Open Interest

Every futures contract has a buyer and a seller, so each open contract is at once one long position and one short position. The explanatory notes state the consequence directly: the aggregate of all long open interest equals the aggregate of all short open interest. Open interest is therefore quoted as a single figure, the number of contracts outstanding, and not as the sum of the long and the short sides, which would count every contract twice.

The same notes use the word position for a trader's own share of the total: open interest held or controlled by a trader is that trader's position. A market's open interest is thus the sum of every trader's long positions, and equally the sum of every trader's short positions, in that market.

Volume Versus Open Interest

The CFTC glossary defines volume as the number of contracts traded during a specified period of time, usually quoted as a number of contracts but for some physical commodities quoted in physical units such as bushels or barrels. Volume is a flow measured over a period; open interest is a stock measured at a point in time. A single contract can be traded many times in a day, adding to volume on each occasion, while open interest changes only when contracts are created or extinguished.

Whether a given trade changes open interest depends on whether each side is opening or closing a position. When both the buyer and the seller open new positions, a new contract comes into existence and open interest rises. When one side opens and the other closes, an existing contract passes from the departing trader to the new one and open interest does not change. When both sides close existing positions, a contract is extinguished and open interest falls. In every case the trade counts in full toward the session's volume.

Offsetting a Position and Rolling It Forward

Most futures positions end by offset rather than by delivery. The CFTC glossary describes offset as liquidating a purchase of futures through the sale of an equal number of contracts of the same delivery month, or liquidating a short sale through the purchase of an equal number of contracts of the same delivery month. The delivery month matters: a sale in a different month does not close the original contract but opens a second position, so a trader who is long March and sells June holds two open positions, not none.

The glossary uses liquidation for the closing out of a long position, and notes that closing out a short position is more often called covering. It describes a roll-over as lifting a near futures position and re-establishing it in a more deferred delivery month, a tactic also referred to as rolling forward. Because a roll closes a position in one month and opens one in another, it moves open interest from the near month to the deferred month while leaving the trader's overall exposure in the commodity broadly unchanged. Market-wide figures that add all months together can therefore hide a large shift of positions between delivery months.

Delivery, Exercise and Expiry

Open interest can also fall without any offsetting trade. A futures contract held into its delivery period may be settled by delivery. The CFTC glossary describes a delivery notice as the written notice given by the seller of an intention to make delivery against an open short futures position on a particular date, delivered through the clearing organization and separate from the warehouse receipt or other document that transfers title.

Once a delivery notice has been issued or stopped against a contract, the contract is on its way out of the market. The Commitments of Traders notes state that open interest as reported to the Commission and used in the report does not include open futures contracts against which notices of delivery have been stopped by a trader or issued by an exchange's clearing organization. The regulation governing exchange data, 17 CFR 16.01, likewise requires each exchange to record its total gross open contracts in futures excluding contracts against which delivery notices have been stopped, and to record separately, for futures that call for delivery, the open contracts against which delivery notices were issued that business day.

Options leave open interest in two further ways. The CFTC's definition of open contracts in 17 CFR 15.00 counts commodity option positions that have not expired, been exercised or been offset. An exercised option is closed when the clearing organization assigns it to a writer, and an option that reaches its expiration date unexercised simply ceases to exist; the glossary describes the expiration date as the date on which an option contract automatically expires, the last day it may be exercised. Neither event involves a trade, so each reduces open interest while adding nothing to volume.

How Exchanges Record and Publish Open Interest

Under 17 CFR 16.01 every reporting market, meaning a designated contract market or another registered entity, must record its trading volume and open contracts for each business day. Futures are recorded by commodity and by futures expiration date. Options are recorded by underlying futures contract or underlying commodity and, within that, separately by put and call, by expiration date and by strike price, so that options open interest is available for each individual series rather than only for the class as a whole. Where the exchange uses a delta system, it also records each option's delta.

The volume an exchange records excludes transfer trades and office trades. The CFTC glossary describes transfer trades as entries made on the books of futures commission merchants to move existing trades from one account to another within the same firm, or from one firm's books to another's, where no change in ownership is involved. Because nobody's position changes hands, such an entry is not trading and does not count as volume. The exchange must also show, within its total volume, the volume of exchanges of futures or options for physical commodities or other derivatives positions, and the volume of block trades.

