What is the CFTC?

The Commodity Futures Trading Commission (CFTC) is an agency of the United States government established to regulate the derivatives markets, including futures, swaps, and certain kinds of options.

The CFTC oversees designated contract markets (DCMs) and exchanges, swap execution facilities (SEFs), derivatives clearing organizations, swap data repositories (SDRs), swap dealers, futures commission merchants, commodity pool operators, and other intermediaries.

The CFTC oversees the derivatives markets, but does not normally regulate the safety and soundness of individual firms directly. Two notable exceptions are newly regulated swap dealers and major swap participants, because the CFTC sets capital standards for them.

Legal Framework

The CFTC was created by Congress in 1974 through the Commodity Futures Trading Commission Act of 1974  (P.L. 93-463).

The Commodity Exchange Act (CEA) is a vital part of CFTCs work as 7 U.S.C. § 1 et seq.of this act specifically prohibits fraudulent conduct in the trading of futures, swaps, and other derivatives.

Background

In the United States, futures contracts based on agricultural commodities have been traded for over 150 years, and federal regulation was implemented as early as the 1920s with the Grain Futures Act of 1922, followed by the wider Commodity Exchange Act of 1936.

Futures trading expanded enormously in the U.S. starting in the 1970s and the field grew to include much more than just derivatives based on agricultural commodities. As a reaction to this, Congress created the CFTC in 1974 through the Commodity Futures Trading Commission Act of 1974  (P.L. 93-463). The CFTC got its first members and a chairman in 1975 and replaced the U.S. Department of Agriculture’s Commodity Exchange Authority.

In December 2000, the CFTC mandate was expanded by Congress through the Commodity Futures Modernization Act of 2000. Part of this change was a mandate for the CFTC to work together with the Securities and Exchange Commission (SEC) to develop a joint regulatory regime for single-stock futures. (Trading in single-stock futures commenced in the U.S. in late 2002.)

The scope and regulatory authority of the CFTC was expanded again in 2010, this time through the Dodd-Frank Wall Street Reform and Consumer Protection Act. Since then, the CFTC has also been regulating the swaps markets.

What Does the CFTC Do?

Regulate Derivatives Markets

The stated mission of the CFTC is to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets. The CFTC oversees the trading of commodity futures and options markets, ensuring these markets operate efficiently and transparently.

Prevent Market Manipulation

The agency enforces rules to prevent fraud, manipulation, and abusive practices in the markets, ensuring a fair trading environment.

Protect Market Participants

The CFTC works to protect traders and consumers by ensuring that financial markets are free from abusive practices and that they operate in a transparent and fair manner.

Promote Financial Stability

The CFTC monitors systemic risk and promotes financial stability in the derivatives markets.

How Do They Protect Traders?

Market Surveillance

The CFTC continuously monitors trading activities to detect and prevent market manipulation, fraud, and other abusive practices.

Enforcement Actions

The agency takes enforcement actions against firms and individuals who violate trading laws and regulations, protecting market integrity.

Educational Resources

The CFTC provides educational materials and resources to help traders understand the risks involved in trading and to make informed decisions.

Customer Protections

The CFTC enforces rules that ensure customer funds are protected and that trading firms adhere to strict standards.

Final Thoughts

The CFTC plays a vital role in maintaining the integrity of the U.S. derivatives markets, protecting traders, and ensuring fair trading practices. Through rigorous oversight, enforcement actions, and educational initiatives, the CFTC helps safeguard the financial markets and promotes a stable trading environment.