We will be studying the definition of commodity futures trading commission, the meaning of Commodity futures trading commission, how the commodity futures trading commission works, regulations of CFTC, options and futures, futures and swaps, commodity exchange act, etc.
In the United States, the derivatives market is controlled by an agency at the federal level of government that stands on its own. This agency is known as Commodity Futures Trading Commission (CFTC).
Meaning of Commodity Futures Trading Commission
It prohibits malicious activities in the derivative market. Like earlier said, they stand on their own at a federal level in the U.S. Examples of derivatives markets are futures and swaps, etc. They also enhance the integrity and rebound in the market.
Commodity Futures Trading Commissions Act was enacted in 1974. The creation of the CFTC also took place that same year. Futures traders were dominating the agricultural sector at this period of time. There has been a legal power to involve foreign currencies, national and international government securities, and stock indices. Diversification and development are not to be left behind.
Additionally, the CFTC made the dollar swap more uniform since the financial crash that occurred 14 years ago. Also with the passing of laws to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which took place 12 years ago. During the enactment of the Commodities Futures Modernization Act, the Securities and Exchange Commission (SEC) was associated with single stock futures. This was due to a command given to the commission.
In terms of regulation, Bitcoin was considered a few years ago by the CFTC. It was considered to be a commodity under the Commodity Exchange Act (CEA).
Afterward, the native token of the Ethereum blockchain has also declared a commodity some years later. The former CFTC Chairman, Heath Tarbert was responsible for such actions. Due to the high volatility in the crypto market, it has been said to be risky trading by the commission. Any form of scam or malicious activity in the digital currency market has been prevented lately.
Further Explanation of CFTC
The Commodity Futures Trading Commission Act established the CFTC in 1974. Their aim for this establishment is to enhance markets that are very competitive and have active goals. They also protect traders against so forms of fraudulent activities.
KEY POINTS:
- The establishment of the CFTC took place when the agricultural sector was very hot.
- The derivatives market was curtailed by the commission in the U.S.
- Now that fintech and digital currencies have existed. It becomes a difficult task to regulate.
- There are 13 different branches and offices in CFTC.
- The CFTC depends on Commodity Exchange Act to carry out activities.
How the Commodity Futures Trading Commission Works
5 commissioners are selected and approved by the President and Senate respectively. Their tenor lasts for five tough years. There are at least 3 commissioners per political party. One of them is appointed as the chairman.
The association entitled to uniting the CFTC and SEC proves dormant. Generally, all the areas touched are agriculture, energy and environmental markets, global markets, market risk, and technology. Specific industries, traders, futures exchanges, commodities exchanges, consumers, and environmental groups are all represented by members of this association.
There are regulations written in title 17, chapter 1 of the Commodity Exchange Act. The CFTC is also capable of using these regulations. The Commodity Exchange Act governs the operation of the CFTC. Due to this fact, the trading of commodity futures in the U.S. is controlled and amended severally.
Crypto traders are told to watch out for the fraud associated with Initial Coin Offerings. The CFTC makes an estimate of 5% to over 80% of this fraud. Some coins tend to do the opposite of what was expected from them at ICO.
Branches of CFTC
There are 13 branches and offices. But we are going to concentrate on only 5 main branches. They are:
- Branch of Clearing and Risk
- The branch of Market Participants
- Branch of Market Oversight
- Data Branch
- Branch of Enforcement
Let’s briefly explain the above-listed branches.
Branch of Clearing and Risk
The Branch of Clearing and Risk simply helps the CFTC to avoid risks in the derivative market. This branch also helps to maintain swift transactions related to the Commodity Exchange Act (CEA) in terms of finance. They manage all operations of derivative clearing operations (DCOs). Hence, has 4 sub-divisions: clearing policy, examinations, surveillance of risks, and international and domestic clearing initiatives.
This branch also performs the following functions:
- To protect customers when DCOs go bankrupt. Bringing solutions to issues involving the DCOs.
- Also, to recommend about issues like review of applications for registration, petitions for regulatory relief or exemption, and rule submission.
- To plan for the resolution of a DCO through engagement with the FDIC and other financial regulators. To also address how to keep moving on, review plans needed to recover. All done together with the committee.
- More so, to checkmate on risks yearly in order to know DCOs to examine. Also to know topics to involve in examining risks.
- To make sure DCOs aligns with all important documents needed by the CEA and the regulations by the commission. Also, to examine systemically important DCO (SIDCO) at least once in a year.
