What Is The Commodity Exchange Act (CEA)?

The term Commodity Exchange Act (CEA) refers to a law that regulates commodities and futures trading activities. The Act, which passed in 1936, established the Commodity Futures Trading Commission (CFTC). It was designed to prevent and remove obstructions on the interstate commerce in commodities by regulating transactions on commodity futures exchanges. The CEA looks to limit, or abolish, short selling and eliminate the possibility of market manipulation.

Key Takeaways

  • The Commodity Exchange Act regulates commodities and futures trading in the U.S.
  • The Act established the Commodity Futures Trading Commission (CFTC) to oversee commodity exchanges.
  • It is mainly responsible for agriculture, global markets, energy and environmental markets, and technology.
  • The CFTC was given additional oversight of the over-the-counter swaps market after the global financial crisis.

Understanding the Commodity Exchange Act (CEA)

​​​​​​​The Commodity Exchange Act (CEA) gives the Commodity Futures Trading Commission the authority to establish regulations as published in Chapter I Title 17, of the Code of Federal Regulations. The CEA essentially replaced the Grain Futures Act of 1922 when it was passed in 1936.The earlier law wasn't able to shut down the so-called bucket shops that became betting parlors for speculation on commodity prices. The CEA also addressed Depression-era concerns about speculation in the commodities markets and their role in the collapse in prices of key crops, such as cotton, wheat, and corn.

The CEA established the statutory framework under which the CFTC operates. The CFTC’s goals include:

  • The promotion of competitive and efficient futures markets 
  • Protection of investors against market manipulation
  • The policing of abusive and fraudulent trade practices

The CEA exists because market participants would be subject to fraud if the regulation didn't exist. Without it, there would be a loss of faith in the country’s capital markets to the detriment of investors and the economy. The goal of capital markets is, after all, to efficiently allocate funds to the most meritorious systems of production and productive economic activities. 

The CFTC has five advisory committees, each headed by a commissioner who is appointed by the president and approved by the Senate. These five committees focus on agriculture, global markets, energy and environmental markets, technology, and market risk. Each committee represents the interests of specific industries, traders, futures exchanges, commodities exchanges, consumers, and the environment.

Crypto-currencies, which have been defined as commodities, are providing a new challenge to trading regulators.

Special Considerations

The law that established the CFTC has been updated several times since it was created, most notably in the wake of the 2007-2008 financial crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act gave the CFTC authority over the swaps market, which previously unregulated. Swaps are a type of derivatives contract—a customized contract that's traded between private parties rather than on an exchange.

Credit default swaps were particularly seen as a key instigator of the global financial crisis. Investors in mortgage debt protected themselves from default risk by entering into swaps. They paid regular premiums to other investors, who in return took on the risk of default of the debt, providing a kind of insurance from risk. When the U.S. housing market collapsed, the sellers of the swaps were left holding the bag.

The CFTC now regulates this market, imposing the kind of restrictions that were already in force in other futures markets. These include requiring the swaps market to trade on regulated exchanges or "swap execution facilities" and imposing margin requirements to lower the risk of these investments.

Crypto-Currency Challenges for the Commodity Exchange Act

Financial technology such as cloud computing, algorithmic trading, distributed ledgers, and artificial intelligence pose new challenges for the CFTC. Virtual or digital currencies, which function as a medium of exchange or nominal money to be exchanged for goods and services, are another challenge. The derivatives exchange marketplace CME Group launched a Bitcoin futures contract in late 2017.

Virtual currencies, such as Bitcoin, are considered commodities under the CEA. However, there are limitations to its regulatory oversight over commodity cash markets. The CFTC has general enforcement authority to combat fraud and manipulation in the crypto-currency cash markets. 

These new technologies have the potential for a significant or even transformational impact on CFTC-regulated markets and the agency itself. The CFTC plans to play an active role in the oversight of this emerging innovation.