Commodity Futures Trading Commission

The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974, that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options.

Commodity Futures Trading Commission
Official seal
Agency overview
FormedApril 15, 1975 (1975-04-15)
Preceding agency
  • Commodity Exchange Authority
JurisdictionFederal government of the United States
Headquarters1155 21st Street, NW, Washington, D.C.
Employees668(2018)[1]
Agency executive
Websitewww.cftc.gov
Footnotes
[2][3]

The Commodity Exchange Act (CEA), 7 U.S.C. § 1 et seq., prohibits fraudulent conduct in the trading of futures, swaps, and other derivatives. The stated mission of the CFTC is to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.[4] After the financial crisis of 2007–08 and since 2010 with the Dodd–Frank Wall Street Reform and Consumer Protection Act, the CFTC has been transitioning to bring more transparency and sound regulation to the multitrillion dollar swaps market.[5]

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.[6] The Grain Futures Act of 1922 set the basic authority and was changed by the Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.).[7][8]

Since the 1970s,[9] trading in futures contracts has rapidly expanded 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.

Congress created the CFTC in 1974 as an independent federal regulatory agency. The Commodity Futures Trading Commission Act of 1974 (P.L. 93-463) created the CFTC to replace the U.S. Department of Agriculture's Commodity Exchange Authority. The Act made extensive changes to the Commodity Exchange Act (CEA) of 1936, which itself amended the original Grain Futures Act of 1922. (7 U.S.C. 1 et seq.).[8][10]

The CFTC's mandate was renewed and expanded in December 2000 when Congress passed the Commodity Futures Modernization Act of 2000, which instructed the Securities and Exchange Commission (SEC) and the CFTC to develop a joint regulatory regime for single-stock futures, the products of which began trading in November 2002.

In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act expanded the CFTC's regulatory authority into the swaps markets. The swaps markets currently have a notional value of more than $400 trillion.

Regulated markets

The CFTC oversees the derivatives markets by encouraging their competitiveness and efficiency, ensuring their integrity, protecting market participants against manipulation, abusive trading practices, fraud, and ensuring the financial integrity of the clearing process. The CFTC generally does not directly regulate the safety and soundness of individual firms, with the exception of newly regulated swap dealers and major swap participants, for whom it sets capital standards pursuant to Dodd-Frank.[11] Through oversight, the CFTC enables the derivatives markets to serve the function of price discovery and offsetting price risk.

As of 2014 the CFTC oversees 'designated contract markets' (DCMs) or 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 coordinates its work with foreign regulators, such as its UK counterpart, the Financial Conduct Authority, which supervises the London Metal Exchange.[12]

Over-the-counter derivatives
Brooksley Born

In 1998 CFTC chairperson Brooksley E. Born lobbied Congress and the President[13][14] to give the CFTC oversight of 'off-exchange markets' for over-the-counter (OTC) derivatives in addition to its existing oversight of exchange-traded derivatives,[15] but her warnings were opposed by other regulators.[16]

Two actions by the CFTC in 1998 led some market participants to express concerns that the CFTC might modify the "Swap Exemption" and attempt to impose new regulations on the swaps market.[17] First, in a February 1998 comment letter addressing the SEC's "broker-dealer lite" proposal, the CFTC stated that the SEC's proposal would create the potential for conflict with the Commodity Exchange Act (CEA) to the extent that certain OTC derivative instruments fall within the ambit of the CEA and are subject to the exclusive statutory authority of the CFTC.[18]

In May 1998 the CFTC issued a 'concept release' requesting comment on whether regulation of OTC derivatives markets was appropriate and, if so, what form such regulation should take.[19] Legislation enacted in 1999 at the request of the US Treasury, the Federal Reserve Board, and the SEC limited the CFTC's rulemaking authority with respect to swaps and hybrid instruments until March 30, 1999, and froze the pre-existing legal status of swap agreements and hybrid instruments entered into in reliance on the 'Swap Exemption', the 'Hybrid Instrument Rule', the 'Swap Policy Statement, or the 'Hybrid Interpretation'.[20] The text of that act read: "...the Commission may not propose or issue any rule or regulation, or issue any interpretation or policy statement, that restricts or regulates activity in a qualifying hybrid instrument or swap agreement". Shortly after Congress had passed this legislation prohibiting CFTC from regulating derivatives, Born resigned.[14] She later commented the failure of Long-Term Capital Management and the subsequent bailout as being indicative what she had been trying to prevent.[14][notes 1]