The data must reach the public quickly and free. Section 16.01 requires each reporting market to make its volume and open interest information readily available to the news media and the general public without charge, no later than the business day following the day to which it relates. Separately, the exchange must transmit the data to the Commission by 12:00 p.m. on the following business day, with the delta factors and settlement prices due earlier, by 7:00 a.m.

Large Trader Reporting and Reportable Positions

The CFTC sees far more than the public totals. Clearing members, futures commission merchants and foreign brokers, which the Commission's notes collectively call reporting firms, file daily reports showing the futures and option positions of each trader whose position exceeds reporting levels set by CFTC regulation. The CFTC glossary calls such a trader a large trader: one who holds or controls a position in any one future, or in any one option expiration series, of a commodity on any one exchange equal to or exceeding the reporting level.

The definition of a reportable position in 17 CFR 15.00 measures the position at the close of the market on any business day, in any one futures month of a commodity on any one reporting market, again excluding contracts against which delivery notices have been stopped or issued. The levels themselves are listed commodity by commodity in 17 CFR 15.03: for example 250 contracts for corn, 1,000 contracts for the S&P 500 stock price index and 2,000 contracts for 10-year Treasury notes, with a default of 25 contracts for commodities not listed. An account holding a reportable position is a special account.

Crossing the level in one month brings in the whole position. The Commitments of Traders notes explain that if, at the daily close, a reporting firm has a trader at or above the reporting level in any single futures month or option expiration, it reports that trader's entire position in all futures and options expiration months in that commodity, regardless of size. The aggregate of reported positions usually represents 70 to 90 percent of total open interest in a market, and the Commission raises or lowers the levels in specific markets from time to time to balance its need for information against the reporting burden on the industry.

The Commitments of Traders Report

The CFTC publishes what its large trader data show in aggregate form. According to the Commission, the Commitments of Traders reports provide a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels. The futures-only report and the futures-and-options-combined report are released every Friday at 3:30 p.m. Eastern time, so the figures a reader sees on Friday describe positions as they stood at the close three days earlier.

The report comes in a short and a long format. The short format shows open interest separately for reportable and nonreportable positions and, for reportable positions, gives the commercial and non-commercial holdings, spreading, the changes since the previous report, the percentage of open interest held by each category and the number of traders. The long format adds a breakdown by crop year where appropriate and the concentration of positions held by the largest four and eight traders.

The report has been reshaped many times. The Commission's history of the series records that data were first published monthly from June 1962, then twice a month from 1990, every two weeks from 1992 and weekly from 2000, while publication moved to the third business day after the as-of date in 1992. Option positions were added in 1995, and a supplemental report showing index traders in selected agricultural markets followed in 2007.

Commercial and Non-Commercial Traders

The legacy report sorts every reportable trader into one of two classes. All of a trader's reported futures positions in a commodity are classified as commercial if the trader uses futures in that particular commodity for hedging as defined in CFTC Regulation 1.3. A trading entity is generally classified as commercial by filing CFTC Form 40, the statement of reporting trader, showing that it is commercially engaged in business activities hedged by the use of the futures or option markets. Commission staff may use judgment to reclassify a trader where other information shows how it actually uses the markets.

Classification is made commodity by commodity. A trader may be commercial in some commodities and non-commercial in others, but a single trading entity cannot be both commercial and non-commercial in the same commodity. A multi-functional organization with more than one trading entity may, however, have each entity classified separately: the Commission's example is a financial organization whose banking entity is classified as commercial in financial futures while its separate money-management entity is classified as non-commercial.

Nonreportable Positions, Spreading and Trader Counts

The report does not survey small traders. The long and short open interest shown as nonreportable positions is derived by subtracting total reportable long and short positions from total open interest. Because the figure is a remainder rather than a count of identified accounts, neither the number of traders behind it nor whether they are commercial or non-commercial is known.

