Contract specification
Family I · Instruments
Not to be confused with futures contract, forward contract, contract size.
Contract specification is the complete rulebook for a listed derivative: it fixes every parameter that is not left to negotiation. Because the exchange standardises these terms, buyers and sellers can trade without drafting a bespoke agreement, and the contract can be cleared and offset centrally.
What a specification fixes
A specification normally states the underlying instrument, the contract size, the quotation and tick size, the contract months available, the last trading day, the settlement method (cash or physical) and any position limits. Exchanges publish these terms and may amend them; the version in force at the time of a trade governs that trade. Because the terms are standardised, the only variable left for the market to determine is price.
Worked example
Why specifications matter
Specifications make contracts fungible: any long position can be offset against any short position in the same contract month on the same exchange. They also determine margin requirements, since exchanges set initial and maintenance margin by reference to the contract's size and observed volatility. Terms such as trading hours, price limits and settlement procedures vary by exchange and jurisdiction, so a specification should always be read from the exchange that lists the contract rather than from a third-party summary.
Often confused with
- futures contract
- A futures contract is the tradable instrument itself, while a contract specification is the document that defines its terms; the specification is the rulebook, the futures contract is the position you hold.
- forward contract
- A forward contract is a private, negotiable agreement whose terms are set by the two parties, whereas a contract specification applies to standardised exchange-listed contracts and is not open to negotiation.
- contract size
- Contract size is one line item within a contract specification, covering only the quantity of the underlying per contract; the specification also fixes expiry, tick size, settlement method and other terms.