What Is the Commodity Futures Trading Commission?
The Commodity Futures Trading Commission (CFTC) is an independent federal agency that regulates the derivatives markets, including futures contracts, options, and swaps, in the United States. Its goals include the promotion of competitive and efficient markets and the protection of investors against manipulation, abusive trade practices, and fraud. The Commodity Futures Trading Commission Act established the CFTC in 1974.
- The Commodity Futures Trading Commission was established in 1974 at a time when most futures trading took place in the agricultural sector.
- The commission's job is to regulate the derivatives markets in the United States.
- Over the years, the role of regulating the futures and options markets has become more complex, especially with the advent of fintech and digital currencies such as bitcoin.
- The CFTC is made up of 13 different operating divisions and offices.
- The Commodity Exchange Act establishes the statutory framework under which the CFTC operates.
Understanding the Commodity Futures Trading Commission
The CFTC consists of five commissioners who are appointed by the president and approved by the Senate. Commissioners serve five-year staggered terms. The president designates one of these commissioners as the chair, and no more than three commissioners at any one time can come from the same political party.
These five commissioners serve on committees focused on agriculture, energy and environmental markets, global markets, market risk, and technology. A committee that focuses on cooperation between the CFTC and Securities and Exchange Commission (SEC) is inactive. Members of the committees represent specific industries, traders, futures exchanges, commodities exchanges, consumers, and environmental groups.
The Commodity Exchange Act regulates the trading of commodity futures in the U.S. Passed in 1936 and amended several times since the act establishes the statutory framework under which the CFTC operates. Under the act, the CFTC has the authority to establish regulations that are published in Title 17, Chapter I, of the Code of Federal Regulations.
The CFTC makes several warnings regarding cryptocurrencies. According to the CFTC website: "Several studies and news reports indicate that a large number of Initial Coin Offerings (ICOs) are fraudulent or the underlying products or services fail to live up to their promises. Estimates of fraud range from 5 percent to more than 80 percent of ICOs."
The CFTC organization consists of the offices of the Chairman and Commissioners as well as the agency's 13 operating divisions and offices. Let's take a look at five of the main divisions of the CFTC: Division of Clearing and Risk, Market Participants Division, Division of Market Oversight, Division of Data, and the Division of Enforcement.
Division of Clearing and Risk
The role of the Division of Clearing and Risk (DCR) is to enable the CFTC to meet its statutory responsibility to ensure the financial integrity of all transactions subject to the Commodity Exchange Act (CEA) and the avoidance of systemic risk in the derivatives markets. The DCR oversees all operations of derivative clearing operations (DCOs) and is divided into four branches itself:
- Clearing Policy
- Risk Surveillance
- International & Domestic Clearing Initiatives
According to the CFTC website, some of the DCR's main responsibilities include:
- Preparing regulations, orders, guidelines, and other regulatory work product on issues pertaining to DCOs, including the protection of customers in the bankruptcy or insolvency of an FCM or DCO
- Reviewing DCO applications for registration, petitions for regulatory relief or exemption, and rule submissions, and making recommendations to the Commission regarding such matters
- Reviewing DCO recovery plans and wind-down plans for consistency with Commission regulations and engaging with the FDIC and other financial regulators, both domestically and internationally, regarding planning for the potential resolution of a DCO
- Conducting risk assessments on an annual basis to determine which DCOs to examine and the topics that should be included in the risk-based examination
- Examination of DCOs for compliance with all relevant requirements of the CEA and Commission regulations, including examining each systemically important DCO (SIDCO) at least once a year
- Analyzing notifications regarding hardware or software malfunctions, cyber-security intrusions, or threats that have or may have a material impact on clearing
As of June 2021, the director of the DCR is Clark Hutchinson.
Market Participants Division
Formed in October 2020, the Market Participants Division (MPD) is the result of a merger between the Division of Swap Dealer and Intermediary Oversight and the Office of Customer Education and Outreach. The primary responsibilities of the MPD are to oversee the registrants of the CFTC who conduct dealing, trading, investment, and advisory businesses in the derivatives markets and educate the American public about the derivative markets the CFTC regulates.
The MPD division is itself divided into five branches:
- Chief Counsel Branch
- Examinations Branch
- Managed Funds & Financial Requirements Branch
- Registration & Compliance Branch
- The Office of Customer Education and Outreach (OCEO)
According to the CFTC, the MPD's main responsibilities include:
- Examining intermediaries and designated self-regulatory organizations
- Maintaining appropriate standards for the registration of intermediaries
- Providing expertise to the Commission in its promulgation of rules
- Issuing concise and timely interpretations and guidance for intermediaries
Amanda Olear serves as the Acting Director.
Division of Market Oversight
The Division of Market Oversight (DMO) is responsible for overseeing the stability and market structure of the derivatives markets regulated by the CFTC, as well as the exchanges and facilities on which those derivatives trade. One of the chief functions of the DMO is the development and implementation of CFTC regulations to promote fair, efficient, vibrant derivatives markets as well as ensuring these rules address the latest developments in the industry.
The DMO is divided into five branches:
- The Chief Counsel supports all DMO rule-making and staff action documents and the branch suggests any enhancements to policy to account for changes in market structure, innovation, and other market developments.
