Commodity Futures Trading Commission

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See also CFTC.

The Commodity Futures Trading Commission (CFTC) is an independent agency of the United States government.

The Commodity Exchange Act (CEA), (USC 7|1) et seq., prohibits fraudulent conduct in the trading of futures contracts.

In 1974, Congress amended the Act to create a more comprehensive regulatory framework for the trading of futures contracts and created the Commodity Futures Trading Commission, replacing the Commodity Exchange Authority.

The stated mission of the CFTC is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets.

Contents

Brief history

Futures contracts for agricultural commodities have been traded in the U.S. for more than 150 years and have been under Federal regulation since the 1920s. See the Futures Trading Act of 1921, Declared unconstitutional in Hill v. Wallace 259 U.S. 44 (1922), the Grain Futures Act of 1922 and Board of Trade of City of Chicago v. Olsen 262 US 1 (1923).

In recent years, trading in futures contracts has expanded rapidly beyond traditional physical and agricultural commodities into a vast array of financial instruments, including foreign currencies, U.S. and foreign government securities, and U.S. and foreign stock indices.

Evolving mission and responsibilities

Congress created the CFTC in 1974 as an independent agency with the mandate to regulate commodity futures and option markets in the United States. The agency's mandate has been renewed and expanded several times since then, most recently in December 2000 when Congress passed the Commodity Futures Modernization Act of 2000, which instructed the Securities & Exchange Commission and the CFTC to develop a joint regulatory regime for single-stock futures, and the products subsequently began trading in November 2002.

Today, the CFTC assures the economic utility of the futures markets by encouraging their competitiveness and efficiency, ensuring their integrity, protecting market participants against manipulation, abusive trading practices, and fraud, and ensuring the financial integrity of the clearing process. Through effective oversight, the CFTC enables the futures markets to serve the important function of providing a means for price discovery and offsetting price risk.

From the outset, the CFTC has been plagued by limited budgets and manpower. In addition, it has faced numerous efforts by the Securities & Exchange Commission (SEC) to usurp its regulatory jurisdiction.

For example, the current Chairperson of the SEC, Mary Schapiro, was previously Chairperson of the CFTC. When she assumed the Commission's top position, Schapiro recruited several former SEC staffers and gave them prominent roles within the agency. Her plan was to reshape the Commission into a mini-SEC with an eventual goal of folding the CFTC into the SEC. Her plan failed to bear fruit because her term in office was relatively brief.

It was cut short by her decision to leave the agency for a more lucrative position with a securities self-regulatory agency. President Obama's effort to reorganize the regulation of entities such as hedge funds and products such as derivative contracts will provide Chairperson Schapiro with another opportunity to attempt to expand SEC jurisdiction at the expense of the CFTC.

Organization

The Commission

The Commission consists of five Commissioners appointed by the President to serve staggered five-year terms. The President, with the consent of the United States Senate, designates one of the Commissioners to serve as Chairman. No more than three Commissioners at any one time may be from the same political party.

The Chairman's staff has direct responsibility for providing information about the Commission to the public and interacting with other governmental agencies and the Congress, and for the preparation and dissemination of Commission documents. The Chairman's staff also ensures that the Commission is responsive to requests filed under the Freedom of Information Act. The Chairman's staff includes the Office of the Inspector General, which conducts audits of CFTC programs and operations, and the Office of International Affairs, which is the focal point for the Commission's global regulatory coordination efforts.

The Chairman's staff is also responsible for liaison with the public, the Congress, and the media. The Office of External Affairs (OEA) is the Commission's liaison with the domestic and foreign news media, producer and market user groups, educational and academic groups and institutions, and the general public. OEA provides timely and relevant information about the Commission's regulatory mandate, the economic role of the futures markets, new market instruments, market regulation, enforcement actions, and customer protection initiatives, actions, and issues. OEA also provides assistance to members of the media and the general public accessing the CFTC's Internet website.

The CFTC monitors markets and market participants closely by maintaining, in addition to its headquarters office in Washington, offices in cities that have futures exchanges—New York, Chicago and Kansas City.

Major Operating Units

  • Division of Clearing and Intermediary Oversight

The functions of the Division of Clearing and Intermediary Oversight include oversight of derivatives clearing organizations, financial integrity of registrants, customer fund protection, stock-index margin, registration and fitness of intermediaries, sales practice reviews, National Futures Association activities related to intermediaries, and foreign market access by intermediaries.

  • Division of Market Oversight

The Division of Market Oversight has regulatory responsibility for initial recognition and continuing oversight of trade execution facilities, including new registered futures exchanges and derivatives transaction execution facilities. The regulatory functions of the Division include, among other things, market surveillance, trade practice reviews and investigations, rule enforcement reviews, review of product-related and market-related rule amendments, and associated product and market-related studies.

