5 Key Functions of the US Commodity Futures Trading Commission

The U.S. Commodities Futures Trading Commission or CFTC because it’s often called, is an independent bureau of the U.S. administration with the authority of controlling the futures and options marketplaces.

US Commodity Futures Trading Commission

The CFTC was established in 1974 with the enactment of the Commodity Futures Trading Commission Act, signed by the then U.S. President Gerald Ford. The CFTC was established nearly 126 years after the Chicago Board of Trade was founded as a cash store for grains.

After the 2007 global financial crisis, the Dodd-Frank Act has pushed the CFTC to transition to implementing more strict regulations and bringing more transparency to the futures marketplaces.

For futures traders, it is essential to know the role played by the CFTC in the futures marketplaces and also understand the key functions of the establishment. The CFTC is tasked for the purpose of avoiding systemic risk while also protecting the store participants’ capital and out of manipulation and fraud.

The CFTC has offices in New York, Chicago and Kansas City along with also the commissioners are appointed by the president with the consent of the senate. The most important office is based in Washington DC.

A total of five commissioners are manufactured with a reasonable separation, using no further than three commissioners at any time could possibly be from the similarly political party. The president designates one among those commissioners to function as Chairman. The commissioners serve staggered past terms. The present Chairman of the CFTC is currently Timothy Massad who had been appointed on June 3, 2014.

The team of the chairman of the CFTC is responsible for providing advice on the topic of the commission into the general public. The team consists of the Office of the Inspector General, in charge of the Office of the International Affairs which contrasts together with other world wide regulatory bodies. Even the chairman’s staff additionally interacts with all other governmental agencies along with the Congress and prepares and disseminates the commission’s records. The team is responsible for attending to the requests filed under the Freedom of Information Act.

The Commodities Futures Trading Commission is organised around four Chief groups:

  • Clearing and Risk: Includes restarting the derivatives clearing organisations along with other store participants
  • Enforcement: Investigation and prosecuting alleged violations of the Commodity Exchange Act and CFTC regulations
  • Market Oversight: Conducting trade surveillance and overseeing the trading centers for example futures
  • Oversight: Includes restarting the enrollment and compliance with self-regulatory businesses (SROs), like the futures trades, the National Futures Association, and also enrollment of exchange dealers and Significant exchange participants

The six Chief branches of this CFTC comprise:

  • Division of Clearing and Intermediary Oversight,
  • Division of Market Oversight,
  • Division of Enforcement,
  • Office of Chief Economist,
  • Office of the General Counsel,
  • along with Office of the Executive Director.

The government watch dog provides protective measures that allow for freedom and security for traders in the futures marketplaces. The CFTC helps to ensure that the strict and at times insecure marketplaces of futures are a flat playing field no matter of institutional traders or even the foreign exchange trader.

History of this CFTC

Commodities are traded at the United States for more than 150 years beginning largely in agricultural product trading. Since 19-20 ‘s product trading has been governed under the Federal law and in 1922, the Grains futures action created the fundamental jurisdiction, referred to as the Commodity Exchange Act allowed in 1936. As time passes, the CFTC’s oversight enlarged to comprise contracts on metals and energy in addition to financial contracts like interest rates, share indexes and monies.

As futures began to expand rapidly and moving past the standard agricultural products, the CFTC was finally generated that substituted the U.S. Department of Agriculture Commodity Act.

In the calendar year 2000, the U.S. Congress passed the Commodity Futures Modernization Act which enlarged and revived the CFTC mandate. Additionally, it comprised the Security Exchange Commission (SEC) to partner with CFTC indevelopment of joint law for some other futures such as the single-stock stocks which started trading after all 2002 as well as overseeing the 400 trillion swaps marketplaces.

Key Functions of this U.S. Commodity Futures Trading Commission

The CFTC defines its mission as “to foster open, transparent, competitive and financially sound marketplaces, to avoid systemic risk, and to protect the store users and their funds, consumers and the public from fraud, manipulation and abusive practices related to derivates and other products that are subject to the Commodity exchange act. “

But what does this mean to futures traders and what role that the CFTC play at the futures marketplaces. The primary purposes of this CFTC are the Following:

Number 1 – Market review of contracts

One of the key purposes of this CFTC would be to Guarantee ethics in the futures marketplaces. Hence, that the CFTC consistently reviews the stipulations of the futures contract and options contracts that the commission reviews any fresh futures options contracts by checking if the brand new financial instruments adhere to certain needs of the Commodity Exchange Act (CEA) and the commission’s rules including perhaps the contract provisions reflect the industrial trading techniques and also to check whether the trades is prone to store exploitation.

This usually means that each futures options contract that’s readily available to trade out of the regulated market has to be accepted by the commission.

For instance, at April 2012 that the CFTC quashed a proposition to permit options contract to the U.S. Presidential elections. The proposition was first put on from North American Derivatives Exchange (NADEX), that wanted to list the most options contracts tied into this election outcomes from 2012 presidential elections race.

