Commodity Futures Trading Commission

U.S. Commodity Futures Trading Commission

Official seal
Agency overview
Formed April 15, 1975
Preceding agency
  • Commodity Exchange Authority
Jurisdiction Federal government of the United States
Headquarters 1155 21st Street, NW, Washington, D.C.
Employees 435 (2006)
Agency executive
Website www.cftc.gov
Footnotes
[1][2]

The U.S. Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974, that regulates futures and option markets.

The Commodities Exchange Act ("CEA"), 7 U.S.C. § 1 et seq., prohibits fraudulent conduct in the trading of futures contracts. The stated mission of the CFTC is to foster open, transparent, competitive, and financially sound markets, to avoid systemic risk, and to protect the market users and their funds, consumers, and the public from fraud, manipulation, and abusive practices related to derivatives and other products that are subject to the Commodity Exchange Act.[3] After the Financial crisis of 2007–08 and since 2010 with the Dodd–Frank Wall Street Reform and Consumer Protection Act, CFTC has been transitioning to bring more transparency and stricter regulation to the multitrillion dollar swaps market.[4]

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.[5] 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.).[6][7]

Since the 1970s,[8] trading in futures contracts has expanded rapidly 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 agency with the mandate to regulate. 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 as the independent federal agency responsible for regulating commodity futures and option markets in the United States. The Act made extensive changes in the basic authority of the Commodity Exchange Act (CEA) of 1936, which itself had made extensive changes in the original Grain Futures Act of 1922. (7 U.S.C. 1 et seq.).[7][9]

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. As of 2003 the growth in the value of swaps had exploded since their introduction in the late 1970s.[10]

In 2010, the Dodd-Frank Act, expanded the CFTC's authority into the swaps markets, to prohibit the reckless use of manipulative schemes without -as in the past- having to prove the specific intent of the accused to affect prices and the existence of an artificial price.[11][12]

Responsibilities

The CFTC assures utility of the futures markets[13] by encouraging their competitiveness and efficiency, ensuring their integrity, protecting market participants against manipulation, abusive trading practices, and fraud, and ensuring the financial integrity of the clearing process. The CFTC like the SEC, 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.[14] Through oversight, the CFTC enables the futures 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 repository, 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[15][16] 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,[17] but her warnings were opposed by other regulators.[18]

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 swap market.[19] 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.[20]

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.[21] 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'.[22] 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.[16] She later commented the failure of Long-Term Capital Management and the subsequent bailout as being indicative what she had been trying to prevent.[16][notes 1]

Crude oil derivatives and futures: speculation or fundamentals

Since 1991 the CFTC has given secret exemptions from hedging regulations to 19 major banks and market participants, allowing them to accumulate essentially unlimited positions.[23] These exemptions came to light only after the 2008 financial crisis had unfolded and Congress requested information on market participants. A trader or bank granted an exemption as a bona-fide hedger can affect the price of a commodity without being either its producer or consumer.[24]

In December 2007 during the subprime mortgage crisis, the CFTC began investigating transportation, storage and trading of U.S. crude oil for price manipulation, which included a probe of U.S. crude oil futures.[25][notes 2] By May 2008, when the price of crude oil futures showed a meteoric rise of 40% to a record $US 135 a barrel there were concerns that the record prices may have been the result of "manipulation or fraud".[25] Michael Haigh, head of U.S. commodities research in New York at Société Générale SA, and former CFTC associate chief economist, said in an interview "It's unprecedented for the CFTC to say that they are in the midst of an investigation.[..] "They may be under pressure from Congress to look at this market given the high prices." Some argued that crude oil market fundamentals drive the price, not the speculative market.[26]

On June 25, 2008 Speaker Pelosi sent a letter to President Bush calling on him to direct the CFTC to use its emergency powers to take immediate action to curb excessive speculation in energy markets, to investigate all energy contracts and that despite growing reports of excessive speculation in energy markets, the CFTC refused to take actions they have taken in the past.[27] The Energy Markets Emergency Act of 2008 was a failed bill that would have attempted to curb excessive speculation in the energy futures markets.

