Overview

The United States Commodity Futures Trading Commission (CFTC) is an independent agency of the United States federal government. Created in 1974, the commission regulates the United States derivatives markets, which includes futures, swaps, and certain kinds of options.

The Commodity Exchange Act (CEA), 7 U.S.C. § 1 et seq., prohibits fraudulent conduct in the trading of futures, swaps, and other derivatives. The stated mission of the CFTC is to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation. After the 2008 financial crisis and since 2010 with the Dodd–Frank Wall Street Reform and Consumer Protection Act, the CFTC has been transitioning to bring more transparency and sound regulation to the multitrillion-dollar swaps market.

The agency was accused during the second Trump administration of weak regulation and even obstructing investigations into prediction markets and cryptocurrency businesses, two industries closely tied with the Trump family businesses. The reporting suggested that the agency had been made ineffective.

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. 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.).

Since the 1970s, trading in futures contracts has rapidly expanded 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 federal regulatory agency. 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. The Act made extensive changes to the Commodity Exchange Act (CEA) of 1936, which itself amended the original Grain Futures Act of 1922. (7 U.S.C. 1 et seq.). In 1975, the first members were selected, and William T. Bagley became its first chairman.

Regulated markets

The CFTC oversees the derivatives markets by encouraging their competitiveness and efficiency, ensuring their integrity, protecting market participants against manipulation, abusive trading practices, fraud, and ensuring the financial integrity of the clearing process. The CFTC generally 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.

Through oversight, the CFTC enables the derivatives 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 repositories (SDRs), 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.

Over-the-counter derivatives

In 1998 CFTC chairperson Brooksley E. Born lobbied Congress and the President^([page needed]) 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, but her warnings were opposed by other regulators.

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 swaps market. 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.

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. 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'.

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. She later commented the failure of Long-Term Capital Management and the subsequent bailout as being indicative what she had been trying to prevent.

Regulating digital currencies

In March 2014 the CFTC acknowledged it was considering the regulation of Bitcoin. The CFTC has since taken the position that Bitcoin is a commodity under the CEA. In October 2019, former CFTC Chairman Heath Tarbert, now Chief Legal Officer of Citadel Securities, declared that ether was also a commodity under the CEA.

In 2015, the CFTC ruled that for purposes of trading, cryptocurrencies were legally classified as commodities. However, in view of market volatility and other factors, the CFTC noted several risks associated with trading virtual currencies. In 2017, the CFTC cited the US SEC's warning against digital token sales and initial coin offerings (ICOs) that can "improperly entice investors with promises of high returns". In recent years, the CFTC has expanded its efforts to civilly prosecute fraud and misappropriation in the digital asset markets.