The Commodity Futures Trading Commission (CFTC), established in 1974, is an independent agency which regulates the options and futures markets. Under the Commodities Exchange Act, it is illegal to commit fraud during futures trading. The CFTC’s mission is to foster transparent, open, financially sound and competitive markets. The CFTC is tasked with avoiding systemic risk and protecting the market users, their funds, the public and consumers from fraud, abusive practices, and manipulation. Following the financial crisis of 2007 and under the Dodd-Frank Act, the CFTC has been transitioning to stricter regulations and more transparency in the multitrillion-dollar swaps market.
For more than 150 years, futures contracts for agricultural commodities have been traded in the United States. These trades have been regulated by Federal law since the 1920s. In 1922, the Grains Futures Act set the central authority. This authority was updated in 1936 by the Commodity Exchange Ac.
Trading in futures has expanded rapidly since the 1970s and includes commodities beyond physical and agricultural. Today, futures trading involves a wide variety of financial instruments, including U.S. and foreign government securities, foreign currencies, and international and U.S. stock indices.
The CFTC was created in 1974 by Congress with the mandate to regulate the futures and options markets within the United States. It replaced the U.S. Department of Agriculture’s Commodity Exchange.
In 2000, Congress passed the Commodity Futures Modernization Act, which expanded and renewed the mandate for the CFTC. This act also directed the Security Exchange Commission to partner with the CFTC in developing joint regulation for the single-stock futures market. Single-stock futures started trading in November 2002.
In 2010, the CFTC realized expanded authority in regulating the swaps markets under the Dodd-Frank Act. The commission was directed to prohibit reckless schemes which attempt to manipulate the market.
Another responsibility of the CFTC is to encourage efficiency and competitiveness of the futures market. Its goal is to ensure its integrity and to protect users against abusive trading practices, manipulation, and fraud. The commission also provides the clearing process’ financial integrity. Like the SEC, the CFTC does not regulate directly the soundness and safety of individual firms, unless they are swap dealers or participants.
Beginning in 2014, the CFTC is responsible for overseeing designated contract markets, swap data repository, derivatives clearing organizations, swap dealers, commodity pool operators, futures brokerage commission merchants, as well as other intermediaries. The CFTC works in partnership with other foreign regulators, including the Financial Conduct Authority in the United Kingdom.
Oversight Of Derivatives
In 1998, energetic lobbying resulted in the CFTC being provided responsibility for oversight of over-the-counter derivatives which was in addition to the commission’s current mission which gave them responsibility for regulating exchange-traded derivatives.
There was some concern that the CFTC would change the Swap Exemption and may try to impose new regulations on the swap market. There were two reasons for this. First, the CFTC commented on the SEC broker-lite proposal that it might create possible conflict with the Commodity Exchange Act CCEA). They stated this was because certain OTC derivatives fall under the CEA and as such are subject to the authority of the CFTC.
Second, in May of 1998, the CFTC published a concept release which asked for comment on regulating the OTC. The CFTC wanted to know if regulation of the OTC derivatives market should be done and what the regulations should cover.
In 1999, at the request of the U.S. Treasury, the SEC, and the Federal Reserve Board, legislation was passed which limited the authority of the CFTC to make sure rules as they pertained to swaps and hybrid instruments. This limit, which lasted until the end of March 1999, froze pre-existing legal status of hybrids and swap agreements if they were already entered into under the Swap Exemption, the Swap Policy Statement, the Hybrid Instrument Rule, or the Hybrid Interpretation.
The CFTC has provided secret exemptions from hedging regulations to 19 market participants and banks since 1991 which has allowed these entities to accumulate unlimited positions. The 2008 financial crisis brought these practices to light when Congress asked for information on who participated in the markets which was especially important because a bank or a trader with an exemption could impact the price of a commodity.
Other loopholes in CFTC regulations are believed to have contributed to the lack of transparency and the skyrocketing prices of the oil markets.
In November of 2014, the UK Financial Conduct Authority and the CFTC fined six banks for their role in manipulating the foreign exchange market. These banks were Chase, JPMorgan, Citigroup, RBS, HSBC, and UBS. The fines totaled almost $1.5 billion to the CFTC and $1.2 billion to the UK Financial Conduct Authority.
The CFTC maintains offices in New York, Chicago, and Kansas City, MO. There are presidentially-appointed commissioners who serve five-year terms which are staggered.