- Lastly, to make analysis on alarms raised by threats like hardware or software malfunctions, invasion of cybersecurity intrusions, etc.
Clark Hutchinson was the director of branch of clearing and risk middle of last year.
Branch of Market Participants
It was founded in October 2020. the Market Participants Branch (MPB) existed because the Branch of Swap Dealer and Intermediary Oversight were joined together. The Office of Customer Education and Outreach were not left out too. Their main job is to teach the American people about the derivative market controlled by CFTC. They also checkmate those who trade, invest, deal and do other business under the CFTC.
There are also 5 subdivisions under this. Namely:
- We have the Chief Counsel Branch
- Another example is Examination Branch
- Managed Funds & Financial Requirements Branch is also an instance
- There is a Registration & Compliance Branch
- The Office of Customer Education and Outreach (OCEO) is the last example.
The main job of this branch are as follows with respect to CFTC:
- They work hard to examine intermediaries and self-regulatory organizations assigned.
- This branch makes sure that intermediaries are registered properly. Also, the maintain high standards.
- Their duty is to make sure that the rules set out by the Commission are topnotch.
- They offer brief interpretations and guidance for intermediaries with respect to time.
The Acting Director of this branch is Amanda Olear.
Branch of Market Oversight
This, promotes fair, efficient and active through development and carrying out rules. They also make sure those rules tackles issues pertaining to recent developments in the industry. This branch maintains stability in the derivative market. It examines the structure of the market, exchanges and equipment for derivative trading.
They have 5 subdivisions:
- The Chief Counsel which is in agreement to all the rules and documents about the actions of workers. It also gives opinion of solutions to changes in market structure, innovation, and other market developments.
- The Compliance which ensures adequate exchange and the enforcement of rules on the trading platform.
- The Market Intelligence whichis in charge of the health and stability of U.S. futures, options, and OTC markets.
- The Market Review which suggests the apps to be used building and registration of SEFs, DCMs, SDRs, and foreign boards of trade (FBOTs).
- The Product Review which prevents manipulation of products. The rules have to match with the new terms and conditions of derivatives. Same with that of new exchange traded on.
Data Branch
Similarly, this branch was adopted from last year, when CFTC was given a new shape. It performs certain analytics role coupled with what the previous branch did.
Data branch functions through 4 ways:
- Collaborate: Data quality has to be maintained. Activities carried out with sincerity and kept secret. But to achieve these, it joins force with market participants, operational divisions of the CFTC, and the industry.
- Integrate: The attention of the policy makers are drawn with the notion of brighter future. This is done to favor this branch. Both internal and external ideas are merged for a better vision of economic and market conditions. Data silos are reduced in the process.
- Train: This branch combines both internal and external tech ideas for best results. It facilitates a data culture within the commission for perfection. It also makes training on data topics easy all through
- Execute: Analytics, visualization, and operational software development are all carried out.9
Enforcement Branch
This branch detects, investigates, and as well prosecute those who violates the Commodity Exchange Act (CEA) and CFTC regulations.
There are kinds of violations that calls the attention of the branch. Some of them are: fraud, false statements to the Commission, disruptive trading practices, misappropriation, use of a manipulative or deceptive device, price manipulation, false reporting, accounting violations, registration and fitness violations, failure to maintain or produce required records, a lack of oversight by registrant, violation of business conduct standards, and illegal off-exchange activity.
It also helps the U.S. Attorneys’ Offices, other federal and state civil and law enforcement agencies, and international authorities to build cases and trials.
Regulations of CFTC
To manage the U.S derivative market efficiently, the following trading organizations are regulated: designated contract markets which are in charge of futures trading, and swap execution facilities, which are in charge of the swaps bought and sold.
Like earlier said, the Branch of Clearing and Risk of the CFTC has a sole aim to monitor derivatives clearing organizations (DCO) such as the options clearing corporation. The OCC is the largest DCO in the world and operates under the legal control of the CFTC.
The CFTC also regulates the swap data deposits. The Dodd-Frank Act created to provide a central facility for swap data reporting and recordkeeping.
Regulation of Intermediaries
Intermediaries are act as agents to assist others with futures, swaps, and options. Whereas, they are exist distinctively. Some of them include:
- The operators of commodity pools. They usually join contributions made by investors to trade on the futures and commodities markets.
- Commodity trading advisors. They offer financial advice to the commodity and futures markets.
- Futures commission merchants. They receive the buy and sell orders of any commodity for future delivery.
