The Commodity Futures Trading Commission aka CFTC is defined as an autonomous US government agency, established in 1974, which regulates the country’s derivatives markets, inclusive of futures, swaps, plus specific categories of options.
What Is CFTC? - The Commodity Futures Trading Commission
This article is a comprehensive guide, aimed to give readers an understanding of what is CFTC and what does it do?
What Is CFTC?
The CFTC is an autonomous agency of the federal government that is in charge of regulating derivatives markets inside the United States.
This includes futures contracts, alternatives, and swaps. Its objectives include making businesses more competitive as well as efficient and protecting investors from fraud, scams, and unfair business practices. In 1974, the CFTC was set up by the CFTC Act. 1.
- In 1974, when the CTFC was set up, most futures trading was done in the agricultural industry.
- The committee's job is to keep the markets for derivatives in the US in order.
- Governing the futures plus options markets has gotten harder over time, especially since financial technology and electronic currencies like Bitcoin have become more popular.
- There are 13 various departments and offices that work together to make up the CFTC.
- The CET aka Commodity Exchange Act is the law that tells the CFTC how it can do its job.
How Does CFTC Work?
5 commissioners make up the CFTC. They are chosen by the US President and confirmed by the country's Senate. The 5-year terms of each commissioner are not the same.
One commissioner is chosen by the President to be the chair. At any given time, not more than 3 commissioners can be in an identical political party.
An advisory board that helps the CFTC and the SEC (Securities and Exchange Commission) work together is not doing anything.
Committee members represent various businesses, businessmen, futures transactions, commodity derivatives, customers, and environmental organizations.
The CEA (Commodity Exchange Act) controls how commodity futures can be bought and sold in the U.S. This same act, which was passed in 1936 and has been changed considerably since then, is the legal framework for how the CFTC works.
The act gives the CFTC the power to make rules that are put in Title 17, Chapter I of the Code of Federal Regulations. The CFTsoC warns about digital currencies in several ways.
What Are the Divisions of CFTC?
The CFTC is made up of 13 divisions and offices, as well as the Chairman's offices plus Commissioners.
Here are the five main parts of the CFTC:
- Division of Clearing and Risk
- Market Participants Division
- Division of Market Oversight
- Division of Data
- Division of Enforcement
Division of Clearing and Risk (DCR)
The job of the DCR is to help the CFTC do what the law says it has to do, which is to make sure that all transactions covered by the CEA are done in a way that protects their financial integrity and keeps systemic risk from happening inside the derivatives markets.
The DCR is in charge of all derivatives clearing operations (DCOs), and it has four different parts:
- Clearing Policy
- Risk Surveillance
- International & Domestic Clearing Initiatives
The CFTC website says that a few of the DCR's most important jobs are:
- Preparing rules, instructions, rules, and other regulations on problems pertaining to DCOs, such as protecting customers if an FCM or DCO goes bankrupt or goes out of business.
- Evaluating DCO registration requests, requests for compliance remedy or deduction, and rule entries, and making suggestions to the Commission about these things
- Assessing DCO contingency plans and wind-down policies to ensure that they are in line with Commission rules and talking with the FDIC as well as other regulatory agencies, both in the U.S. and abroad, about planning for the negotiated settlement of a DCO.
- Performing risk assessments every year to figure out which DCOs to look at and what topics should be covered in the risk-based examination.
- Examining DCOs to make sure they meet all relevant CEA and Commission regulatory requirements, including at least once a year for every systemically important DCO (SIDCO).
- Analyzing alerts about software or hardware problems, cyber-security breaches, or risks which have or could have a significant effect on clearing.
Participants in the Market (MPD)
In October 2020, the Division of Swap Dealer and Intermediary Oversight and the Office of Customer Education and Outreach will join together to form the MPD.
The main jobs of the MPD are to keep an eye on the CFTC-registered businesses that deal, trade, invest, or give advice in the derivatives markets and to teach the American public about the markets that the CFTC oversees.
The MPD division is split into five different parts:
- Chief Counsel Branch
- Examinations Branch
- Managed Funds & Financial Requirements Branch
- Registration & Compliance Branch
- The Office of Customer Education and Outreach (OCEO)
The main tasks of the MPD, according to the CFTC, are:
- Taking a look at middlemen and self-regulatory organizations
- Keeping the registration of intermediaries up to the right standards
- Providing the Commission with advice on how to write rules
- Putting out clear explanations and instructions for intermediaries at the right time
- Amanda Olear is the director for now
Division of Market Oversight (DMO)
The DMO is in charge of keeping tabs on the consistency and framework of the CFTC-regulated derivatives markets and the transactions and amenities where they trade.
Another of the main jobs of the DMO is to make sure that CFTC rules are fair, and efficient, and keep derivatives markets growing. The DMO also makes sure that these rules keep up with trends in the marketplace.
The DMO has five different parts:
- The Chief Counsel backs all of the DMO's regulation-making and employees action records, and the branch recommends any changes in the law that are needed to take into account market changes, structure, advancement, as well as other developments in market conditions.
- The Compliance branch is in charge of looking at and judging how well the self-regulatory plus rule implementation programs of exchanges and trading systems cover both exchange and Commission rules.