Regulating digital currencies

In March 2014 the CFTC acknowledged it was considering the regulation of Bitcoin.[21] The CFTC has since taken the position that Bitcoin is a commodity under the CEA. In October 2019, CFTC Chairman Heath Tarbert declared that ether was also a commodity under the CEA.[22]

In 2015, the CFTC ruled that for purposes of trading, cryptocurrencies were legally classified as commodities.[23] However, in view of market volatility and other factors, the CFTC noted several risks associated with trading virtual currencies.[24] In 2017, the CFTC cited the US SEC’s warning against digital token sales and initial coin offerings (ICOs) that can “improperly entice investors with promises of high returns”.[25] In recent years, the CFTC has expanded its efforts to civilly prosecute fraud and misappropriation in the digital asset markets.

Organization

Based in Washington, D.C., the CFTC maintains regional offices in Chicago, New York and Kansas City, Missouri. The Commission consists of five Commissioners appointed by the President of the United States 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.[26]

Current commissioners
Former Chairman Heath Tarbert
Name Title Party Took office Term expires
Rostin Behnam Acting Chairman Democrat September 6, 2017 June 19, 2021
Brian Quintenz Commissioner Republican August 15, 2017 April 13, 2020
Dawn DeBerry Stump Republican September 5, 2018 April 13, 2022
Dan Berkovitz Democrat September 7, 2018[27] April 13, 2023
Heath Tarbert Republican July 15, 2019 April 13, 2024

Market Participants Division

Formerly known as the Division of Swap Dealer and Intermediary Oversight, the Market Participants Division (MPD) primarily oversees derivatives market intermediaries, including commodity pool operators, commodity trading advisors, futures commission merchants, introducing brokers, major swap participants, retail foreign exchange dealers, and swap dealers, as well as designated self-regulatory organizations. MPD conducts the registration, compliance, and business conduct standards of intermediaries, swap dealers and major swap participants. The division also oversees the agency's customer education initiatives. As of 2019, Joshua B. Sterling serves as Director of the Market Participants Division.[28]

Division of Clearing and Risk

The Division of Clearing and Risk (DCR) oversees derivatives clearing organizations (DCOs) and other market participants in the clearing process. These include futures commission merchants, swap dealers, major swap participants, and large traders. DCR monitors the clearing of futures, options on futures, and swaps by DCOs, assesses DCO compliance with Commission regulations, and conducts risk assessment and surveillance. DCR also makes recommendations on DCO applications and eligibility, rule submissions, and which types of swaps should be cleared.[29] As of 2019, Clark Hutchison serves as Director of the Division of Clearing and Risk.[30]

Division of Market Oversight

The Division of Market Oversight (DMO) has regulatory responsibility for initial recognition and continuing oversight of trade execution facilities, including new registered futures exchanges, swap execution facilities, and swap data repositories. 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. As of 2019, Dorothy D. DeWitt serves as Director of the Division of Market Oversight.[31]

Division of Enforcement

The Division of Enforcement (DOE) 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.

