What the CFTC regulates: a guide to US derivatives oversight

The Commodity Futures Trading Commission (CFTC) is the federal agency that oversees the US derivatives markets: futures, options on futures and, since the post-crisis reforms, most swaps. A derivative is a contract whose value depends on something else, such as a crop price, an interest rate or a stock index. The CFTC does not regulate the underlying thing itself. It regulates the markets, intermediaries and infrastructure through which those contracts are traded, cleared and reported.

Understanding what the CFTC regulates helps explain why a farmer, a refinery, a pension fund and a bank can all end up under its rules. It also clears up a common confusion, which is where the agency’s authority ends and the Securities and Exchange Commission’s begins.

In brief

• The CFTC was created by Congress in 1974 to oversee futures trading, which until then had been regulated mainly in agricultural form.
• Its stated mission is to promote the integrity, resilience and vibrancy of US derivatives markets through sound regulation.
• Its authority comes from the Commodity Exchange Act and the rules it has written in Title 17 of the Code of Federal Regulations.
• It supervises exchanges, clearinghouses, data repositories and intermediaries, and it polices fraud and manipulation.

Where the CFTC came from

Federal oversight of agricultural futures dates to the 1920s. For decades, the contracts in question were mostly grain, cotton and livestock, and the regulator sat inside the Department of Agriculture. Congress established the CFTC as an independent agency in 1974 through the Commodity Futures Trading Commission Act, at a time when futures trading was still dominated by farm products.

Since then the product range has widened sharply. Financial futures on interest rates, currencies and stock indexes now sit alongside energy, metals and agricultural contracts. The CFTC’s own description of its history notes that the industry has grown more varied and complex, and that growth is the reason the agency’s remit looks very different from the one Congress first wrote down.

The core of its authority

Two sources of law frame the agency’s work. The first is the Commodity Exchange Act, the statute that sets out the rules for derivatives trading. The second is the CFTC’s own regulations, which are published in Title 17, Chapter I of the Code of Federal Regulations and are available through the eCFR. When people refer to a “CFTC rule”, they usually mean one of these regulations, adopted through notice-and-comment rulemaking and codified there.

The Commission itself is led by a group of commissioners, and its staff is organized into divisions that handle market oversight, clearing and risk, enforcement and other functions. The agency is headquartered in Washington, with additional offices around the country.

The markets and firms under its watch

The CFTC’s oversight can be grouped by the kind of entity involved. The agency’s website organizes its work along these lines.

Trading venues. Designated contract markets are the exchanges where futures and options on futures trade. Swap execution facilities are platforms for trading certain swaps. These venues must meet statutory core principles on topics such as preventing manipulation, keeping records and managing conflicts of interest.

Clearing organizations. A derivatives clearing organization stands between the two sides of a trade and takes on the risk that one side will default. The CFTC requires these clearinghouses to register and to meet a set of core principles covering financial resources, risk management, default procedures and recordkeeping. Our separate guide on clearinghouses and central counterparties covers this in detail.

Data repositories. Swap data repositories collect and maintain records of swap transactions so regulators can see activity that once took place privately.

Intermediaries. Futures commission merchants, introducing brokers, commodity pool operators, commodity trading advisors and swap dealers all act on behalf of customers or as counterparties, and each category carries its own registration and conduct requirements. The registration system is administered together with the National Futures Association, a self-regulatory organization for the industry.

Market surveillance. The agency monitors trading and large positions to look for squeezes, manipulation and other disruptions, and it sets or reviews position limits in certain commodities.

Swaps after the financial crisis

Before the 2008 crisis, most swaps were negotiated privately and largely outside federal oversight. The Dodd-Frank Act changed that. According to the CFTC’s overview, the law gave the agency expanded authority over swaps and set out a framework with several parts:

• Swap dealers face capital and margin requirements intended to reduce risk to the financial system, along with business conduct standards and recordkeeping and reporting duties.
• Standardized derivatives are meant to trade on regulated exchanges or swap execution facilities rather than privately, which is intended to increase competition and improve pricing.
• Standardized derivatives are also meant to move into central clearinghouses.
• Reporting obligations give regulators visibility into who holds what.