In a campaign speech August 2008 presidential candidate Barack Obama argued that loopholes in CFTC regulations contributed to skyrocketing prices and lack of transparency on oil markets.[28]

In April 2010 Reuters reported that of the "40 major figures in the oil industry, including traders and analysts at some of the largest banks, trading houses and oil companies" interviewed, the vast majority (73 percent) thought increased speculation boosted prices beyond what supply and demand fundamentals dictated.[29] Peregrine Financial Group analyst Phil Flynn argued that in terms of supply and demand fundamentals, oil markets were only the messenger.[29] By April the CFTC began to "rein in" speculation in energy and commodity trading, especially oil, and proposed limiting the number of futures contracts financial players can hold at any one time."[29]

Foreign Exchange rates

In November 2014, the CFTC and the UK Financial Conduct Authority fined six banks for manipulating the foreign exchange market; JPMorgan, Chase, Citigroup, HSBC, RBS, and UBS paid roughly $1.2 billion to FCA and $1.5 billion, or about $300 million apiece to the CFTC.[30]

Regulating digital currencies

In March 2014 the CFTC acknowledged it was considering the regulation of Bitcoin.[31] The CFTC could treat Bitcoin transactions as swaps, futures, or spot transactions, otherwise Bitcoin would likely be a commodity under the CEA.[32] In October, CFTC's Global Markets Advisory Committee discussed virtual currencies. Mark Wetjen wrote in an OpEd by the WSJ afterwards that ["bitcoin] could play a fascinating role in the derivatives markets as well as financial services."[33] and that a swap contract on Bitcoin that had been listed for trading by one registered trading platform was recently presented to CFTC.

Organization

The Commission

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.

Current members of the Commission

Chairman's staff

The Chairman's staff has responsibility for providing information about the Commission, interacting with other entities and for the preparation and dissemination of Commission documents. The Chairman's staff includes the Office of the Inspector General, which conducts audits of CFTC programs and operations, and the Office of International Affairs, the focal point for the Commission's global regulatory coordination efforts.

The Office of External Affairs (OEA) is the Commission's liaison with news media, producer and market user groups, educational groups, and the general public. OEA provides information about the regulatory mandate, the economic role of the futures markets, new market instruments, market regulation, enforcement actions, and customer protection initiatives.

Major operating units

Division of Swap Dealer and Intermediary Oversight

The Division of Swap Dealer and Intermediary Oversight oversees the registration, compliance, and business conduct standards of intermediaries, swap dealers and major swap participants.

Division of Clearing and Risk

The functions of the Division of Clearing and Intermediary Oversight include oversight of derivatives clearing organizations.

Division of Market Oversight

The Division of Market Oversight has regulatory responsibility for initial recognition and continuing oversight of trade execution facilities, including new registered futures exchanges and derivatives transaction execution facilities. 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.Director as of 2013 is Vincent A. McGonagle[35]

Division of Enforcement

The Division of Enforcement 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. The director of the Division of Enforcement until 2008 was Gregory Mocek, followed by David Meister until October 2013, followed byGretchen L. Lowe,[36] and is Aitan Goelman.[37]

Office of Chief Economist

The Office of the Chief Economist is an independent office with responsibility for providing expert economic advice to the Commission. Its functions include policy analysis, economic research, expert testimony, education, and training. As of 2014 the office is held by Sayee Srinivasan.[38]

Office of the General Counsel

The Office of the General Counsel (OGC) is the Commission's legal advisor. OGC staff represents the Commission in appellate litigation and certain trial-level cases, including bankruptcy proceedings which involve futures industry professionals. As the Commission's legal advisor, OGC reviews all substantive regulatory, legislative, and administrative matters presented to it and advises the Commission on the application and interpretation of the Commodity Exchange Act and other administrative statutes. OGC also assists the Commission in performing its adjudicatory functions. Head as of April 2013 is Jonathan L. Marcus.[39]

Office of the Executive Director

The Office of the Executive Director (OED) formulates and implements the management and administrative policies and functions of the agency. OED staff formulate the agency's budget, supervise the allocation and use of agency resources, promote management controls and financial integrity, and develop and maintain the agency's automated information systems. The Office of Proceedings, which is under the administrative direction of OED, provides an inexpensive and expeditious forum for handling customer complaints against people or firms registered with the National Futures Association (NFA) through its reparations program. The Office of Proceedings also hears and decides enforcement cases brought by the Commission.

It is responsible for recording and monitoring the trading of futures contracts on United States futures exchanges. The CFTC has the authority to fine, suspend, or sue the company or individual in a federal court in cases of misconduct, fraud, or if a rule breaking occurs.

The CFTC publishes weekly reports containing details of holdings for market-segments, which have 20 or more reportable participants. The reports are released every Friday (including data from the previous Tuesday) and contain data on open interest split by reportable and non-reportable open interest as well as commercial and non-commercial open interest. This type of report is referred to as the 'Commitments of Traders Report', COT-Report or simply COTR.

