Commodity Futures Trading Commission

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U.S. Commodity Futures Trading Commission
US-CFTC-Seal.svg
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 Gary Gensler, Chairman
Website
cftc.gov
Footnotes
[1][2]

The U.S. Commodity Futures Trading Commission (CFTC) is an independent agency of the United States government that regulates futures and option markets. The Commodity Futures Trading Commission Act of 1974 (P.L. 93-463) created the Commodity Futures Trading Commission, to replace the U.S. Department of Agriculture’s Commodity Exchange Authority, as the independent federal agency responsible for regulating the futures trading industry. The Act made extensive changes in the basic authority of Commodity Exchange Act of 1936, which itself had made extensive changes in the original Grain Futures Act of 1923. (7 U.S.C. 1 et seq.).[3][4]

The Commodity 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 protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets.[5]

Contents

History [edit]

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]

Since the 1970s,[7] 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. The growth in the value of swaps exploded since their introduction in the late 1970s.[8] ...

Evolving mission and responsibilities [edit]

Congress created the CFTC in 1974 as an independent agency with the mandate to regulate commodity futures and option markets in the United States. The agency's mandate has been renewed and expanded several times since then, most recently in December 2000 when Congress passed the Commodity Futures Modernization Act of 2000, which instructed the Securities and Exchange Commission and the CFTC to develop a joint regulatory regime for single-stock futures, and the products subsequently began trading in November 2002. Today, the CFTC assures the economic utility of the futures markets 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. Through effective oversight, the CFTC enables the futures markets to serve the important function of providing a means for price discovery and offsetting price risk.

Over-the-counter derivatives [edit]

Brooksley E. Born was chairperson of the Commodity Futures Trading Commission (CFTC) from August 26, 1996, to June 1, 1999, which oversaw the futures and commodity options markets. In 1998 Born lobbied Congress and the President [9][10] to give the CFTC oversight of off-exchange markets for Over-the-Counter (OCD)derivatives in addition to its role with respect to exchange-traded derivatives,[11] but her warnings were opposed by other regulators.[12] 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.[13] First, in a 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.[14]

In May 1998 the CFTC issued a concept release requesting comment on whether regulation of OTC derivatives markets is appropriate and, if so, what form such regulation should take.[15] Legislation enacted at the request of Treasury, the Federal Reserve Board, and the SEC in 1998 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.[16] 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". Brooksley Born resigned on June 1, 1999, and later commented the failure of Long-Term Capital Management and the subsequent bailout as being indicative what she had been trying to prevent.[10] Born resigned as chairperson on June 1, 1999, shortly after Congress passed legislation prohibiting her agency from regulating derivatives.[10]

[notes 1]

CFTC: Crude Oil Derivatives and Futures: Speculation or Fundamentals [edit]

In December 2007 during the subprime meltdown, the Commodity Futures Trading Commission began investigating transportation, storage and trading of U. S. crude oil which including a probe of U.S.crude oil futures.[17] [notes 2] By May 2008, when the price of crude oil futures experienced a meteoric rise of "40% to a record $US 135 a barrel (Bloomberg 2008-05)",[17] there were concerns that the record prices may have been the result of "manipulation or fraud (Bloomberg 2008-05)." [17]

Others argued that crude oil market fundamentals drives the price, not the speculative market.[18] PFGBest analyst Phil Flynn in Chicago argued that in terms of supply and demand fundamentals, oil markets are only the messenger.[19]

Reuters (2010-04-27) 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.[19]

“It’s unprecedented for the CFTC to say that they are in the midst of an investigation.” Michael Haigh, head of U.S. commodities research in New York at Societe Generale SA, and a former CFTC associate chief economist, said in an interview. “They may be under pressure from Congress to look at this market given the high prices.” 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. [20] These exemptions were originally given in secret, coming to light only as the 2008 financial crisis 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.[21] Barack Obama has argued that current loopholes in CFTC regulations have contributed to skyrocketing prices and lack of transparency of oil on markets.[22]

On June 25, 2008 Speaker Pelosi sent a letter to President Bush calling on him to direct the Commodity Futures Trading Commission (CFTC) to use its emergency powers to take immediate action to curb excessive speculation in energy markets, and to investigate all energy contracts. Despite growing reports of excessive speculation in energy markets, the CFTC has refused to take actions they have taken in the past.[23] The Energy Markets Emergency Act of 2008 was a failed bill that would have attempted to curb excessive speculation in the energy futures markets.