List of past commissioners[32]
  • J. Christopher Giancarlo (Acting Chairman 01/20/17 – 08/03/17) (Chairman 08/03/17 – 04/13/19) (term of Service 06/06/14 – 06/05/19)
  • Sharon Y. Bowen (term of Service 06/09/14 – 09/29/17)
  • Timothy Massad (term of Service 6/5/14 – 02/17/17)
  • Mark P. Wetjen (term of Service 10/25/11 – 08/28/15)
  • Scott D. O'Malia (term of Service 10/19/09 – 08/08/14)
  • Bart Chilton (term of Service 08/08/07 – 03/21/14)
  • Gary Gensler (Chairman 05/26/09 – 01/3/14) (term of Service 05/26/09 – 01/3/14)
  • Jill E. Sommers (term of Service 08/08/07 – 07/08/13)
  • Michael V. Dunn (Acting Chairman 1/20/09 – 5/25/09) (term of Service 11/21/04 – 10/24/11)
  • Walter L. Lukken (Acting Chairman 6/27/07- 01/20/09) (term of Service 08/07/02 – 07/10/09)
  • Reuben Jeffery, III (chairman 07/11/05 – 6/27/07) (term of Service 07/11/05 – 06/27/07)
  • Frederick W. Hatfield (term of Service 12/06/04 – 12/31/06)
  • Sharon Brown-Hruska (Acting Chairman 08/24/04 – 07/10/05) (term of Service 08/07/02 – 07/28/06)
  • James E. Newsome (Acting Chairman 01/20/01 – 12/27/01) (chairman 12/27/01 – 07/23/04) (term of Service 08/10/98 – 07/23/04)
  • Thomas J. Erickson (term of Service 06/21/99 – 12/01/02)
  • Barbara P. Holum (Acting Chairwoman 12/22/93 – 10/07/94) (term of Service 11/28/93 – 12/09/03)
  • David D. Spears (Acting Chairman 06/02/99 – 08/10/99) (term of Service 09/03/96 – 12/20/01)
  • Brooksley E. Born (Chairwoman 08/26/96 – 06/01/99)
  • John E. Tull, Jr. (Acting Chairman 01/27/96 – 08/25/96) (term of Service 11/24/93 – 02/27/99)
  • Joseph B. Dial (term of Service 06/20/91 – 11/13/97)
  • Mary L. Schapiro (Chairwoman 10/13/94 – 01/26/96) (term of Service 10/13/94 – 01/26/96)
  • Sheila C. Bair (Acting Chairwoman 08/22/93 – 12/21/93) (term of Service 05/02/91 – 06/16/95)
  • William P. Albrecht (Acting Chairman 01/22/93 – 08/20/93) (term of Service 11/22/88 – 08/20/93)
  • Wendy L. Gramm (term of Service 02/22/88 – 01/22/93)
  • Fowler C. West (term of Service 10/06/82 – 01/20/93)
  • Kalo A. Hineman (Acting Chairman 07/27/87 – 02/22/83) (term of Service 01/12/82 – 06/19/91)
  • Robert R. Davis (terms of Service 10/03/84 – 04/30/90)
  • William Rainer (term of Service 08/11/99 – 01/19/01)
  • William E. Seale (term of Service 11/16/83 – 09/01/88)
  • Susan M. Philips (Chairwoman 11/17/83 – 07/24/87) (Acting Chairwoman 05/28/83 – 11/16/83) (term of Service 11/16/81 – 07/24/87)
  • Philip McBride Johnson (Chairman 6/8/81 – 5/01/83) (term of Service 06/06/81 – 05/01/83)
  • James M. Stone (Chairman 05/04/79 – 06/08/81) (term of Service 05/04/79 – 01/31/83)
  • Reed P. Dunn (term of Service 04/15/75 – 11/13/81)
  • David G. Gartner (term of Service 05/19/78 – 10/05/82)
  • Robert L. Martin (term of Service 06/20/75 – 08/31/81)
  • Gary L. Seevers (Acting Chairman 12/06/78 – 05/03/79) (term of Service 04/15/75 – 06/01/79)
  • William T. Bagley (term of Service 04/15/75 – 11/15/78)
  • John V. Rainbolt (term of Service 04/15/75 – 05/18/78)

Funding/budget

Unlike the other four main financial regulators, the CFTC does not have self-funding. A transaction fee has been "requested" for several years but Congress has not taken any legislative action. During the government shut down in October 2013, SEC and Federal Reserve stayed open, but "futures and most swaps markets were left with essentially no cop on the beat".[33]