  • Division of Enforcement

The Division of Enforcement investigates and prosecutes alleged violations of the Commodity Exchange Act and CFTC regulations. Violations may involve commodity futures or option trading on domestic commodity exchanges, or the improper marketing of commodity investments. The Division may, at the direction of the Commission, file complaints before the agency's administrative law judges or in the U.S. District Courts. Alleged criminal violations of the Commodity Exchange Act or violations of other Federal laws which involve commodity futures trading may be referred to the Justice Department for prosecution. The Division also provides expert help and technical assistance with case development and trials to U.S. Attorneys’ Offices, other Federal and state regulators, and international authorities.

On July 25, 2007 the Division of Enforcement filed a civil complaint in Federal District Court in New York City alleging various illegal practices connected with natural gas futures trading and the collapse of hedge fund Amaranth Advisors.

  • Office of Chief Economist

The Office of the Chief Economist is an independent office with responsibility for providing expert economic advice to the Commission. Its functions include policy analysis, economic research, expert testimony, education, and training.

  • Office of the General Counsel

The Office of the General Counsel (OGC) is the Commission's legal advisor. OGC staff represents the Commission in appellate litigation and certain trial-level cases, including bankruptcy proceedings which involve futures industry professionals. As the Commission’s legal advisor, OGC reviews all substantive regulatory, legislative, and administrative matters presented to it and advises the Commission on the application and interpretation of the Commodity Exchange Act and other administrative statutes. OGC also assists the Commission in performing its adjudicatory functions.

  • Office of the Executive Director

The Office of the Executive Director (OED) formulates and implements the management and administrative policies and functions of the agency. OED staff formulate the agency's budget, supervise the allocation and use of agency resources, promote management controls and financial integrity, and develop and maintain the agency's automated information systems. The Office of Proceedings, which is under the administrative direction of OED, provides an inexpensive and expeditious forum for handling customer complaints against people or firms registered with NFA through its reparations program. The Office of Proceedings also hears and decides enforcement cases brought by the Commission.

It is responsible for recording and monitoring the trading of futures contracts on United States futures exchanges. The CFTC has the authority to fine, suspend, or sue the company or individual in a United States federal court in cases of misconduct, fraud, or if a rule breaking occurs.

The CFTC publishes weekly reports containing details of holdings for market-segments, which have 20 or more reportable participants. The reports are released every Friday (including data from the previous Tuesday) and contain data on open interest split by reportable and non-reportable open interest as well as commercial and non-commercial open interest. This type of report is referred to as the 'Commitments of Traders Report', COT-Report or simply COTR.

The CFTC is authorized to regulate commodity pools and commodity trading advisors.

Many hedge funds operate as commodity pools. In an address to the Securities Industry Association in 2004, Sharon Brown-Hruska, acting director of the CFTC, said that 65 of the top 100 hedge funds in 2003 were commodity pools, and 50 out of the 100 largest hedge funds were CTAs in addition to being commodity pools.[1]

Primary exchanges monitored

  • Chicago Board Options Exchange
  • Chicago Board of Trade
  • Chicago Mercantile Exchange
  • HedgeStreet
  • U.S. Futures Exchange
  • Kansas City Board of Trade
  • Minneapolis Grain Exchange
  • New York Mercantile Exchange
  • New York Board of Trade
  • OneChicago

Criticism

Barack Obama has argued that current loopholes in CFTC regulations have contributed to skyrocketing prices and lack of transparency of oil on markets [2].

On June 25, 2008 Speaker Pelosi sent a letter to President Bush calling on him to direct the Commodity Futures Trading Commission (CFTC) to use its emergency powers to take immediate action to curb excessive speculation in energy markets. They must act to investigate all energy contracts. Despite growing reports of excessive speculation in energy markets, the CFTC has refused to take actions they have taken in the past[3].

On June 26, 2008 the House passed the Energy Markets Emergency Act of 2008, H.R. 6377. The bill would take crucial steps to curb excessive speculation in the energy futures markets by directing the CFTC to:

  • Use all its authority, including its emergency powers, immediately to curb the role of excessive speculation in any contract market trading energy futures or swaps, and
  • Use its most potent emergency tools including the immediate powers to set new position limits (size of the stake that each speculative investor can hold in a given market), increase margin requirements (the money needed to trade), and impose other corrective actions as necessary to eliminate excessive speculation, price distortion, sudden or unreasonable fluctuations, or unwarranted changes in the price of energy commodities or other unlawful activity causing major market disturbances that prevent the market from accurately reflecting the forces of supply and demand for energy commodities.



References

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