- Introducing brokers. They transfer the work of carrying out trades to futures merchant. Although, the have direct contact with retail traders to provide leverage.
- Swap dealers. They are persons that act as brokers for swapping. They also engage in swap contracts with opponents or make the market themselves.
New Challenges Faced by the CFTC
The CFTC is gradually leaving its initial function. A new challenge facing the CFTC is coming from the perspective of the new financial technology (fintech) products and cryptocurrencies such as Bitcoin. The CME group recently trades with a Bitcoin futures contract launched last 5 years.
New technologies are capable of transforming both the CFTC and the markets they regulate. The CFTC plans to keep an eye on this emerging innovation. Fintech is globally pulling weight in the financial markets. These technologies covers a wide area. Starting from cloud computing and algorithmic trading to distributed ledgers, then we move down to artificial intelligence and devices learning to network cartography and so on.
Regulations can make capital markets non-functional. This happens when resources are allocated to a means of production and productive economic activities considered to be most suitable. But not in favor of investors, consumers and the society at large. Is the agency ready to face these new challenges? It’s a matter of time. Market participants still believe in the financial markets, without fear of scam. Well, all thanks to the CFTC for making this possible through their regulations.
AREAS OF CONCENTRATION ON CFTC
Difference Between the SEC and CFTC
The main difference between the SEC and CFTC is that the former regulates the securities market while the latter regulates the derivatives market. The two entities were created by different laws, have different responsibilities, and have their own way of taking up their responsibilities at the same time.
Funding of the CFTC
The federal government is in charge of funding the CFTC. However, many people have criticized the government owing to their believe of insufficient funds provided to the CFTC. Whereas other regulators are paid well enough. The
CFTC requested $394 million from Congress for FY 2022.
Registration with the CFTC
All the intermediaries are requested to register with the CFTC. As far as you act as a middleman with futures, swaps, and options transactions. They are: commodity pool operators and advisors, futures commission merchants, introducing brokers, and swap dealer.
Reason for the Choice of Commodity Futures Trading Commission
The Commodity Exchange Act (CEA), doesn’t support any form of malicious activity in the trading of futures, swaps, and other derivatives. The CFTC has vouched to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation. Since the incidence of financial crisis that took place years ago, the CFTC has been working hard to enhance their regulations to perfection with regards to the multitrillion dollar swaps market.
Since the early 90’s, Futures contracts for agricultural commodities have been topping the U.S. trading charts for more than 150 years. They have also been under regulation by the federal government. The Grain Futures Act is the pillar of authority. It was later changed by the Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.)
Futures contracts trading varies with financial instruments. This has been so since the early 90’s. They grew so fast, beyond traditional physical and agricultural commodities into different foreign currencies, and foreign government securities, and foreign stock indices.
In 1974, Congress created the CFTC in replacement of the U.S. Department of Agriculture’s Commodity Exchange Authority. This made big changes to the Commodity Exchange Act (CEA) of 1936. CEA was created from Grain Futures Act of 1922. (7 U.S.C. 1 et seq.).
The CFTC renewed its mandate in December 2000 and also made it spread. The Congress enacted the Commodity
Futures Modernization Act of 2000, which instructed the SEC and the CFTC to join hands to make regulation for single-stock futures. The products began its journey in the trading market on November 2002.
Later on, the Dodd–Frank Wall Street Reform and Consumer Protection Act extended the regulatory authority of CFTC into the swaps markets. Recently, the swaps markets has an estimated value of more than $400 trillion.
Markets that are Controlled
Only major people who take part in swaps, swap dealers that were recently regulated, operates directly with the personal firms. Derivative markets are granted the access to discover prices and identify price risks. But it’s still under the watch of the CFTC. This is achieved by encouraging their competitiveness and efficiency, integrity. They also protect market participants from price manipulation, abusive trading practices, fraud, and integrity of the clearing process.
Designated contract markets (DCMs), swap execution facilities (SEFs), derivatives clearing organizations, swap data repositories (SDRs), swap dealers, futures commission merchants, commodity pool operators and other intermediaries, were all controlled by the CFTC in 2014. They collaborate with foreign regulators like the Financial Conduct Authority, which supervises the London Metal Exchange in UK.
Things Derived From Over-the-counter
She was the CFTC chairperson. There was an appeal from her to supervise the CFTC oversight on ‘off-exchange markets’ for over-the-counter (OTC) derivatives. Although, they have that of exchange-traded derivatives. However, other regulators turned down her appeal.