Number 2 – Surveillance and maintaining store ethics

The CFTC also simplifies daily surveillance and will, in a few instances dictate a futures exchange to carry certain activities or to reestablish orderliness from the futures contract under consideration.

Under the everyday defense application, the CFTC monitors all of the busy futures options contracts with an surveillance team tracking the everyday tasks from large traders for example checking vital amount connections medially the stocks and the cash marketplaces and supply and demand factors.

May 2010 Flash Crash Caused by Futures Traders

The most recent high profile case being the investigation of a 37 year old, London based futures trader who pleaded guilty for the 2010 share store crash by spoofing the futures contracts.

High frequency trading, which is often considered a nemesis by retail traders also came under the scrutiny of the CFTC. Some of the more recent changes including the proposed rules known as “Regulation Automated Trading” or “Regulation AT” designed to reduce the likelihood of automated trading disruptions and gain transparency measures and introducing other safeguards.

#3 – Large trader reporting program

The CFTC’s Large trader reporting program offers a confidential reporting system from firms and large traders. Under this program, clearinghouses, foreign brokers and FCM’s (futures commission merchants) are required to file daily reports with the commission. The reports show the futures and options positions of the traders who have their positions at or above the specific reporting level set by the commission.

The reporting levels vary from one commodity contract to another, but to give an example for crude oil, 350 contracts is the levels specified by the CFTC while 200 contracts are set as the reporting level for gold futures contracts. Below are some of the most commonly traded commodities and their reporting levels.

Commodity Contracts
Gold 200
Natural Gas 200
Crude Oil (Light Sweet) 350
30-day Fed funds 600
S&P500 Stock amount index 1,000
Coffee 50
Corn 250
Cotton 100
Soybeans 150

More details on the reporting levels is found here.

What this means is that if a reporting firm has a trader with a position at or above the commission’s reporting level in any single futures or option expiration month, the firm is obligated to report the trader’s entire position in all futures and options expiration months in that commodity.

The CFTC aggregates all this information and publishes it on a weekly basis is what is known as the Commitment of Traders report. The CoT report is one of the most widely used store sentiment indicators to show the general speculative money positioning in the marketplaces covering energy, metals and currencies.

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Besides the CoT report, the CFTC also published other store reports such as:

  • Weekly swap reports
  • Bank participation reports
  • Net position changes
  • Cotton-on-Call

CFTC Bank Participation sample document – Source CFTC

Number 4 – Regulation of Futures Professionals:

The CFTC has funding rules in position to defend the eye of the public. The commission enforces that by ensuring firms or those who manage customer capital or provide trading information needs to enroll together with the National Futures Association (NFA). The NFA is a self-evident organization that’s approved by the CFTC.

According to the principles, the CFTC takes all NFA registered businesses and people to clearly disclose the store risks and past performance information to prospective customers. Different rules involve maintaining customer capital within an account that’s distinct from the main one maintained by the business for its own usage and requires customer consideration to be corrected to reflect the present store value by the end of every trading day.

If the above sounds like technical jargon, then afterward there’s ‘s a more straightforward solution to describe this. For those who are a trader or have already been after markets, you may possibly have encounter that the CFTC’s 4.41 decree that could pass by different names like the CFTC revelation that alarms one to the chance of financial trading, so this really is just CFTC’s regulation in training.

Your ordinary Commodity Trading Advisor (CTA) is part of this CFTC’s law where just certified CTA’s are in a position to supervise your trading resources or provide investment information.

Number 5 – Regulation of Designated contract marketplaces

Designated contract marketplaces of DCM’s are all required to run under the regulatory supervision of their CFTC, based on next 5 of the Commodity Exchange Act. A Designed Contract Market are all boards of trade or conventional futures trades that allow usage of their own facilities from all types of traders.

Sample Daily Market report published by CME Group – Source CME Group

Any exchange or trading facility that offers trading futures and options on commodities need to apply to the CFTC to be a designed DCM. The DCM’s are required to comply with the CFTC’s rules and the 23 governing principles, some of which are:

  • Contracts not readily subject to manipulation
  • Daily publication of trading volume
  • Trade information
  • Financial integrity of transactions
  • Dispute resolution
  • Conflict of interest

The CFTC undertakes regular reviews of the DCM to ensure the ongoing compliance with the commission’s rules. You can also view a full list of the DCM or in other words check if an exchange is regulated by the CFTC by clicking here.

To conclude, the Commodities Futures Trading Commission is a financial watchdog tasked for the purpose of maintaining the financial integrity of the marketplaces. For retail traders this means having access to a transparent marketplaces and the ability to trade the futures contracts that are regulated by the CFTC. Last but not the least, trading with a CFTC regulated exchange and a broker is often in the best interest for the retail traders as it offers additional advantages such as the regulatory oversight to ensure fairness in the futures marketplaces.

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