What Is the Commodity Futures Trading Commission?

The Commodity Futures Trading Commission (CFTC) is an independent federal agency that regulates the derivatives markets, including futures contracts, options, and swaps, in america. Its goals include the promotion of competitive and efficient markets and the protection of investors against manipulation, abusive trade practices, and fraud. The Commodity Futures Trading Commission Act established the CFTC in 1974.

Understanding the Commodity Futures Trading Commission

The CFTC consists of 5 commissioners who’re appointed by the president and approved by the Senate. Commissioners serve five-year staggered terms. The president designates certainly one of these commissioners because the chair, and not more than three commissioners at anybody time can come from the identical political party. 

These five commissioners serve on committees focused on agriculture, energy and environmental markets, global markets, market risk, and technology. A committee that focuses on cooperation between the CFTC and Securities and Exchange Commission (SEC) is inactive. Members of the committees represent specific industries, traders, futures exchanges, commodities exchanges, consumers, and environmental groups.

The Commodity Exchange Act regulates the trading of commodity futures within the U.S. Passed in 1936 and amended several times since the act establishes the statutory framework under which the CFTC operates. Under the act, the CFTC has the authority to determine regulations which might be published in Title 17, Chapter I, of the Code of Federal Regulations.

CFTC Divisions

The CFTC organization consists of the offices of the Chairman and Commissioners in addition to the agency’s 13 operating divisions and offices. Let’s take a have a look at five of the foremost divisions of the CFTC: Division of Clearing and Risk, Market Participants Division, Division of Market Oversight, Division of Data, and the Division of Enforcement.

Division of Clearing and Risk

The role of the Division of Clearing and Risk (DCR) is to enable the CFTC to satisfy its statutory responsibility to make sure the financial integrity of all transactions subject to the Commodity Exchange Act (CEA) and the avoidance of systemic risk within the derivatives markets. The DCR oversees all operations of derivative clearing operations (DCOs) and is split into 4 branches itself:

1. Clearing Policy
2. Examinations
3. Risk Surveillance
4. International & Domestic Clearing Initiatives

In keeping with the CFTC website, among the DCR’s foremost responsibilities include:

• Preparing regulations, orders, guidelines, and other regulatory work product on issues pertaining to DCOs, including the protection of shoppers within the bankruptcy or insolvency of an FCM or DCO
• Reviewing DCO applications for registration, petitions for regulatory relief or exemption, and rule submissions, and making recommendations to the Commission regarding such matters
• Reviewing DCO recovery plans and wind-down plans for consistency with Commission regulations and fascinating with the FDIC and other financial regulators, each domestically and internationally, regarding planning for the potential resolution of a DCO
• Conducting risk assessments on an annual basis to find out which DCOs to look at and the topics that ought to be included within the risk-based examination
• Examination of DCOs for compliance with all relevant requirements of the CEA and Commission regulations, including examining each systemically necessary DCO (SIDCO) not less than annually
• Analyzing notifications regarding hardware or software malfunctions, cyber-security intrusions, or threats which have or could have a cloth impact on clearing

As of June 2021, the director of the DCR is Clark Hutchinson.

Market Participants Division

Formed in October 2020, the Market Participants Division (MPD) is the results of a merger between the Division of Swap Dealer and Intermediary Oversight and the Office of Customer Education and Outreach. The first responsibilities of the MPD are to oversee the registrants of the CFTC who conduct dealing, trading, investment, and advisory businesses within the derivatives markets and educate the American public concerning the derivative markets the CFTC regulates.

The MPD division is itself divided into five branches:

1. Chief Counsel Branch
2. Examinations Branch
3. Managed Funds & Financial Requirements Branch
4. Registration & Compliance Branch
5. The Office of Customer Education and Outreach (OCEO)

In keeping with the CFTC, the MPD’s foremost responsibilities include:

• Examining intermediaries and designated self-regulatory organizations
• Maintaining appropriate standards for the registration of intermediaries
• Providing expertise to the Commission in its promulgation of rules
• Issuing concise and timely interpretations and guidance for intermediaries

Amanda Olear serves because the Acting Director.

Division of Market Oversight

The Division of Market Oversight (DMO) is chargeable for overseeing the steadiness and market structure of the derivatives markets regulated by the CFTC, in addition to the exchanges and facilities on which those derivatives trade. One among the chief functions of the DMO is the event and implementation of CFTC regulations to advertise fair, efficient, vibrant derivatives markets in addition to ensuring these rules address the most recent developments within the industry.

The DMO is split into five branches:

• The Chief Counsel supports all DMO rule-making and staff motion documents and the branch suggests any enhancements to policy to account for changes in market structure, innovation, and other market developments. 
• The Compliance branch is chargeable for examining and assessing the adequacy of exchange and trading platforms’ self-regulatory and rule enforcement programs covering each exchange rules and Commission regulations.
• The Market Intelligence branch is chargeable for assessing the health and stability of U.S. futures, options, and OTC markets.
• The Market Review branch assesses and makes recommendations to the CFTC regarding applications for registration or designation of SEFs, DCMs, SDRs, and foreign boards of trade (FBOTs).
• The Product Review branch assesses recent and existing exchange-traded derivatives, including amendments to the terms of existing contracts, for compliance with CFTC regulations, ensuring that products should not at risk of manipulation.

