Top Series 3 Exam Terms

The top terms you must know to pass the series 3 exam

In this article we are going to provide you with a comprehensive overview of the series 3 exam, along with many of the top terms and concepts you need to know to successfully pass your exam

The series 3 exam is unique from most securities exams in a number of ways. The structure of the exam uses both multiple choice and true and false format. The true and false style questions tend to work in favor of the test taker as there are only two possible choices, as a result the test taker automatically has a 50/50 chance of selecting the correct answer.  The multiple choice style questions tend to be more challenging and have four possible answers. Often the choices in the answer key will be long and only subtly different from one another. Additionally, The series 3 exam requires the test taker to pass two independent sections on the exam. A passing score of 70 percent is required on both the general section as well as on the rules and regulation portion of the exam. Successfully completing both sections on the series 3 exam will qualify a candidate to become registered to transact business in commodities futures contracts. 

While the commodities futures markets in some ways  operate in a similar fashion to the stock markets in many ways the operation of the futures markets are very different. The terms, concepts and rules must all be mastered in order to successfully complete your series 3 exam. The clearing, settlement and delivery of underlying commodities are extremely important concepts and are the basis for many difficult series 3 test questions.  Here are some of the top terms you must know in order to pass your series 3 exam. 

Approved Delivery Facility – Is an exchange-approved warehouse or storage facility authorized to accept delivery of underlying commodities for the settlement of futures contracts. 

Associated Person – Any individual under the control of a Futures commission Merchant / FCM or  introducing broker / IB , including employees, officers, and directors, as well as those individuals who act in any sales capacity or who supervise such. 

Backwardation – A pricing structure where distant futures contracts are trading at progressively lower prices to near-term contracts. Also known as an inverted market. 

Basis – The term used to describe the price spread between the price of the underlying cash commodity and the front month futures contract. 

Basis Grade – A minimum standard for the quality of a commodity that may be delivered under the settlement of a futures contract.

Carrying Charge – The cost to store, insure, and finance the physical possession of the underlying commodity. 

Carrying Charge Market – A pricing structure where distant month contracts trade at a premium to near-term contracts, representing the cost to store, insure, and finance the physical possession of the underlying commodity. 

Clearinghouse –An agency that guarantees and settles futures and option transactions for an exchange.

Clearing Member – A member of both the exchange and of the clearinghouse who may carry customer funds and clear trades. 

Commodity Pool – A business entity established to trade commodities in a single account established from the combined contributions of numerous participants. 

Commodity Pool Operator or CPO – A Commodity Pool Operator or CPO is an organization which invests money contributed by a group of participants to a single account for the purpose of investing the money in futures contracts, options on futures, retail off-exchange forex contracts or swaps, or to invest in another commodity pool.

Commodity Trading Advisor or CTA – A commodity trading advisor or CTA is an individual or business who, for compensation or profit, advises others on trading futures contracts or options on futures contracts. A CTA is also someone who advises as to the value of futures contracts, options on futures, retail off-exchange forex contracts, or swaps.

Contango – A futures contract pricing structure where the further delivery months trade at successively higher premiums. This market structure is also known as a premium market, a normal market, or a carrying charge market

Crop Year – The period for agricultural commodities which begins with the current harvest and runs until the next harvest of the following year. 

Delivery Notice –A written notice submitted to a long futures contract holder informing them of their requirement to accept delivery of the physical commodity on a specified date from the short futures contract holder. 

First Notice Day – The first day during a delivery month in which the seller of the Futures Contract Mets tender their notice of their intention to deliver the physical commodity for settlement of the Futures Contract.

Forwards – A customized two-party contract for the purchase and sale of a commodity delivered at a future date.  there are no standard terms, the contracts are illiquid and there is significant counterparty risk

Futures – A two-party contract. The specific terms and conditions of the contracts are standardized and set by the exchanges on which the futures contracts trade. The contract amount, delivery date, and type of settlement vary between the different types of futures contracts. tures contracts are very liquid and counterparty risk has been eliminated

Futures Commission Merchant or FCM – A person who is required to register or is registered as a futures commission merchant under the Act and Commission Rules. An FCM may conduct futures business with the public and FCMs who are members of the Clearing House, may transmit margin to the Clearing House.

Initial Margin – The amount of the good faith deposit that must be deposited in an account when a futures position is established. Also known as original margin.

Large Position Report – A report required to be filed in order to prevent large investors from manipulating the price of commodities futures or the value of the underlying cash commodity. The exchanges have set both reporting and maximum limits for the size of a position established on the same side of the market.

Last Notice Day – The last day during the delivery period on which a seller of a futures contract may tender notice of intention to deliver the underlying commodity. Also known as final notice day.

Notice of Delivery – The notice tendered by a clearinghouse, used to inform the broker representing a long contract holder that the short contract holder intends to make physical delivery of the commodity. 

Open Trade Equity (OTE) – The total cash value of a futures position based on the initial margin deposit plus or minus any unrealized gains or losses

Scale Order – This order is entered when an investor wishes to establish or offset a position by purchasing or selling futures contracts at specified intervals. This will allow an investor to establish or liquidate a position at an average price instead of just executing the full order at a prevailing price.

Short the Basis – A term used to describe someone who needs, but who has not yet obtained, the physical cash commodity to effect delivery or to operate a business. 

Switch Order – An order entered by a customer who wishes to roll out the delivery month to continue holding a position in the underlying commodity but who does not want to take or make delivery. 

Variation Margin – The amount of money required to be deposited to return the equity in a futures account to the initial margin requirement. 

Visible Supply – The amount of a commodity that is known to exist and to be readily available for delivery.

Warehouse – A certified facility where stock of commodities may be stored and where delivery may be accepted. 

These are just some of the top terms you will need to know to pass your series 3 exam.  The Series 3 exam is a very challenging exam and requires test takers to master a significant amount of knowledge.

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Watch a free series 3 video covering Futures and forwards Series 3 Exam Prep

 Good luck on your exam!

  The Securities Institute of America

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