By April 2010, The U.S. Commodity Futures Trading Commission (CFTC) began to "rein in speculation in energy and commodity trading, especially oil, and has proposed limiting the number of futures contracts financial players can hold at any one time." [19]

Organization [edit]

The Commission [edit]

The Commission consists of five Commissioners appointed by the President 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.

Commissioners [edit]

The five commissioners are:

Chairman's staff [edit]

The Chairman's staff has direct responsibility for providing information about the Commission to the public and interacting with other governmental agencies and the Congress, and for the preparation and dissemination of Commission documents. The Chairman's staff also ensures that the Commission is responsive to requests filed under the Freedom of Information Act. 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, which is the focal point for the Commission's global regulatory coordination efforts.

The Chairman's staff is also responsible for liaison with the public, the Congress, and the media. The Office of External Affairs (OEA) is the Commission's liaison with the domestic and foreign news media, producer and market user groups, educational and academic groups and institutions, and the general public. OEA provides timely and relevant information about the Commission's regulatory mandate, the economic role of the futures markets, new market instruments, market regulation, enforcement actions, and customer protection initiatives, actions, and issues. OEA also provides assistance to members of the media and the general public accessing the CFTC's Internet website.

The CFTC monitors markets and market participants closely by maintaining, in addition to its headquarters office in Washington, offices in cities that have futures exchanges—New York, Chicago and Kansas City.

Major operating units [edit]

Division of Clearing and Intermediary Oversight [edit]

The functions of the Division of Clearing and Intermediary Oversight include oversight of derivatives clearing organizations, financial integrity of registrants, customer fund protection, stock-index margin, registration and fitness of intermediaries, sales practice reviews, National Futures Association activities related to intermediaries, and foreign market access by intermediaries. The director is Jane Kang Thorpe.[24]

Division of Market Oversight [edit]

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.

Division of Enforcement [edit]

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 is Gregory Mocek.

Office of Chief Economist [edit]

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. The office is currently held by Andrei Kirilenko.

Office of the General Counsel [edit]

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.

Office of the Executive Director [edit]

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 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.[25]

Former Commissioners [edit]

The following are the historical and current Commissioners since inception in 1974[26]

[27]

Chairpersons:

  • William T. Bagley (Chairman 4/15/75-11/15/78) 4/15/75 – 11/15/78
  • Gary L. Seevers (Acting Chairman 12/6/78-5/3/79) 4/15/75 – 4/15/79, 4/15/75 – 6/1/79
  • James M. Stone (Chairman 5/4/79-6/8/81) 4/15/78 – 4/15/83 5/4/79 – 1/31/83
  • Phillip McBride Johnson (Chairman 6/8/81-5/1/83) 4/15/79 – 4/15/84, 6/6/81 – 5/1/83
  • Susan M. Phillips (Acting Chairman 5/28/83 – 11/16/83) (Chairman 11/17/83-7/24/87) 4/15/85 – 4/15/90, 11/16/81 – 7/24/87
  • Kalo A. Hineman (Acting Chairman 7/27/87-2/22/88) 6/19/81 – 6/19/86, 6/19/86 – 6/19/91, 1/12/82 – 6/19/91
  • Wendy L. Gramm (Chairman 2/22/88-1/22/93) 4/15/85 – 4/15/90, 4/15/90 – 4/15/95, 2/22/88 – 1/22/93
  • William P. Albrecht (Acting Chairman 1/22/93-8/20/93) 4/15/88 – 4/15/93, 11/22/88 – 8/20/93
  • Sheila C. Bair (Acting Chairman 8/21/93-12/21/93) 4/15/89 – 4/15/94, 5/2/91 – 10/4/94*
  • Barbara P. Holum (Acting Chairman 12/22/93-10/7/94) 4/15/92 – 4/13/97, 4/13/97 – 4/13/02, 4/13/02 – 4/13/07 11/28/93 – 12/9/03
  • Mary L. Schapiro (Chairman 10/13/94-1/26/96) 4/15/94 – 4/15/99, 10/13/94 – 1/26/96
  • John E. Tull, Jr. (Acting Chairman 1/27/96-8/25/96) 4/15/93 – 4/15/98, 11/24/93 – 2/27/99
  • Brooksley E. Born (Chairperson 8/26/96-6/1/99) 4/15/94 – 4/15/99, 8/26/96 – 6/1/99
  • David D. Spears (Acting Chairman 6/2/99-8/10/99) 4/15/95 – 4/15/00, 9/3/96 -12/20/01
  • William J. Rainer (Chairman 8/11/99 – 1/19/01) 4/15/99 – 4/13/04, 8/11/99 – 1/19/01
  • James E. Newsome (Acting Chairman 1/20/01 – 12/27/01) (Chairman 12/27/01 – 7/23/04) 6/19/96 – 6/19/01, 6/19/01 – 6/19/06 8/10/98 – 7/23/04
  • Sharon Brown-Hruska (Acting Chairman 7/24/04 – 7/10/05) 4/13/99 – 4/13/04, 4/13/04 – 04/13/09, 8/7/02 – 7/28/06
  • Reuben Jeffery III (Chairman 7/11/05 – 6/27/07) 4/13/02 – 4/13/07, 7/11/05 – 6/27/07
  • Walter L. Lukken(Acting Chairman 6/27/07-1/20/09) 4/15/00 – 4/15/05, 4/15/05 – 4/15/10, 8/07/02 -7/1/09
  • Gary Gensler (Chairman 5/26/09 - )

