What is the Commodities Futures Trading Commission (CFTC)?

Published by Thomas Herold in Investments, Laws & Regulations, Trading

'Commodities Futures Trading Commission (CFTC)' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

The CFTC is the regulatory agency whose acronym stands for the Commodities Futures Trading Commission. This group arose as a direct result of the Congressionally enacted Commodity Futures Trading Commission Act of 1974. Since that time, the group has carried the responsibility of regulating both the commodity options and futures markets. Their goals range from protecting investors from manipulative endeavors of firms to promoting fair, efficient, and competitive futures markets to stopping fraud and other abusive trading practices.

This regulatory group with vast powers is a fully independent agency under the umbrella of the United States’ government. Besides their core objectives listed above, they seek to use their considerable powers to safeguard against systemic risk and to encourage transparent and financially viable markets. Following the Global Financial Crisis of 2007-2009 they have been working towards greater transparency and more stringent regulation of the swaps market, a multiple trillion dollar enterprise. The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 gives them this authority and ability to transition into this additional role as safe guardian of the swaps markets.

Five different committees comprise the CFTC. Each of these governing groups reports to a commissioner. The President of the United States appoints these commissioners directly which the Senate must then approve. The areas of concentration for the five committees include global markets, technology, agriculture, energy and environmental markets, and cooperation with the SEC Securities Exchange Commission. Each committee is made up of people with backgrounds in and connections to various industries and their interests. This includes the commodities exchanges, the futures exchanges, traders, the environment, and consumers.

The history of regulation of these futures and commodities markets stretches back nearly a century. While these contracts have been trading in the United States for longer than 150 years, they have only been Federally regulated from the 1920s. The original Congressional act that gave the government the authority to regulate and monitor these high stakes and leveraged markets was the Grain Futures Act of 1922. This authority was expanded by the Commodity Exchange Act of 1936.

With the advent of technological advances in the 1970s, the futures and commodity contracts trading has rapidly grown well beyond the original agricultural and other physical types of commodities. It now spans a dizzying range of financial instruments. Among these are the securities of foreign (and American) governments, foreign currencies, and foreign and American stock indices, and even individual company shares. Because of this rapid and spiraling expansion into countless other arenas, Congress decided to act to ensure that the oversight functions of these markets were adequate to handle the vast array of new activity.

They passed the Commodity Futures Trading Commission Act of 1974 in order to establish the CFTC. This new agency took the place of the U.S. Department of Agriculture and its Commodity Exchange Authority with regards to regulating both commodity futures and options exchanges and markets throughout the U.S. This new Act enabled vast changes to the old simple powers which the Commodity Exchange Act of 1936 had granted.

When their original mandate expired around the year 2000, Congress updated it with the Commodity Futures Modernization Act of 2000. This act mandated that the CFTC and the SEC begin to establish a combined regulatory authority for the relatively new single stock futures. These financial instruments had started trading in November of 2002. By 2003, such swaps had massively and exponentially expanded from the time when they had been originally introduced in the latter years of the 1970s.

As with the SEC, the CFTC does not exercise direct regulatory control for individual companies in the commodity and futures markets and their corporate financial soundness. The exception to this general rule pertains to huge swap participants and the now-regulated swap dealers. For these organizations, the CFTC actually sets the minimum capital standards as mandated by the Dodd-Frank Act.

Since 2014, the Commodities Futures Trading Commission has also gained oversight over the DCM designated contract markets. This includes the derivatives clearing organizations, swap execution facilities, swap dealers, swap data repository, commodity pool operators, and futures commission merchants, as well as other intermediary groups. This regulatory body also coordinates its efforts with major international counterparts, such as the British regulatory group the Financial Conduct Authority that oversees the London Metal Exchange.

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The term 'Commodities Futures Trading Commission (CFTC)' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.