The Commodity Futures Trading Commission (CFTC) is a federal government agency that regulates the derivatives markets. This includes oversight of options and futures on agricultural products, metals, foreign exchange, and the exchanges on which they trade.
Although the CFTC is similar to the Securities and Exchange Commission (SEC), there are significant differences between the two. If you’re interested in derivatives contracts, it’s a good idea to know something about how they are regulated, where you can go to find information about brokers, and how to file a complaint if you run into a problem.
Definition and Example of the Commodity Futures Trading Commission
In 1974, the federal government established the Commodity Futures Trading Commission as an independent government agency that regulates trading in options and futures. It has five commissioners who are appointed by the U.S. president to staggered five-year terms; no more than three can belong to the same political party at a time. This structure reduces the amount of political interference in regulation.
The CFTC oversees two broad categories of derivatives markets: designated contract markets and swap execution facilities.
Designed contract markets are the exchanges where options and futures on commodities trade. This includes trading in agricultural commodities, metals, and financial futures. (Options and futures on stocks and stock market indexes are overseen by the SEC jointly with the CFTC.) Investors can turn to the CFTC to learn more about options and futures, check on the regulatory and disciplinary status of firms in the market, and file complaints, if necessary.
Swap execution facilities are the platforms used for trading swaps. This was mostly unregulated until the CFTC was given responsibility for oversight by the Dodd-Frank Act of 2010, after problems that emerged in the financial crisis. By maintaining records of outstanding contracts, the CFTC staff can evaluate the amount of risk created by swap activity.
How the Commodity Futures Trading Commission Works
The Commodity Futures Trading Commission oversees options, futures, and swaps in several different ways:
- Requiring different filings from firms in these markets, and for new options and futures products, to create transparency in the industry.
- Regulating the derivatives clearing organizations, which ensure that contracts are executed and settled.
- Maintaining data repositories for the swaps market, to ensure that there are records of the transactions to reduce fraud.
- Market surveillance to watch for signs of insider trading and market manipulation, as well as that speculative activity, does not reach unsafe levels.
- Setting anti-money laundering (AML) procedures and watching for potential money laundering through derivatives markets.
Historically, the futures markets operated to help farmers and ranchers manage their price risks. The CFTC’s predecessor was part of the U.S. Department of Agriculture, and the agency continues today to work closely with food producers to keep those markets stable.
What It Means for Individual Investors
The work of the Commodity Futures Trading Commission helps give individual investors confidence in the commodities market. Even small traders know that the exchanges are regulated, that there are procedures to ensure that the party on the opposite side of the contract pays up, and that there is protection against market manipulation.
The agency often issues sanctions against bad actors, which helps protect the trading public. Not only do firms in the options and futures business need to register with the CFTC, but the CFTC also maintains a list of non-U.S. companies that may seem to be regulated by it, but are not. By checking it, investors may be able to avoid fraud or other problems.
The CFTC vs. the SEC
|Independent federal agency||Independent federal agency|
|Regulates commodity options, futures, and swaps||Regulates single-stock options and futures with the CFTC, as well as the stock and bond markets unilaterally|
|Maintains data on commodity options and futures, as well as on swaps contracts||Maintains filings for all public companies|
|FY 2021 budget: $355 million||FY 2021 budget: $3 billion|
The Commodities Futures Trading Commission is similar to the Securities and Exchange Commission, although it has a much narrower focus. Because many people are more familiar with the SEC than the CFTC, this chart helps compare the two.
Because there are options and futures contracts on cryptocurrencies, the CFTC has been doing research and providing information to crypto traders. The agency evolves as the market does, so if you trade crypto, you might see more news about trading regulations from the CFTC.
- The Commodity Futures Trading Commission oversees the U.S. markets for swaps, commodity options, and commodity futures.
- The CFTC is an independent federal agency.
- Investors who have complaints about the options and futures market can file their concerns with the CFTC.
Commodity Futures Trading Commission. “The Commission.”
Commodity Futures Trading Commission. “Chairman & Commissioners.”
Commodity Futures Trading Commission. “Trading Organizations.”
Commodity Futures Trading Commission. “Dodd-Frank Act.”
Commodity Futures Trading Commission. “Industry Filings.”
Commodity Futures Trading Commission. “Clearing Organizations.”
Commodity Futures Trading Commission. “Data Repositories.”
Commodity Futures Trading Commission. “Market Surveillance.”
Commodity Futures Trading Commission. “Anti-Money Laundering.”
Commodity Futures Trading Commission. “Protecting America’s Farmers and Ranchers.”