Market participants were scared of watching the CFTC adjust the swap exemption rule to their own taste in the late 90’s. Firstly, the CFTC wrote about “broker-dealer lite” proposal made by SEC. The commission wrote that this proposal can bring conflict with the Commodity Exchange Act (CEA) subjecting them to authority exclusion.
In May 1998, the CFTC wanted to know people’s opinion on the way the regulation of OTC derivative markets should be, if legal. The U.S. Treasury requested for law enactment in the late 90’s. In terms of swaps and hybrid instruments, CFTCs were also striped off the right to make rules. The text of that act read: “…the Commission may not propose or issue any rule or regulation, or issue any interpretation or policy statement, that restricts or regulates activity in a qualifying hybrid instrument or swap agreement”. Shortly after Congress gave CFTC these restrictions, followed the resignation of Born. She said that Long-Term Capital Management not being successful and the release that came afterwards indicates exactly what she has been avoiding.
Control of Digital Currencies.
Cryptocurrencies were formally made commodities because of trading in the past years. However, there are various risks involved in terms of market volatility and other factors. In recent years, fraud and mishandling in the digital asset markets has been fought against tirelessly by the CFTC.
The CFTC organization is situated at Washington, D.C., there are regional offices located in Chicago, New York and Kansas City, Missouri.
There are clear differences between the CFTC and the Securities and Exchange Commission (SEC). When we talk about information about brokers, laying complaints and regulation of derivative contracts, one of them will be a solution.
Examples of Commodity Futures Trading Commission
This structure reduces the amount of political interference in regulation. The purpose of establishing the CFTC was to regulate trading associated with options and futures. It doesn’t rely on others for operation.
In the derivative markets, they handle two vast categories which are designated contract markets and swap execution facilities. Let’s show further explanations below.
Designed contract markets are trading platforms for both options and futures. For example, trading in agricultural commodities, metals, and financial futures. The management of options and futures in terms of stocks and stock market indexes is done jointly. One can learn more about options and futures with CFTC. They offer services like attending to complaints(if any), checking how well the firms are performing.
On the other hand, swap execution facilities oversees swaps in the trading market. The CFTC is charge by the Dodd-Frank Act of 2010. This is because of issues of financial crisis. Special contracts measure the risks we incur while swapping .
Operations of the Commodity Futures Trading Commission
Are options, futures and swaps similar? Meanwhile, you can manage options, futures and swaps in several ways:
- The industry is transparent by requesting for different filings from firms.
- The derivatives clearing organizations carry out contracts and settle them as well. Therefore their regulation is necessary.
- The maintain data deposits for swaps market. This puts down the list of transaction to reduce scam.
- You can observe market manipulation and intruding trades through survey. They keep other important activities on safe conditions too.
- They set up methods to prevent money laundering .
The pioneers of CFTC was part of the U.S. Department of Agriculture. Collaboration with food producers maintains stability of the future market. Note that, the futures market helps farmers and ranchers in their price risk management. This is an overview of options, futures and swaps.
Its Importance to Individual Investors
It builds a lot of confidence for individual investors in the commodity market. Retail traders are not ignorant of exchange regulations, payment procedures, and prevention of market manipulation as the case may be.
The CFTC also accepts complaints about different firms or contracts by traders.
The agency checkmate industries not based in United States. Companies in the options are futures trading are to register with the Commission too. he CFTC sanctions bad acts. We protect the trading market from scam and other fraudulent activities by those measures.
Comparison between CFTC and SEC
Both of them are similar to each other. Just that SEC is more popular and utilized than CFTC the chart below helps us to compare and contrast.
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CFTC
- Independent federal agency.
- Puts a check on commodity options, futures and swaps.
- Stabilizes the state of data on commodity options and futures. It also does this on swaps contracts.
- FY 2021 budget: $355 million.
SEC
- Independent federal agency.
- Puts a check on single-stock options and futures with the CFTC, also on the stock and bond markets unilaterally.
- Stabilizes filings for all public companies.
- FY 2021 budget: $3 billion.
Significant Occurrences
The agency changes with respect to the crypto market. There is more news emphasizing how to trade by the CFTC. You may come to them if you are a crypto trader. The commission also conducts research and releases info on a regular basis. This was due to the fact that cryptocurrency possesses options and futures contracts.
KEY POINTS:
- The CFTC manages the U.S. markets for futures and swaps, commodity options, and commodity futures.
- CFTC is a federal agency that works on its own.
- The CFTC also attends to laid complaints by investors regarding options and futures trading.