- The Compliance branch is responsible for examining and assessing the adequacy of exchange and trading platforms’ self-regulatory and rule enforcement programs covering both exchange rules and Commission regulations.
- The Market Intelligence branch is responsible for assessing the health and stability of U.S. futures, options, and OTC markets.
- The Market Review branch assesses and makes recommendations to the CFTC regarding applications for registration or designation of SEFs, DCMs, SDRs, and foreign boards of trade (FBOTs).
- The Product Review branch assesses new and existing exchange-traded derivatives, including amendments to the terms of existing contracts, for compliance with CFTC regulations, ensuring that products are not susceptible to manipulation.
Division of Data
Like the Markets Participants Division, the Division of Data (DOD) was formed as part of a restructuring of the CFTC that occurred in October 2020. The DOD handles responsibilities that were previously held in the Department of Market Oversight (DMO) and additional analytics functions.
According to the CFTC, the DOD fulfills its role through four essential functions:
- Collaborate: the DOD collaborates with market participants, operational divisions of the CFTC, and the industry to ensure data quality, integrity, and confidentiality.
- Integrate: the DOD reduces data silos by joining datasets both within the Commission and from external sources for the clearest possible picture of economic and market conditions. The DOD creates a holistic picture of potential future conditions to inform data-driven policymaking.
- Train: the DOD manages centers of excellence to facilitate a data culture within the commission, participates in technology advisory groups internally and externally to determine best practices, and facilitates training on data topics throughout the Commission.
- Execute: the DOD performs or informs analytics, visualization, and operational software development at the Commission.
Division of Enforcement
As its name suggests, the Division of Enforcement (DOE) is charged with detecting, investigating, and prosecuting violations of the Commodity Exchange Act (CEA) and CFTC regulations.
The DOE investigates the following potential violations: "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, failure to make required reports, a registrant’s failure to supervise, failure to comply with business conduct standards, and illegal off-exchange activity."
The DOE also assists with case development and trials to U.S. Attorneys' Offices, other federal and state civil and law enforcement agencies, and international authorities.
What Does the CFTC Regulate?
The CFTC regulates the U.S. derivatives markets. This includes the commodity futures, options, and swaps markets as well as over-the-counter (OTC) markets. In order to sufficiently oversee these markets, the CFTC regulates the following organizations: trading organizations such as designated contract markets which are the exchanges that host futures trading, and swap execution facilities, which are platforms that allow participants to buy and sell swaps.
The Division of Clearing and Risk of the CFTC is solely responsible for monitoring derivatives clearing organizations (DCO) such as the options clearing corporation. The OCC is the largest DCO in the world and operates under the jurisdiction of the CFTC.
Swap data repositories, which were created by the Dodd-Frank Act to provide a central facility for swap data reporting and recordkeeping are also regulated by the CFTC.
The CFTC also regulates all intermediaries—entities that act as agents for other people when dealing with futures, swaps, and options. Some of these intermediaries include:
- The operators of commodity pools, which are funds that combine investor contributions to trade on the futures and commodities markets.
- Commodity trading advisors, those who provide investment advice for the commodity and futures markets.
- Futures commission merchants, who accept the order to purchase or sell any commodity for future delivery.
- Introducing brokers, who have a direct relationship with a client, but delegates the work of the floor operation and trade execution to another futures merchant.
- Swap dealers, individuals, or entities that serve as swaps brokers, make markets in swaps or enter into swaps contracts with counterparties.
New Challenges for the CFTC
The CFTC is moving away from its historic role as a regulator of traditional commodity products-related futures and options contracts to face new challenges in the digital age of the 21st century. A new challenge facing the CFTC is in relation to new financial technology (fintech) products and cryptocurrencies such as Bitcoin, which had a Bitcoin futures contract launched in December 2017 that trades with the CME Group.
Fintech is driving innovation in financial markets across the globe. New technologies are wide-ranging in scope, from cloud computing and algorithmic trading to distributed ledgers to artificial intelligence and machine learning to network cartography and many others. These technologies have the potential for 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.
The CFTC plays an important role in regulating financial markets. Without such regulation and regulators, market participants could be subjected to fraud by unscrupulous individuals and, in turn, lose faith in our capital markets. This could make capital markets ineffective at efficiently allocating financial resources to the most deserving means of production and productive economic activities to the detriment of investors, consumers, and society. Time will show if the agency is up to the new challenges it faces.
What Is the Difference Between the SEC and CFTC?
The SEC and CFTC were created by different laws, have different responsibilities, and use different methods to fulfill those responsibilities. The most basic difference between the two entities is that the SEC regulates the securities market and the CFTC regulates the derivatives market.
How Is the CFTC Funded?
The CFTC is funded by the federal government. Many critics, however, believe the CFTC does not receive sufficient funding compared to other regulatory agencies. The CFTC requested $394 million from Congress for FY 2022.
Who Has to Register with the CFTC?
Any intermediaries, entities that act as agents for other people when dealing with futures, swaps, and options, must register with the CFTC. These include commodity pool operators and advisors, futures commission merchants, introducing brokers, and swap dealers.