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LeoGlossary: Commodity Futures Trading Commission (CFTC)

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The Commodity Futures Trading Commission (CFTC) is a U.S. government agency responsible for regulating the futures and options markets. The CFTC's mission is to protect market participants, promote open access to the markets, and foster economic efficiency, competitiveness, and stability.

The CFTC was created by the Commodity Futures Trading Act of 1974 (CFMA). The CFMA gave the CFTC authority to regulate the futures and options markets, which had previously been unregulated. The CFTC's jurisdiction includes the following:

  • Futures contracts: These are contracts that obligate the buyer to purchase and the seller to sell an asset at a predetermined price on a future date. Futures contracts are used to hedge against risk and to speculate on the price of an asset.

  • Options contracts: These are contracts that give the buyer the right, but not the obligation, to purchase or sell an asset at a predetermined price on or before a future date. Options contracts are used to protect against risk and to speculate on the price of an asset.

  • Swaps: These are agreements between two parties to exchange payments based on the performance of a financial or commodity index. Swaps are used to hedge against risk and to speculate on the price of an index.

The CFTC's regulatory responsibilities include:

  • Registering and supervising futures and options exchanges: The CFTC registers and supervises futures and options exchanges to ensure that they are fair, honest, and free from manipulation.

  • Registration of Futures Commission Merchants (FCMs) and Commodity Trading Advisors (CTAs): The CFTC registers and supervises FCMs and CTAs to ensure that they are competent and meet minimum financial standards.

  • Enforcement of the CFMA: The CFTC enforces the CFMA against violations, such as fraud, manipulation, and insider trading.

  • Providing market surveillance: The CFTC monitors the futures and options markets for suspicious activity and takes action to protect market participants.

  • Regulating new products: The CFTC reviews and approves new futures and options contracts to ensure that they meet appropriate standards.

  • Promoting public education and awareness: The CFTC educates the public about the futures and options markets to help protect them from fraud and manipulation.

History

The Commodity Futures Trading Commission (CFTC) is a relatively new agency, having been established in 1974. However, the history of government regulation of futures markets can be traced back much further.

In the early 19th century, the U.S. Congress enacted the Grain Futures Act of 1922, which gave the Secretary of Agriculture the authority to regulate futures exchanges. The goal was to prevent fraud and manipulation in the futures markets for grains and other agricultural commodities.

In 1936, Congress passed the Commodity Exchange Act (CEA), which established the Commodity Exchange Authority (CEA) to oversee the regulation of futures markets. The CEA was responsible for registering and supervising futures exchanges, futures commission merchants (FCMs), and commodity trading advisors (CTAs).

In 1974, Congress passed the Commodity Futures Trading Act of 1974 (CFMA), which significantly expanded the CFTC's authority. The CFMA gave the CFTC authority to regulate futures and options markets for all commodities, including financial instruments. The CFMA also gave the CFTC the authority to regulate swaps, which are agreements between two parties to exchange payments based on the performance of a financial or commodity index.

The CFTC has been at the forefront of efforts to modernize and adapt the regulation of futures and options markets to the changing financial landscape. In recent years, the CFTC has focused on regulating new financial products, such as credit default swaps, and on addressing the risks posed by high-frequency trading.

The CFTC's work has helped to ensure the integrity, efficiency, and competitiveness of the futures and options markets. The CFTC's regulation also plays a critical role in protecting market participants from fraud and manipulation.

Here are some of the key events in the history of the CFTC:

  • 1922: Congress enacts the Grain Futures Act of 1922, giving the Secretary of Agriculture the authority to regulate futures exchanges.

  • 1936: Congress passes the Commodity Exchange Act (CEA), establishing the Commodity Exchange Authority (CEA) to oversee the regulation of futures markets.

  • 1974: Congress passes the Commodity Futures Trading Act of 1974 (CFMA), significantly expanding the CFTC's authority.

  • 1982: The CFTC's jurisdiction is expanded to include options markets.

  • 1992: The CFTC adopts the market risk Rule, which requires FCMs and CTAs to hold capital to cover their market risks.

  • 1999: The CFTC adopts the Commitment of traders Reporting (COT) Rule, which requires traders to report their positions in certain futures and options contracts.

  • 2000: The CFTC adopts the Regulation of Credit Default Swaps and Other Privately Negotiated derivatives (Dodd-Frank Wall Street Reform and Consumer Protection Act), which gives the CFTC authority to regulate credit default swaps and other privately negotiated derivatives.

  • 2010: The CFTC adopts the Order audit Trail System (OATS) Rule, which requires FCMs to record and maintain records of all orders and trades.

  • 2012: The CFTC adopts the swap data Repository Regulation (SDR) Rule, which requires swaps to be traded on regulated exchanges or cleared by central counterparties.

Notable Cases

Throughout its history, the Commodity Futures Trading Commission (CFTC) has undertaken a number of high-profile cases that have had a significant impact on the futures and options markets. Here are some of the biggest cases that the CFTC has undertaken:

  • The Bankers Trust spoofing case: In 2015, the CFTC fined Bankers Trust $150 million for engaging in spoofing, a manipulative trading tactic that involves placing and canceling orders to create false market signals.

  • The Amaranth case: In 2006, the CFTC fined Amaranth Advisors $2.6 billion for engaging in excessive speculation and failing to hedge its positions, which contributed to the collapse of the Amaranth hedge fund.

  • The J.P. Morgan London whale case: In 2013, the CFTC fined J.P. Morgan Chase $1 billion for failing to properly manage its risk and engaging in unauthorized trading activities.

  • The Barclays LIBOR manipulation case: In 2015, the CFTC fined Barclays $336 million for manipulating the London Interbank Offered Rate (LIBOR), a benchmark interest rate used for trillions of dollars in financial transactions.

  • The Deutsche Bank FOREX rigging case: In 2015, the CFTC fined Deutsche Bank $2.5 billion for rigging the foreign exchange (forex) market.

These cases illustrate the CFTC's commitment to ensuring the integrity, efficiency, and competitiveness of the futures and options markets. The CFTC's enforcement actions have sent a strong message to market participants that illegal activity will not be tolerated.

In addition to these high-profile cases, the CFTC also undertakes a wide range of other enforcement actions, including:

  • **Enforcing prohibitions against fraud, manipulation, and insider trading.

  • **Taking action against FCMs and CTAs that fail to meet their regulatory obligations.

  • **Providing market surveillance and investigating suspicious activity.

  • **Educating the public about the futures and options markets.

The CFTC's comprehensive regulatory framework helps to protect market participants and promotes fair and orderly markets. The CFTC's work is essential to the stability and efficiency of the global financial system.

Regional Offices

  • Chicago
  • New York
  • Kansas City, Missouri

The Commission

The Commission is appointed by the President of the United States. This is made up of 5 members, one who is selected as Chair. The term is for 5 years, which are staggered among the different commissioners.

There can be no more than 3 member from any party.

Digital Assets

In March of 2014, the CFTC declared Bitcoin to be a commodity, hence the trading of it came under its domain. This is a point of contention with the Securities and Exchange Commission (SEC) who feels that digital assets, including cryptocurrencies, are securities.

Ethereum is another coin that was declared to be a commodity. However, in 2022, due to the shift to the proof-of-stake consensus mechanism, the SEC is alleging that it is going to be a security. This is going to set off another round of fighting between the two regulators.

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