There are two types of settlement events for all futures contracts – the daily settlement and the final settlement. The daily settlement is used internally to facilitate the marked to market transfers of funds, calculate margins, and establish daily price limits. It is used externally as a signal for the current price of a given commodity. For the South American Soybean (FOB Santos Soybeans) futures contract, daily settlement in each expiry will be based on all relevant market data available at 13:15 Central Time (CT).

A big part of the relevant market data will be derived from the daily submissions that a select panel of brokers in the SAS futures contract market submits to the CME Group. These so-called ‘broker curves’ express the collective thoughts of market participant about the price levels in the market at the “Snapshot time” of 13:15 Central Time. The broker curves are submitted electronically to the exchange shortly after the Snapshot Time. It is critical to note that broker curves are a such an important component in any new cash-settled futures contract.  Brokers who facilitate bilateral negotiation and trade between counterparties and submit those trades to the exchange for clearing. The role and participation of the brokers is generally key to a well-functioning, cash-settled futures contract.

The other important settlement price that should be noted is final settlement. Final settlement is the price used by both the buyer (long) and the seller (short) to ultimately terminate a contract. In physical delivery, it represents the invoice price at which the commodity will be sold and change hands. In cash-settlement, it is the price to which all financial obligations will be marked.

In most physically delivered agricultural contracts, the final settlement price that will be used to determine the price at which the commodity will change hands is derived in nearly the same way as daily settlement – a volume weighted average price calculated during a short settlement period on the day of expiry. In cash-settled agricultural contracts, a price reporting agency (PRA) or some other price reporting entity is necessary to determine final settlement. The role of the PRA is to combine data on underlying cash transactions, bids, and offers along with their knowledge of the market to come up with a price assessment – either daily or weekly – for a given commodity. The exchange then employs calculations, which differ by commodity, to turn these assessments into final settlement prices.

For the South American Soybean futures contracts, the final settlement will be a 15 calendar day average of the Platts SOYBEX FOB Santos assessment (code: SYBBB00). The averaging period will begin the 1st of the month of expiry and end on the last trading day, the 15^th calendar day of the month of expiry. For example, a May FOB Santos Soybeans futures contract will cease trading on April 15. The final settlement price will reflect the average of the daily Platts SOYBEX FOB Santos assessment that are published from April 1 to April 15. This is true only for final settlement, as each day during the assessment window, the exchange’s daily settlement price will continue to be established by broker submissions.

Price reporting agencies play a vital role in derivatives markets. Any PRA chosen to supply assessments that underlie a final settlement price must be thoroughly trusted by the industry. Final settlement prices determined by the exchange using PRA data represent the final valuation of a commodity for the entire marketplace. The exchange puts serious consideration into the PRAs that it works with. Customer validations are continually conducted to assure PRAs retain the highest confidence within the industry, and all PRAs that partner with the exchange are expected to operate in line with the principles of the International Organization of Securities Commissions (IOSCO).

There are strengths and weaknesses with both physical delivery and cash settlement. Each commodity market is unique, and contracts should be developed to suit the specific needs of that given market. That said, there are several benefits afforded by cash settlement.

Cash-settled contracts are typically less complicated to design and can work for a broader array of market participants. Setting up a physical delivery mechanism requires significant time and investment by the exchange. Often, that effort is the best fit for an industry and physical delivery makes sense. However, some markets already have active over-the-counter (OTC) trades being valued to reliable PRA assessments. This existing infrastructure, already accepted by market participants, can make a cash-settled contract more straightforward and timely to launch.

Additionally, traders can participate in the expiration of a contract without the consideration of any aspects of physical delivery. It facilitates speculation near contract expiration since liquidity providers need not be concerned with notice days and delivery timing. Additionally, any market participant within a commodity’s value chain can hedge their risk without concern over physical delivery. Cash settlement allows a greater number of entities to participate late into a contract’s life because the end result is purely a financial exchange rather than optionality on a physical commodity.

The CME Group Agricultural product suite contains several successful cash-settled products, including the Lean Hog, Feeder Cattle, Dairy, Fertilizer, Canadian Wheat, Australian Wheat, Black Sea Wheat, and Black Sea Corn futures contracts.