COMMODITY FUTURES TRADING COMMISSION



The Commodity Futures Trading Commission (CFTC) was established with the passage of the Commodity Futures Trading Act of 1974. The CFTC, which began operating in April 1975, is an independent agency of the federal government authorized to regulate 11 U.S. futures exchanges which offer trading in futures and options contracts. The authority of the CFTC to operate was renewed by Congress in 1978, 1982, 1986, 1992, and 1995. The CFTC succeeded the Commodity Exchange Authority which, as part of the U.S. Department of Agriculture and acting for the Commodity Exchange Commission, enforced the Commodity Exchange Act of 1936. This act was preceded by the Grain Futures Act of 1922.

A futures contract is an agreement to buy or sell a commodity for future delivery. An option is a contract giving parties the right, but not the obligation, to buy (call option) or sell (put option) a futures contract for a set quantity of a particular commodity at a specified price within a specified period of time, regardless of the market price of the commodity. (The terms "option" and "futures contract" are often erroneously interchanged.) Most commodities traded on U.S. exchanges are for agricultural products such as grain, soybeans, and cattle. Futures contracts and options may also be written for precious metals, oil, and financial futures such as foreign currencies, treasury bonds, and stock indexes. Some contracts anticipate delivery of the commodity while others may stipulate cash in lieu of delivery. Most contracts are liquidated or settled before the delivery date. With few exceptions options and future contracts must be executed on the floor of an exchange. Commodity exchanges bring together hedgers who are seeking price guarantees on the future sale or purchase of a commodity; speculators who hope to profit from the rise or fall of commodity prices; and floor traders or "scalpers" who buy and sell contracts in anticipation of profits based on their trades.

The purpose of the CFTC is to monitor the futures and options markets, detect and prevent distortions and market manipulations of commodity prices, and protect customers who use futures exchanges for commercial, investment, or speculative purposes. To these ends, the CFTC reviews proposed futures and options contracts to determine whether the terms and conditions of the contract accurately reflect the market status of the particular commodity. The overall U.S. commodity market is surveyed on a daily basis by the CFTC which has the authority to intervene in emergencies to restore orderliness to any futures contracts being traded. The CFTC also regulates those companies and individuals handling customer funds and providing trading advice. This is done in conjunction with the National Futures Association, a self-regulatory futures organization. The CFTC requires registrants to apprise customers of market risks and provide them past performance data; to keep their own trading funds separate from those of their customers; and to adjust customer accounts at the end of each trading day to reflect current market value.

In 1997 the CFTC issued a mission statement that reiterated its stance against abusive practices. The statement read in part," The mission of the CFTC is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity futures and options, and to foster open, competitive, and financially sound commodity futures and options markets." While many people in the futures industry have a love-hate relationship with the CFTC, most do agree that some regulatory oversight is necessary. Nevertheless, industry leaders, such as Patrick Arbor, chairman of the Chicago Board of Trade, question why the long-term viability of the U.S. futures market is not included in the CFTC strategic plan. After the CFTC plan was issued Arbor asked, "Why has the CFTC largely ignored these trends affecting the futures industry and their competitive implications in formulating its objectives and strategies?" Arbor went on to say that the CFTC should be more concerned with global trends affecting the competitiveness of U.S. exchanges.

The CFTC is headed by five commissioners appointed by the president with the advice and consent of the Senate. One commissioner is appointed by the president to serve as chairperson. Commissioners serve staggered five-year terms and no more than three commissioners can belong to the same political party. The commission has five major operating components: the Division of Enforcement, the Division of Economic Analysis, the Division of Trading and Markets, the Office of the Executive Director, and the Office of the General Counsel.

[ Michael Knes ]

FURTHER READING:

Cavaletti, Carla. "As the Regulatory World Turns." Futures 27, no. 8 (August 1998): 68-72.

Commodity Futures Trading Commission. "The CFTC Glossary: A Layman's Guide to the Language of the Futures Industry." Washington: Commodity Futures Trading Commission, 1997. Available from www.cftc.gov/glossary.html .

Commodity Futures Trading Commission. "Commodity Futures Trading Commission: The Federal Regulatory Agency for Futures Trading." Washington: Commodity Futures Trading Commission, 1999. Available from www.cftc.gov .

Commodity Futures Trading Commission. "Economic Purposes of Commodity Futures Trading." Washington: Commodity Futures Trading Commission, 1997. Available from www.cftc.gov/futures.htm .



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