The CFTC, or the United States Commodities Futures Trading Commission, is an independent federal agency that regulates the trading of futures contracts. If you trade futures, CFTC regulations will be very important for you.
The CFTC commitment to traders is to ensure that traders are conducting trades legitimately and fairly. It is essential for every trader and everyone else involved in futures to understand CFTC regulations, and why they are in place. For this reason, we will take some time to outline the history, purpose, and present situation of the CFTC.
History and Purpose of the CFTC
The Commodity Futures Trading Commission was established in 1974 with the express mission of regulating futures and options. The Federal government had been regulating agriculture based futures since the 1920’s. By the 1970’s it was becoming obvious that the government lacked the proper scope and expertise to regulate the increasingly complex futures and options market.
For this reason, Congress passed the Commodity Futures Trading Commission Act of 1974 to establish the CFTC. The government gave the commission the authority and ability to regulate options and futures. Pre-existing organizations, such as the Securities Exchange Commission, lacked the proper authority and U.S. Federal Reserve lacked the proper authority and expertise to regulate futures.
This was essential because by the 1970’s, futures were beginning to include a lot more things than agricultural products. Traders were increasingly trading foreign currencies, stock indices, government securities, and non-agricultural commodities through the futures market. With so many products and so much money flowing through futures and options markets, it was becoming essential to properly regulate them.
The CFTC Commitment of Traders
Importantly, the CFTC commitment of traders requires that traders honor their dealings. If a trader promises money or the commodity in question, that trader must provide it. By ensuring this integrity, the CFTC ensures that markets themselves are stable and reliable. The futures trading commission is thus vital for protecting markets.
Futures, you see, are much more complex instruments than stocks and bonds. If you want to buy a stock or a bond, you just buy it. You give a stock broker or other party money, and they give you the assets, it’s that simple. Since the exchange is made in the moment, it’s much easier to regulate and much easier to pursue legal action if something is amiss.
With futures, however, the seller does not deliver the actual assets in question until a later date in time, often months or years down the road. At the same time, the person buying the future or option is giving up his or her money in the moment. So the buyer has to give up his or her money based on a promise of delivery in the future. That makes it an inherently high risk transaction.
Not only are these transactions higher in risk, but they are also very complicated. This means traditional regulatory authorities may simply lack the necessary skills and knowledge to properly regulate such complex financial instruments. For this reason Congress set out to set up a special regulatory agency that could focus specifically on futures and options, the CFTC.
The Modern-Day CFTC
These days, the CFTC has grown into a large and increasingly powerful organization. That’s because futures and other derivatives are increasingly important for the global economy. Derivatives provide yet another investment opportunity for investors, and also assist businesses and other organizations.
Unfortunately, futures and other derivatives have also been a source of some economic chaos and bad publicity. That’s because authorities have left advanced financial instruments relatively unregulated. Following the 2008 financial crisis, the government has stepped up regulations, and provided the CFTC with more powers and authority.
Among other things, the CFTC is tasked with regulating the trade on oil futures, which is essential for helping to regulate and normalize oil trading prices. This in turn is crucial for ensuring stability of global energy markets. The CFTC is also involved in regulating foreign exchange markets and forex markets. With recent efforts by some traders to rig such markets, oversight on foreign exchange rates has been increasing.
Additionally, the CFTC has also been considering regulating bitcoin and other digital currencies. These new, innovative currencies are quite literally unlike anything seen before, and so far authorities have been unsure of how to approach them. The CFTC is considering treating them as swaps, futures, or another type of financial instrument.
Likely, the Commodity Futures Trading Commission will see its role and authority expand in the future. As financial markets grow more complex, regulators will also have to evolve. For the CFTC this will likely mean increased authority and increased willingness to regulate global markets.