- The Market Intelligence department is in charge of figuring out how healthy and stable the futures, options, and over-the-counter (OTC) markets in the United States are.
- The Market Review branch looks at applications to register or name SEFs, SDRs, DCMs, and international forums of trade and tells the CFTC what it thinks about them.
- The Product Review branch looks at fresh and innovative exchange-traded derivatives, as well as changes to the concepts of current contracts, to make sure they follow CFTC rules and can't be manipulated.
Division of Data (DOD)
The DOD, much like the Markets Participants Division, was made when the CFTC was reorganized in October 2020. The Department of Defense (DOD) is in charge of tasks that used to be done by the DMO, as well as other analytical tasks.
The CFTC says that the DOD does its job by doing four important things:
- Collaborate: The DOD works with market players, the CFTC's operational factions, and the market to make sure that data is accurate, secure, and kept private.
- Integrate: The DOD gets rid of data silos by putting together datasets from both inside and outside the Commission. This gives the clearest picture possible of the macroeconomic environment. The DOD makes a complete picture of what could happen in the future so that policy can be made based on facts.
- Train: The DOD handles centres of excellence to help the Commission develop a data culture. It also takes part in both domestic and foreign tech consulting groups to find out what the best practices are and helps the Commission get coaching on data subjects.
- Execute: The DOD does analytics, imaging, and operational software engineering at the Commission or gives the Commission information about what to do.
Division of Enforcement (DOE)
As its title implies, the DOE is in charge of finding, investigating, and prosecuting people who break the CEA and CFTC rules.
The DOE looks into fraud, incorrect statements to the Commission, illegal trading activities, misappropriation, manipulative devices, price manipulation, reporting, registration, and accounting violations, inability to show or make the needed records, supervisory failure, and others.
The DOE also helps the U.S. Attorney's Office, other federal, state, and global civil agencies, and law enforcers build cases and prepare for trials.
What Does CFTC Do?
The CFTC oversees governing the U.S. financial markets. This includes both over the counter (OTC) markets and markets for futures, options, and swaps on commodities.
To adequately supervise these businesses, the CFTC governs the following organizations:
Trading organizations such as assigned contract marketplaces — transactions, which host futures and options, swap execution amenities — platforms that allow attendees to purchase swaps.
The only group in charge of keeping an eye on DCOs like the Options Clearing Corporation aka OCC is the CFTC's Division of Clearing and Risk. The OCC is the biggest DCO in the world, and the CFTC is in charge of how it works.
The Dodd-Frank Act made swap data repositories so that swap data could be reported and kept in one place. The CFTC also oversees swap datasets.
The CFTC has rules for all enterprises that function as agencies for other individuals when futures, options, and swaps are involved. Here are some of these middlemen:
- The people who run commodity reservoirs, which are resources made up of money from many investors and used to barter on the futures and commodity markets.
- People who give investment services to the commodity and futures markets are called "commodity trading advisors."
- Futures commission vendors are people who take orders to buy or sell any kind of good for delivery in the future.
- Introducing brokers have an immediate rapport with customers, but they let another futures vendor run the floor and handle trades.
- Swap dealers are people or businesses that buy and sell swaps or gain entry into swaps agreements with counterparties.
What Are CFTC Challenges?
In the 21st century, the CFTC is relocating from its traditional responsibility as a controller of futures contracts related to the key commodities.
The CFTC is now facing a new problem with modern fintech) products plus cryptocurrencies like Bitcoin. In December 2017, the CME Group launched a Cryptocurrency futures contract that traders can use to buy and sell Bitcoin.
Fintech is making financial markets all over the world more innovative. There are many kinds of new technologies, including cloud computing, automated trading, distributed ledgers, machine intelligence, deep learning, network mapmaking, and many more.
These techniques could have big or even huge effects on the markets that the CFTC regulates and on the agency itself. The CFTC wants to be an active part of keeping an eye on this new idea.
The CFTC is an important part of making sure that financial markets are run well. Without these rules and regulators, crooked people could trick market participants into giving them money they don't deserve, which would make them lose confidence in our financial markets. This could make it hard for capital markets to get money for the best ways to make things and the most productive economic activities. It would also hurt the shareholders, customers, and society. Time will tell if the agency can handle the new problems it has to deal with.
We hope the above article has helped you get a complete understanding of CFTC. For additional queries, leave your suggestions in the comments section below.
What is the purpose of the CFTC?
The objective of the Commodity Futures Trading Commission is to make sure that the U.S. derivatives markets are fair, strong, and full of life through good rules.
What is the difference between CFTC and SEC?
The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) were made by different laws, have different jobs, and do those jobs in different ways. The SEC is in charge of regulating the securities market, while the CFTC is in charge of regulating the derivatives market.
Who needs to register with the CFTC?
The CFTC needs to know about all organizations that act as agencies for other individuals when interacting with futures, swaps, and options. There are people who run and advise commodity pools, people who sell futures commissions, people who act as introducing brokers, and people who sell swaps.
Can the CFTC prosecute criminal violations?
If you do something illegal with a commodity-related instrument, you could be charged with a crime under the CEA or CFTC – under other federal criminal laws, like commodities forgery, mail fraud, bank fraud, or conspiracy.