying to pull the wool over someone's eyes. I have a hard time believing that everyone in the futures market fully understands that their contracts are partially backed (or that this has been appropriately communicated). The fact that the first folks in line get served soup and the others don't has many on edge (including folks here) and casts doubt and worry about the exchange. This is a primary reason we stack vs investing too much in paper markets. I know there are other reasons
Some of us just feel safer with a silver brick under our pillows at night... not the most comfortable by the way
However, as JFF has said, live in the now and you can profit from it because the system works... for now.
My apologies if I did not address any questions.
Just as a quick disclaimer, I am not the legal rep for any clearinghouse or clearinghouse member of any participating exchange.
The purpose of the exchange is to match buyers and sellers. It is not a physical procurement warehouse. Derivatives are inherently "derived" from an underlying commodity. They are not the actual commodity. The primary use is for financial hedging against physical (production or consumption) or for speculative purposes. What seems to you that the exchange should or shouldn't back the transactions....all transactions ARE guaranteed and backed by the exchange as the ultimate counterparty. There has never been any default for customers to be made whole. Having said that, if you as a member are supposed to provide me with good delivery bars and don't, you are in default. Does that mean that the clearinghouse has a magical stockpile of bars to ship me, in the event of your nonperformance? Nope. But they will make the financial guarantee to make me whole. For this reason some members don't allow for delivery becasue the exchange is a zero sum game. Let's say you are a customer with XYZ clearing member. XYZ is responsible to the clearinghouse to make that delivery or be in default. That means they will want to be assured that you deliver good bars to XYZ who then has to deliver to me via the clearinghouse. Many such XYZ firms will not take that risk with you becasue what you post as collateral in your account is financial, not physical. Again, this is just part of the reason why the exchange is a marketplace, not a procurement center. However, unlike most two party transactions that take place privately elsewhere, the exchange does eliminate that counterparty risk.
Consider even smaller "exchanges" i.e. Nucleo (which is not registered with the NFA or CFTC) where you are the clearinghouse member, which is one layer less than you being a customer with a member (COMEX). Nucleo IS designed to be a physical only exchange to match buyers and sellers. What happens if two members contract but the selling party defaults? Does Nucleo offer the purchasing member physical good delivery product from a magical inventory somewhere? Nope. But you can still be made whole financially for the difference just the same.
Even simpler. What if you Send Bob's Coin Shop on 123 Elm street $150,000 for a special order of "cheaper than the other guys if you can be patient for a few days before I can get them in" bars that you were going to sleep with under your pillow but Bob never delivers and skips town? You have nothing between you and Bob to make you whole, with the exception that you hire Dawg the bounty hunter to do a skip trace, find Bob (at the crackhouse where he spent your money), then have him served with court papers for your legal claim.
As for what you think the exchage appears to be doing and what you think people understand about what they are doing with their finances with whatever you feel has or hasn't been properly communicated, I have no answer. It is your opinion. Having said that, the exchange has full transparent disclosures of rules and proceedures for among other things, delivery, which are made available whenever you open an account with a clearing member firm. Non of that is hidden. It is on the clearinghouse website as well.
Any doubt or worry about the exchange as a clearinghouse is also just an opinion. It is a marketplace where buys and sellers set the price. Anyone is free to feel what they want. I obviously couldn't nor wouldn't want to change that. It is still where the large commercial hedging and spec transactions take place regardless. When you talk about some getting soup and others not, everyone from the clearinghouse has always been fed but if you deal with Bob's Coin Shop, there is a much higher risk that only Bob gets to eat and you are left out on the street.
I hope the question was answered. Your personal opinions are yours, just like mine are mine. Hopefully none of this is taken as "financial vs physical...to be or not to be". That was never my intention. Just for the record- I like both. Make a lot of financial...buy a lot of physical.
Cheers!
FWIW, I've been nibbling in the paper PM market the past few days.