For non-commercial traders the report separates outright positions from spreading. In the futures-only report, spreading measures the extent to which each non-commercial trader holds equal long and short futures positions. The Commission's example is a non-commercial trader holding 2,000 long and 1,500 short contracts: 500 contracts appear in the long category and 1,500 in the spreading category. Intermarket spreads, such as one futures contract against a different contract, are not counted as spreading.

Percentages are calculated against total open interest in the futures-only report and against total futures-equivalent open interest in the combined report; values below 0.05 are shown as 0.0, and rounding may leave totals away from 100.0. In counting traders, each trader is counted once toward the total number of reportable traders in a market but is counted in every category in which it holds a position, so the category counts often add up to more than the total.

Concentration Ratios and Crop-Year Data

The long format shows the percentage of open interest held by the largest four and the largest eight reportable traders, whatever their classification. The ratios are computed twice: on a gross long and gross short basis, and on a net basis after offsetting each trader's equal long and short positions. A trader with large but balanced long and short positions in one market may therefore rank among the four or eight largest on the gross measures and yet fall outside them on the net measure.

For commodities with a well-defined marketing season or crop year, the data are split into old and other crop years. So as not to disclose positions in a single future near its expiration, on the first business day of the month of the last future in an old crop year that future's data are combined with the next crop year's and shown as old crop. The Commission's example is wheat on the Chicago Board of Trade, where the crop year begins with July and the prior crop year ends with May.

Spreading is computed within a crop year. A non-commercial trader who is long an old-crop future and equally short an other-crop future is shown as long-only in the old crop year and short-only in the other crop year, but as spreading in the all-futures figures, which ignore crop year. That is why adding the old and other figures for long, short or spreading need not reproduce the all-futures figure.

Options and Futures-Equivalent Open Interest

Option contracts and futures contracts cannot simply be added together, because an option does not move one for one with its underlying futures contract. For the futures-and-options-combined report the Commission computes option open interest and traders' option positions on a futures-equivalent basis, using delta factors supplied by the exchanges.

The direction of each option position decides which side it joins. Long calls and short puts are converted to long futures-equivalent open interest, and short calls and long puts to short futures-equivalent open interest. In the Commission's example, a trader with a long put position of 500 contracts and a delta factor of 0.50 is treated as holding a short futures-equivalent position of 250 contracts. Each trader's futures-equivalent long and short positions are then added to its futures positions to give combined-long and combined-short positions.

The CFTC's position limits regulation uses the same idea. Part 150 defines a futures-equivalent option as one adjusted by an economically reasonable and analytically supported measure of its exposure to price changes in the underlying contract and converted to an equivalent open futures position. Because that exposure moves with the market, the regulation allows a trader one business day to liquidate an excess over the limits that results from an option assignment, or from a change in an option's delta at that day's close where the position was within the limits on the previous day's delta, except on the last trading day of the spot month.

The Disaggregated and Supplemental Reports

Since 2009 the Commission has also published a disaggregated report for physical commodity markets, which divides reportable traders into four categories: producer, merchant, processor or user; swap dealers; managed money; and other reportables. A producer, merchant, processor or user predominantly produces, processes, packs or handles a physical commodity and uses futures to manage the risks of that business. A swap dealer deals primarily in swaps for a commodity and uses futures to manage the risk of those swaps, whether its counterparties are speculators or commercial clients. Managed money means registered commodity trading advisors, registered commodity pool operators and unregistered funds identified by the CFTC.

The categories split the legacy ones. The legacy commercial category always included swap dealers that offset over-the-counter risk in futures regardless of whether the counterparty was a commercial firm or a speculator; the disaggregated report reports them apart from producers and users. For the producer, merchant, processor or user category, open interest is reported only as long or short, while spreading is shown for the other three. Where fewer than four traders are active in a category, the size of their positions is published but the trader count is suppressed to protect confidentiality. Staff place each trader by its predominant activity, using Form 40, which CFTC Regulation 18.04 requires reportable traders to complete and which is requested again every two years.