The CFTC is authorized to regulate commodity pools and commodity trading advisors. Many hedge funds operate as commodity pools. In an address to the Securities Industry Association in 2004, Sharon Brown-Hruska, acting director of the CFTC, said that 65 of the top 100 hedge funds in 2003 were commodity pools, and 50 out of the 100 largest hedge funds were CTAs in addition to being commodity pools.[40]

Office of the Whistleblower

In 2012, Christopher Ehrman, a SEC veteran was selected to run the new Office of the Whistleblower for the CFTC.[41] In an interview published in the Wall Street Journal, Mr. Ehrman is quoted: "One is just understanding enforcement. I'm an enforcement guy and I did investigations and brought cases for a number of years. I understand what folks in enforcement are looking for. Whistleblower complaints have no intrinsic value. When they're just sitting here with me, they just don't mean anything. They're valuable to the enforcement division so that they can bring investigations."[42] The website for the program claims that "information that was first submitted to the CFTC after July 21, 2010 – the date of enactment of the Dodd-Frank Act – is eligible for a whistleblower award". And continues to explain "The information, however, can be about conduct that happened at any time".

The CFTC announced its first award of approximately $240,000 to a whistleblower on May 20, 2014. The second award of approximately $290,000 was announced on September 29, 2015.

List of Past Commissioners

[43]

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".[44]

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.[45] In 2013 CFTC's performance was severely affected by limited resources and had to delay cases.[46] 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.[44] The Obama administration's latest budget proposal for FY 2015 requested $280m, which is $35m less than the request for the previous year,[47] 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.[44] 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.[48] 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."[49]

Primary exchanges monitored

See also

Related legislation

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)
  2. ↑ Crude oil futures in December 2007 were at $90 US (Yedlin 2008-06-05).