In 2007, the CFTC's budget was $98 million and it had 437 full-time equivalent employees (FTEs). After 2008, funding increased by 80% to $205 million and 687 FTEs for fiscal year (FY) 2012, but was cut to $180.4 million and 682 FTEs for FY 2013.[34] In 2013 CFTC's performance was severely affected by limited resources and had to delay cases.[35] The current, FY 2014 funding of $215m did not keep up with CFTC's increasing swaps market oversight and regulation, equivalent to tens of trillions of dollars in formerly dark market trading, according to outgoing Commissioner Bart Chilton in his last speech.[33] The Obama administration's latest budget proposal for FY 2015 requested $280m, which is $35m less than the request for the previous year,[36] and would fund "100 less employees than we need" per Chilton, who called the budget "woefully insufficient" for CFTC's more than 40-fold increased purview.[33] In February 2014, Commissioner Scott D. O'Malia dissented from the FY 2014 spending plan saying that it did not allocate enough funding to new technology investments, but allocated too much to swap dealer oversight, duplicating the work of the self-regulatory National Futures Association.[37] In March he dissented from the FY 2015 budget request stating CFTC "makes an unrealistic request for new staff and funding in this budget request without a firm understanding of its mission priorities, specific goals, and corresponding personnel and technology needs."[38]

In December 2019, the CFTC secured funding of $284 million for FY2020, an increase of nearly 6 percent from the $268 million appropriated for FY2019.[39] Chairman Tarbert commented that this "fully matched" the CFTC's request, the first time that had happened in "nearly a decade.[40]"

Primary exchanges monitored

See also

Notes
  1. Born was the focus of an October 2009 Frontline documentary titled "The Warning" and was also chronicled in the documentary Inside Job. The two films recount her attempts to investigate and regulate the OTC derivatives market (PBS Frontline The Warning)