The supplemental report adds an index traders category in selected agricultural markets, drawn from both the commercial and non-commercial categories. These traders generally replicate a commodity index by holding long futures in the component markets and rolling them forward from one future to the next using a fixed methodology. Some traders placed in the category are also engaged in other futures activity that the Commission could not disaggregate, so a category typically made up of long-only positions will still include some short positions where index trading is the bulk of a trader's activity. The commercial part includes swap dealers hedging over-the-counter commodity index exposure sold to institutions such as pension funds.

Speculative Position Limits

Speculative position limits cap the size of the position one person may hold or control. Under 17 CFR 150.2, no person may hold or control positions in a referenced contract in excess of the Commission's levels in the spot month, in any single month, or in all months combined, measured net long or net short. Spot month limits apply separately to physical-delivery and to cash-settled referenced contracts. The CFTC glossary describes the spot month as the futures contract that matures and becomes deliverable during the present month.

Because the limits are measured on a net basis, a speculator's long and short positions in the same month offset each other before the limit is applied. The limits also reach accounts a person does not hold directly. Under 17 CFR 150.4, positions in all accounts in which a person controls trading, or holds a 10 percent or greater ownership or equity interest, are aggregated with that person's own unless one of the exemptions listed in the section applies, among them exemptions for passive pool participants, for certain owned entities and for accounts carried by an independent account controller. One requirement overrides every one of those exemptions: a person who holds or controls the trading of positions in more than one account or pool with substantially identical trading strategies must aggregate all of those positions, determined pro rata, with its own.

Open Interest as the Yardstick for Exchange-Set Limits

For physical commodity contracts that are not subject to federal limits, 17 CFR 150.5(b) requires the exchange to set its own. In the spot month the limit may be no greater than 25 percent of the estimated spot month deliverable supply, calculated separately for each month listed, so the spot-month benchmark is the supply of the commodity available for delivery rather than the open interest in the contract.

Outside the spot month the exchange must adopt either speculative position limits or position accountability. Appendix F to Part 150 sets out acceptable practices for the limits: an exchange may set single-month or all-months-combined levels no greater than any one of four benchmarks, the last of which is 10 percent of the average combined futures and delta-adjusted option month-end open interest in the contract for the most recent calendar year up to 50,000 contracts, with a marginal increase of 2.5 percent of open interest thereafter. On average open interest of 200,000 contracts, that benchmark gives 5,000 contracts on the first 50,000 and a further 3,750 on the remaining 150,000, a level of 8,750 contracts. Another of the four benchmarks is a fixed 5,000 contracts, scaled to the contract's size relative to a typical cash-market transaction.

Position accountability is the alternative to a hard limit. Part 150 defines it as an exchange rule, submitted to the Commission in place of or alongside a limit, that requires an entity whose position exceeds the accountability level to consent to provide information about its position to the exchange and to halt increasing its position, or to reduce it in an orderly manner, in each case as the exchange requests. The CFTC glossary describes the information an exchange may ask for as the nature of the position, the trading strategy and hedging information. Passing an accountability level is therefore not itself a violation; it opens the position to the exchange's questions and directions.

Common Errors and Exam Traps

A frequent error is to add long and short open interest together. Every open contract has one long and one short side, and the aggregate long figure always equals the aggregate short figure, so open interest is the number of contracts, counted once.

A second error is to assume that heavy trading means rising open interest. A session in which positions pass from closing traders to opening ones adds to volume while leaving open interest unchanged, and delivery, exercise and expiry reduce open interest without any trade at all.

A third is to treat the Commitments of Traders report as current. It describes the close of business on Tuesday and is released on Friday, and its nonreportable figure is a remainder whose traders are neither counted nor classified.

A fourth is to assume that position limits are always set as a share of open interest. Spot month limits for physical commodities rest on deliverable supply, and the open-interest formula is one of several acceptable benchmarks for limits outside the spot month.

Examination Relevance and Key Takeaways

Open interest appears on securities and commodities licensing examinations wherever listed options and futures are tested: in reading market data, in distinguishing volume from open interest, and in the regulatory framework that monitors the size of positions. The key points are that open interest counts outstanding contracts once, changes only when contracts are created or extinguished, is reported daily and published free by exchanges, and supplies both the population that the CFTC's large trader reports describe and one benchmark for the position limits that cap speculative positions.