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What is the CFTC?

The CFTC, founded in 1975, is the United States Commodity Futures Trading Commission. It is an independent federal agency regulating futures for raw materials and the options market in the United States.

Its main headquarters are in Washington, and its objectives include protecting investors from manipulation, fraud, and abusive trading practices. The CFTC comprises of five commissioners approved by the Senate. The agency’s responsibilities underwent reform and expanded several times since its founding and, most recently, by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The United States traded agricultural commodity futures contracts for more than 150 years and has been subject to federal regulation since the 1920s. The CFTC was created through the enactment of the ‘Commodity Futures Trading Commission Act,’ signed by President Gerald Ford. Then, most of the futures trading occurred in the agricultural sector, and over the years, the futures industry became quite a complex area.

The Commodity Futures Trading Commission (CFTC) is an independent agency with powers higher than its predecessor agency, the ‘Commodity Exchange Authority.’ For example, while the ‘Commodity Exchange Authority’ only regulated the agricultural products listed in the ‘Commodity Exchange Act,’ the 1974 law gave the CFTC exclusive jurisdiction over futures trading on all products.

The Commodity Exchange Authority was a former US regulatory agency created to administer the ‘Commodity Exchange Act’ of 1936. It was the predecessor of the ‘Commodity Futures Trading Commission’ (CFTC).

CFTC Regulations

Title 17 Chapter I of the Code of Federal Regulations (CFR) shows the CFTC regulations. They are available on the US GPO Access website. The final regulations are published in the Federal Register.

The goals of the regulator include the promotion of efficient and competitive futures markets. Also, it protects investors against manipulation, fraud, and abusive trade practices.

Foreign currency options, currency swaps, non-deliverable forward contracts including foreign exchange, currency swaps, cross-currency swaps, and forward rate agreements are subject to the CFTC jurisdiction.

 

CFTC Regulator

Dodd-Frank Act

The Dodd-Frank Act followed the 2008 financial crisis, and it intensified the CFTC’s regulatory authority. The act formed to identify threats to the financial stability of the US. The law also abolished the exception from regulation for security-based swaps. It required credit-default exchanges and other transactions.

Swaps Regulations

The Dodd-Frank Wall Street Reform and Consumer Protection Act supported CFTC to supervise more than $400 trillion swaps market. Previously, the US did not regulate swaps. They were at the center of the 2008 economic crisis. The Dodd-Frank Act allows the CFTC to regulate swap dealers.

Swap dealers are subject to capital and margin demands to reduce risk in the system. Moreover, dealers are expected to meet robust business organization standards to lower risk and support market integrity. Dealers must keep records and report requirements so that regulators can control the markets.

Increased Transparency and Improved Pricing in the Derivatives Market

Instead of trading hidden from the public, standardized derivatives undergo trades through swap execution facilities or regulated exchanges. Transparent trading of swaps lower costs for businesses and consumers since it increases competition and brings better pricing.

Lower Risk to the Public

Standardized derivatives are submitted to central clearinghouses to reduce the risk in the financial system. The clearinghouses act as representatives between two parties to a transaction. They take on the risk that one co-contractor may renege on its obligations. These associations have lowered risk in the futures market since the 1890s. The Dodd-Frank Act brings this vital market innovation to the swaps marketplace.

Reports and Studies

The office of the chief economist of the CFTC regularly cooperates with academics on research projects that focus on financial markets. Furthermore, these projects will often make use of one or more of the data estimates CFTC receives as part of its plan of regulatory monitoring.

The Dodd-Frank Act required the CFTC to carry several studies and reports on a wide variety of issues that influence the derivatives market.

CFTC’s International Presence

The CFTC takes part in a wide range of international initiatives and contributes to many international publications.

From February 2018, CFTC started a collaboration with the FCA, Financial Conduct Authority, based in the U.K. The regulators released an agreement, which outlines the parties’ commitment to supporting each other’s efforts to encourage fintech innovation. They also promised to monitor development and trends and achieve more efficient regulation.

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