References
  1. "Agency Financial Report" (PDF). Commodity Futures Trading Commission. Commodity Futures Trading Commission. Retrieved July 26, 2019.
  2. History of the CFTC Retrieved from Internet Archive January 13, 2014.
  3. Commodity Futures Trading Commission Retrieved from Internet Archive January 13, 2014.
  4. "Mission & Responsibilities | U.S. COMMODITY FUTURES TRADING COMMISSION". cftc.gov. Retrieved October 20, 2019.
  5. Ackermann, Andrew (April 9, 2014). "Senate Panel Approves Three Nominees to CFTC – WSJ". Archived from the original on October 19, 2015. Retrieved April 14, 2018.
  6. 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).
  7.  This article incorporates public domain material from the Congressional Research Service document: Archived August 10, 2011, at the Wayback Machine Jasper Womach. "Report for Congress: Agriculture: A Glossary of Terms, Programs, and Laws, 2005 Edition" (PDF).CS1 maint: multiple names: authors list (link)
  8. "About". CFTC.
  9. Dennis W. Carlton (1984). "Futures Markets: Their Purpose, Their History, Their Growth, Their Successes and Failures". Journal of Futures Markets. 4 (3): 237–71. doi:10.1002/fut.3990040302. ProQuest 228205962.
  10.  This article incorporates public domain material from the Congressional Research Service document: Archived August 10, 2011, at the Wayback Machine Jasper Womach. "Report for Congress: Agriculture: A Glossary of Terms, Programs, and Laws, 2005 Edition" (PDF).CS1 maint: multiple names: authors list (link)
  11. Murphy, Edward V (May 28, 2013). "Who Regulates Whom and How? An Overview of U.S. Financial Regulatory Policy for Banking and Securities Markets" (CRS Report for Congress,7-5700). Congressional Research Service. p. 51. Retrieved March 14, 2014.
  12. "Testimony of Vincent McGonagle, Director Division of Market Oversight, Commodity Futures Trading Commission Before the Financial Institutions and Consumer Protection Subcommittee Senate Committee on Banking, Housing, and Urban Affairs". January 15, 2014. Retrieved March 13, 2014.
  13. Michael Hirsh (December 13, 2010). "Capital Offense: How Washington's Wise Men Turned America's Future Over to Wall Street". The New York Times. John Wiley & Sons. pp. 352 pages. ISBN 978-0470520673. Retrieved February 20, 2013.
  14. "The Warning", Frontline, PBS
  15. "Concept Release Concerning Over-The-Counter Derivatives market", CFTC Release #4142-98, May 7, 1998.
  16. Goodman, Peter S. The Reckoning – Taking Hard New Look at a Greenspan Legacy, The New York Times, October 9, 2008.
  17. "Over-the-Counter Derivatives Markets and the Commodity Exchange Act" (PDF), press release, President's Working Group on Financial Markets, archived from the original (PDF) on October 13, 2010
  18. Letter from Jean A. Webb, Secretary, CFTC, to Jonathan G. Katz, Secretary, SEC (February 26, 1998).
  19. Over-the-Counter Derivatives, 63 Fed. Reg. 26,114 (May 12, 1998).
  20. "Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Act, 1999, § 760, as enacted in Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999, Pub. L. No. 105-277, 112 Stat. 2681, 2681–35 (1998)".
  21. "U.S. swaps watchdog says considering bitcoin regulation". Reuters.com. March 11, 2014. Retrieved March 11, 2014.
  22. "CFTC says cryptocurrency ether is a commodity, and ether futures are next". finance.yahoo.com. Retrieved October 20, 2019.
  23. "A CFTC Primer on Virtual Currencies" (PDF). U.S. Consumer Commodities Trading Commission. U.S. Government. Retrieved February 7, 2019.
  24. "Understand the Risks of Virtual Currency Trading" (PDF). Commodities Futures Trading Commission. Retrieved November 16, 2018.
  25. "Investor Bulletin: Initial Coin Offerings". US Securities and Exchange Commission. Retrieved November 16, 2018.
  26. "7 U.S. Code § 2 - Jurisdiction of Commission; liability of principal for act of agent; Commodity Futures Trading Commission; transaction in interstate commerce". LII / Legal Information Institute. Retrieved October 20, 2019.
  27. Schroeder, Pete. "U.S. Senate confirms pair of commissioners to join CFTC". U.S. Retrieved September 4, 2018.
  28. "Chairman Tarbert Announces CFTC Executive Leadership Appointments | U.S. COMMODITY FUTURES TRADING COMMISSION". cftc.gov. Retrieved July 18, 2019.
  29. "CFTC Organization | U.S. COMMODITY FUTURES TRADING COMMISSION". cftc.gov. Retrieved July 22, 2019.
  30. "Chairman Tarbert Announces Key Executive Leadership Appointment | U.S. COMMODITY FUTURES TRADING COMMISSION". cftc.gov. Retrieved October 20, 2019.
  31. "Chairman Tarbert Announces Executive Leadership Appointment | U.S. COMMODITY FUTURES TRADING COMMISSION". cftc.gov. Retrieved October 20, 2019.
  32. "Former Commissioners". U.S. Commodity Futures Trading Commission. Retrieved February 24, 2015.
  33. "Statement of Commissioner Bart Chilton on the President's FY 2015 Budget". Press Room. CFTC. March 4, 2014. Retrieved March 14, 2014.
  34. "House panel sticks with CFTC funding cut". Reuters.com. June 19, 2012. Retrieved March 14, 2014. Georgia Republican Jack Kingston faulted the CFTC for not preventing or foreseeing the collapse of M.F. Global last year or J.P. Morgan's loss of more than $2 billion in derivatives trade this year. "We spent a lot of money. What did we get for it? Zero," said Kingston, adding, "We're not seeing brilliance."
  35. Jean Eaglesham (November 1, 2013). "CFTC Backs Off, Lacking Funding". WSJ.com. Retrieved March 14, 2014.
  36. Andrew Ackerman (February 28, 2014). "Obama to Request 30% Bump in CFTC Funding". WSJ. Retrieved March 14, 2014.
  37. "Statement of Dissent by Commissioner Scott D. O'Malia, Fiscal Year 2014 Spending Plan". Press Room. CFTC. February 27, 2014. Retrieved March 14, 2014.
  38. "Statement of Dissent by Commissioner Scott D. O'Malia, Fiscal Year 2015 President's Budget & Performance Plan". Press Room. CFTC. March 5, 2014. Retrieved March 14, 2014.
  39. Mejdrich, Kellie (December 16, 2019). "Twitter".
  40. Tarbert, Heath. "Tweet on December 16, 2019". Twitter.com. Retrieved April 24, 2020.

Further reading
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