Derivatives DTEF: Understanding Transaction Execution Facilities

What Is a Derivatives Transaction Execution Facility (DTEF)?

A derivatives transaction execution facility (DTEF) is a market that focuses on supporting the transaction of derivatives limited to underlying assets of excluded commodities or assets with an inexhaustible and deliverable supply. A derivatives transaction execution facility allows for the execution of commodities with no cash market. All products listed on the exchange must not be susceptible to measures of influence or manipulation.

A DTEF provides a venue for the trading of excluded commodities, such as interest or exchange rates and other derivatives. DTEFs bring liquidity to the trade of limited sets of commodities.

Key Takeaways

• A derivatives transaction execution facility (DTEF) focuses on supporting the transaction of derivatives limited to underlying assets of excluded commodities or assets with an inexhaustible and deliverable supply.
• DTEFs allow for the execution of commodities with no cash market. 
• Because DTEFs are not open to retail investors, investors must belong to an eligible commercial entity, be an eligible contract participant, or transact through a futures commission merchant.
• Retail participants may trade on DTEFs through high net worth futures commission merchants with at least $20 million of adjusted net capital in their accounts.

Understanding a Derivatives Transaction Execution Facility (DTEF)

Derivative transaction execution facilities are not open to retail investors. To trade on this exchange, an investor must belong to an eligible commercial entity, be an eligible contract participant, or transact trades through a futures commission merchant.

Retail participants may trade on DTEFs through high net worth futures commission merchants (FCMs) with accounts with an adjusted net capital of at least $20 million. A registered commodity trading investor who directs trading for accounts containing total assets of at least $25 million may also trade for the retail investor.

Derivative transaction execution facilities must register with the Commodity Futures Trading Commission (CFTC). The CFTC grants the facilities with fewer regulatory requirements than other contract markets. The CFTC receives reports and data on significant trader transactions. The regulatory commission also assesses derivative transaction execution facilities’ compliance programs via rule enforcement reviews.

The Role of Underlying Assets in a Derivatives Transaction Execution Facility (DTEF)

Derivative prices depend on the underlying assets. Underlying assets include stocks, futures, commodities, and currencies. The underlying asset may also be an index, such as the S&P 500. In this case, the underlying asset is made from all of the common stock listed on that index.

The two main types of underlying assets in the U.S. options market are securities options, including stock options and futures options. In a case that involves stock options, the underlying asset is the stock itself. In futures options, a futures trader will buy or sell a contract that promises to deliver an underlying asset on a particular date.

Investors use underlying assets and options as a way of speculating and hedging risk. The value of an underlying asset could increase or decrease over time, which therefore changes the value of its option. In a contract for difference (CFD) trade, the underlying asset is never actually bought or sold, but the profit or loss depends on the price movement of the underlying asset of the position taken.