Other commissioners:

* Indicates two separate terms.

Primary exchanges monitored [edit]

See also [edit]

Notes [edit]

  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 possibly regulate the over-the-counter (OTC) derivatives market (PBS Frontline The Warning)
  2. ^ Crude oil futures in December 2007 were at $90 US (Yedlin 2008-06-05).

References [edit]

  1. ^ [1][dead link]
  2. ^ [2][dead link]
  3. ^  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 Jasper Womach.
  4. ^ CFTC.gov "About". CFTC. 
  5. ^ "About". CFTC. 
  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. ^ Dennis W. Carlton (1984). "Futures Markets: Their Purpose, Their History, Their Growth, Their Successes and Failures". Journal of Futures Markets 4 (3): 237–71. 
  8. ^ William D. Coleman (2003). Governing Global Finance: Financial derivatives, liberal states and transformative capacity (PDF). GHC Working Paper 01/2. 
  9. ^ 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. 
  10. ^ a b c "The Warning", Frontline (PBS) 
  11. ^ "Concept Release Concerning Over-The-Counter Derivatives market", CFTC Release #4142-98, May 7, 1998.
  12. ^ Goodman, Peter S. The Reckoning - Taking Hard New Look at a Greenspan Legacy, New York Times, October 9, 2008.
  13. ^ Over-the-Counter Derivatives Markets and the Commodity Exchange Act, President’s Working Group on Financial Markets 
  14. ^ Letter from Jean A. Webb, Secretary, CFTC, to Jonathan G. Katz, Secretary, SEC (Feb. 26, 1998).
  15. ^ Over-the-Counter Derivatives, 63 Fed. Reg. 26,114 (May 12, 1998).
  16. ^ "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).". 
  17. ^ a b c Matthew Leising; Alexander Kwiatkowski (May 30, 2008). "U.S. Probes Crude Oil Trading for Price Manipulation". Bloomberg. 
  18. ^ Deborah Yedlin (June 5, 2008). "Witch hunt won’t fix oil price". Calgary, Alberta: Calgary Herald. 
  19. ^ a b c David Sheppard London (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. 
  20. ^ David Stawick, Secretary of the Commodity Futures Trading Commission (March 17, 2009). "FR Doc. E9-6187". Washington, DC. 
  21. ^ Brush, Silla; Loder, Asjylyn (December 15, 2010). "Wall Street Pushes for Delay in U.S. Rules to Curb Commodities Speculation". Bloomberg. 
  22. ^ "Barack Obama and Joe Biden: New energy for America" (PDF). Obama for America. Retrieved May 3, 2010. 
  23. ^ "Energy Markets Emergency Act". Speaker Nancy Pelosi. June 26, 2008. Retrieved May 3, 2010. 
  24. ^ http://www.cftc.gov/files/opa/press03/opa4819-03chart.pdf
  25. ^ "Hedge Funds 101: A Primer for Regulators". Commodity Futures Trading Commission. November 30, 2004. Retrieved May 3, 2010. 
  26. ^ About the CFTC, 2011 1 20
  27. ^ CFTC Website

External links [edit]

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