Division of Data

Just like the Markets Participants Division, the Division of Data (DOD) was formed as a part of a restructuring of the CFTC that occurred in October 2020. The DOD handles responsibilities that were previously held within the Department of Market Oversight (DMO) and extra analytics functions.

In keeping with the CFTC, the DOD fulfills its role through 4 essential functions:

• Collaborate: the DOD collaborates with market participants, operational divisions of the CFTC, and the industry to make sure data quality, integrity, and confidentiality.
• Integrate: the DOD reduces data silos by joining datasets each inside the Commission and from external sources for the clearest possible picture of economic and market conditions.  The DOD creates a holistic picture of potential future conditions to tell data-driven policymaking.
• Train: the DOD manages centers of excellence to facilitate a knowledge culture inside the commission, participates in technology advisory groups internally and externally to find out best practices, and facilitates training on data topics throughout the Commission.
• Execute: the DOD performs or informs analytics, visualization, and operational software development on the Commission.

Division of Enforcement

As its name suggests, the Division of Enforcement (DOE) is charged with detecting, investigating, and prosecuting violations of the Commodity Exchange Act (CEA) and CFTC regulations.

The DOE investigates the next potential violations: “fraud, false statements to the Commission, disruptive trading practices, misappropriation, use of a manipulative or deceptive device, price manipulation, false reporting, accounting violations, registration and fitness violations, failure to take care of or produce required records, failure to make required reports, a registrant’s failure to supervise, failure to comply with business conduct standards, and illegal off-exchange activity.”

The DOE also assists with case development and trials to U.S. Attorneys’ Offices, other federal and state civil and law enforcement agencies, and international authorities.

What Does the CFTC Regulate?

The CFTC regulates the U.S. derivatives markets. This includes the commodity futures, options, and swaps markets in addition to over-the-counter (OTC) markets. As a way to sufficiently oversee these markets, the CFTC regulates the next organizations: trading organizations resembling designated contract markets that are the exchanges that host futures trading, and swap execution facilities, that are platforms that allow participants to purchase and sell swaps.

The Division of Clearing and Risk of the CFTC is solely chargeable for monitoring derivatives clearing organizations (DCO) resembling the choices clearing corporation. The OCC is the most important DCO on the planet and operates under the jurisdiction of the CFTC.

Swap data repositories, which were created by the Dodd-Frank Act to offer a central facility for swap data reporting and recordkeeping are also regulated by the CFTC.

Intermediaries

The CFTC also regulates all intermediaries—entities that act as agents for other people when coping with futures, swaps, and options. A few of these intermediaries include:

• The operators of commodity pools, that are funds that mix investor contributions to trade on the futures and commodities markets.
• Commodity trading advisors, those that provide investment advice for the commodity and futures markets.
• Futures commission merchants, who accept the order to buy or sell any commodity for future delivery.
• Introducing brokers, who’ve a direct relationship with a client, but delegates the work of the ground operation and trade execution to a different futures merchant.
• Swap dealers, individuals, or entities that function swaps brokers, make markets in swaps or enter into swaps contracts with counterparties.

Recent Challenges for the CFTC

The CFTC is moving away from its historic role as a regulator of traditional commodity products-related futures and options contracts to face recent challenges within the digital age of the twenty first century. A brand new challenge facing the CFTC is in relation to recent financial technology (fintech) products and cryptocurrencies resembling Bitcoin, which had a Bitcoin futures contract launched in December 2017 that trades with the CME Group.

Fintech is driving innovation in financial markets across the globe. Recent technologies are wide-ranging in scope, from cloud computing and algorithmic trading to distributed ledgers to artificial intelligence and machine learning to network cartography and lots of others. These technologies have the potential for significant and even transformational impact on CFTC-regulated markets and the agency itself. The CFTC plans to play an lively role within the oversight of this emerging innovation.

The CFTC plays a very important role in regulating financial markets. Without such regulation and regulators, market participants may very well be subjected to fraud by unscrupulous individuals and, in turn, lose faith in our capital markets. This might make capital markets ineffective at efficiently allocating financial resources to essentially the most deserving technique of production and productive economic activities to the detriment of investors, consumers, and society. Time will show if the agency is as much as the brand new challenges it faces.

CFTC FAQs

What Is the Difference Between the SEC and CFTC?

The SEC and CFTC were created by different laws, have different responsibilities, and use different methods to satisfy those responsibilities. Essentially the most basic difference between the 2 entities is that the SEC regulates the securities market and the CFTC regulates the derivatives market.

How Is the CFTC Funded?

The CFTC is funded by the federal government. Many critics, nevertheless, imagine the CFTC doesn’t receive sufficient funding in comparison with other regulatory agencies. The CFTC requested $394 million from Congress for FY 2022.

Who Has to Register with the CFTC?

Any intermediaries, entities that act as agents for other people when coping with futures, swaps, and options, must register with the CFTC. These include commodity pool operators and advisors, futures commission merchants, introducing brokers, and swap dealers.