References

  1. ↑ History of the CFTC Retrieved from Internet Archive January 13, 2014.
  2. ↑ Commodity Futures Trading Commission Retrieved from Internet Archive January 13, 2014.
  3. ↑ "About". CFTC.
  4. ↑ Ackermann, Andrew (9 April 2014). "CFTC nominees gain". WSJ. Retrieved 23 April 2014.
  5. ↑ 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).
  6. ↑  This article incorporates public domain material from the Congressional Research Service document "Report for Congress: Agriculture: A Glossary of Terms, Programs, and Laws, 2005 Edition" by Archived August 10, 2011, at the Wayback Machine. Jasper Womach.
  7. 1 2 "About". CFTC.
  8. ↑ 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.
  9. ↑  This article incorporates public domain material from the Congressional Research Service document "Report for Congress: Agriculture: A Glossary of Terms, Programs, and Laws, 2005 Edition" by Archived August 10, 2011, at the Wayback Machine. Jasper Womach.
  10. ↑ William D. Coleman (2003). Governing Global Finance: Financial derivatives, liberal states and transformative capacity (PDF). GHC Working Paper 01/2.
  11. ↑ "Antidisruptive Practices Authority, 78 FR 31890" (PDF). Federal Register. CFTC. May 28, 2013. Retrieved 13 March 2014.
  12. 1 2 "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". Testimony. CFTC. January 15, 2014.
  13. ↑ "breakdown of the net positions for "non-commercial" (speculative) traders in U.S. futures markets". Investing.com. Retrieved 29 March 2017.
  14. ↑ 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 14 March 2014.
  15. ↑ Michael Hirsh (December 13, 2010). Capital Offense: How Washington's Wise Men Turned America's Future Over to Wall Street. John Wiley & Sons. pp. 352 pages. ISBN 0470520671. Retrieved February 20, 2013.
  16. 1 2 3 "The Warning", Frontline, PBS
  17. ↑ "Concept Release Concerning Over-The-Counter Derivatives market", CFTC Release #4142-98, May 7, 1998.
  18. ↑ Goodman, Peter S. The Reckoning - Taking Hard New Look at a Greenspan Legacy, New York Times, October 9, 2008.
  19. ↑ "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
  20. ↑ Letter from Jean A. Webb, Secretary, CFTC, to Jonathan G. Katz, Secretary, SEC (Feb. 26, 1998).
  21. ↑ Over-the-Counter Derivatives, 63 Fed. Reg. 26,114 (May 12, 1998).
  22. ↑ "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).".
  23. ↑ David Stawick, Secretary of the Commodity Futures Trading Commission (17 March 2009). "FR Doc. E9-6187". Washington, DC.
  24. ↑ Brush, Silla; Loder, Asjylyn (December 15, 2010). "Wall Street Pushes for Delay in U.S. Rules to Curb Commodities Speculation". Bloomberg.
  25. 1 2 Matthew Leising; Alexander Kwiatkowski (May 30, 2008). "U.S. Probes Crude Oil Trading for Price Manipulation". Bloomberg.
  26. ↑ Deborah Yedlin (June 5, 2008). "Witch hunt won't fix oil price". Calgary, Alberta: Calgary Herald.
  27. ↑ "Energy Markets Emergency Act". Speaker Nancy Pelosi. June 26, 2008. Retrieved May 3, 2010.
  28. ↑ "Barack Obama and Joe Biden: New energy for America" (PDF). Obama for America. August 3, 2008. Archived from the original (PDF) on October 17, 2008. Retrieved May 3, 2010.
  29. 1 2 3 David Sheppard (April 27, 2010). "Financial speculation seen boosting oil price: Financial speculators in oil are costing consumers at least $300 billion a year, according to almost 75 percent of industry players surveyed by Reuters.". Reuters. Retrieved February 20, 2013.
  30. ↑ Lee Brodie (12 Nov 2014). "Bank scandal sparks CFTC outrage, aggression". CNBC. NBC UNiversal. Retrieved 27 December 2014.
  31. ↑ "U.S. swaps watchdog says considering bitcoin regulation". Reuters.com. 11 March 2014. Retrieved 11 March 2014.
  32. ↑ Todd P. Zerega, Thomas Watterson (March 12, 2014). "United States: Bitcoin And The CFTC: "Spot"ing The Jurisdictional Hook". Business and Finance. Mondaq.com. Retrieved 13 March 2014.
  33. ↑ Mark Wetjen (3 November 2014). "Bringing Commodities Regulation to Bitcoin". WSJ. Retrieved 27 December 2014.
  34. ↑ "Current CFTC Commissioners". U.S. Commodity Futures Trading Commission. Retrieved 9 August 2017.
  35. ↑ "CFTC Announces Vincent A. McGonagle as Director of the Division of Market Oversight". Press Room. CFTC. September 16, 2013. Retrieved 13 March 2014.
  36. ↑ "CFTC Announces Gretchen L. Lowe as Acting Director of Division of Enforcement". Press Room. CFTC. April 1, 2013. Retrieved 13 March 2014.
  37. ↑ "404 Page Not Found".
  38. ↑ "CFTC Announces Sayee Srinivasan as the Acting Chief Economist". Press room. CFTC. 13 December 2013. Retrieved 13 March 2014.
  39. ↑ "CFTC Announces Jonathan L. Marcus as General Counsel". Press Room. CFTC. 9 April 2013. Retrieved 13 March 2014.
  40. ↑ "Hedge Funds 101: A Primer for Regulators". Commodity Futures Trading Commission. November 30, 2004. Retrieved May 3, 2010.
  41. ↑ Rachel Louise Ensign. "Q&A: Christopher Ehrman, Director, CFTC's Whistleblower Office". WSJ.
  42. ↑ "CFTC's Whistleblower Program".
  43. ↑ "Former Commissioners". http://www.cftc.gov/About/Commissioners/FormerCommissioners/index.htm. Retrieved 24 February 2015. External link in |work= (help)]
  44. 1 2 3 "Statement of Commissioner Bart Chilton on the President's FY 2015 Budget". Press Room. CFTC. 4 March 2014. Retrieved 14 March 2014.
  45. ↑ "House panel sticks with CFTC funding cut". Reuters.com. Jun 19, 2012. Retrieved 14 March 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."
  46. ↑ Jean Eaglesham (1 November 2013). "CFTC Backs Off, Lacking Funding". WSJ.com. Retrieved 14 March 2014.
  47. ↑ Andrew Ackerman (28 February 2014). "Obama to Request 30% Bump in CFTC Funding". WSJ.
  48. ↑ "Statement of Dissent by Commissioner Scott D. O'Malia, Fiscal Year 2014 Spending Plan". Press Room. CFTC. 27 February 2014. Retrieved 14 March 2014.
  49. ↑ "Statement of Dissent by Commissioner Scott D. O'Malia, Fiscal Year 2015 President's Budget & Performance Plan". Press Room. CFTC. 5 March 2014. Retrieved 14 March 2014.

Further reading

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