Our guide to swaps regulation after Dodd-Frank walks through each of these pillars.

Where the SEC fits

The most common misconception is that the CFTC regulates “commodities” and the SEC regulates “securities” in a clean split. The dividing line is not that tidy. Congress divided responsibility for derivatives according to what the contract references. In general, the CFTC oversees futures, options on futures and swaps tied to broad-based measures such as commodities, interest rates, currencies and broad stock indexes. The SEC oversees securities, options on securities and security-based swaps, which reference a single security or a narrow group of securities.

Some products sit near the boundary, and the two agencies have joint rulemaking and consultation duties for certain definitions. Anyone trying to work out which agency covers a specific instrument should read the statutory definitions and the agencies’ joint rules rather than rely on a rule of thumb.

Enforcement and anti-fraud authority

Beyond supervising registered firms, the CFTC has authority to bring enforcement actions against fraud and manipulation in markets under its jurisdiction. It can pursue civil cases in federal court and administrative proceedings, and it works with the Department of Justice when conduct may be criminal. CFTC enforcement actions can involve registrants, but also unregistered individuals and companies that defraud customers in futures, swaps or related markets.

The agency also publishes advisories to the public about common schemes, and it maintains a program through which tips can be submitted.

Common misconceptions

“The CFTC regulates all commodity prices.” It does not set prices. Prices are determined by trading. The agency regulates how markets operate, who may act as an intermediary and what conduct is prohibited.

“The CFTC regulates every use of the word commodity.” The statutory definition of a commodity is broad, which is why the agency’s reach extends to financial products as well as physical goods. Whether a particular digital asset or other instrument falls under the CFTC’s authority depends on the facts and on how the law applies to it. Readers should check current CFTC and SEC statements rather than assume.

“The exchanges are unregulated private clubs.” Exchanges and clearinghouses are self-regulatory in part, but they are registered with the CFTC, must follow core principles and are subject to its oversight.

“Only professionals are affected.” Retail customers trade futures and options through registered brokers, and the protections around customer funds, disclosures and fraud apply to them.

A worked example

Consider a regional grain cooperative that wants to lock in a selling price for its corn before harvest. It opens an account with a futures commission merchant, which is registered with the CFTC and is a member of the National Futures Association. The cooperative sells corn futures on a designated contract market. The exchange’s clearinghouse, a registered derivatives clearing organization, becomes the counterparty to each side of the trade and collects margin.

Every part of that chain is within the CFTC’s reach: the broker’s registration and handling of customer funds, the exchange’s rules, the clearinghouse’s risk practices and, for large positions, federal reporting and any applicable position limits. If someone tried to corner the corn market or mislead customers about the trade, the agency’s anti-manipulation and anti-fraud authority would apply.

Where to read the primary sources

The best starting points are the CFTC’s own website, the Commodity Exchange Act as published by the US House Office of the Law Revision Counsel, and the CFTC regulations on the eCFR. Rule proposals and final rules appear in the Federal Register, and the agency posts press releases and staff letters on cftc.gov.

FAQ

Is the CFTC the same as the SEC?

No. They are separate federal agencies with different statutes. The SEC oversees securities markets, while the CFTC oversees futures, options on futures and most swaps. They coordinate on products near the boundary, such as security-based swaps and mixed swaps.

Does the CFTC regulate stocks?

Not individual stocks, which fall under the SEC. The CFTC does regulate futures on broad-based stock indexes, which are derivatives rather than securities.

Who must register with the CFTC?

Categories include futures commission merchants, introducing brokers, commodity pool operators, commodity trading advisors and swap dealers, among others. Some firms qualify for exemptions. The CFTC and the National Futures Association publish the registration requirements.

How can I check whether a firm is registered?

The National Futures Association operates a public database called BASIC where you can look up the registration and disciplinary history of firms and individuals. The CFTC also publishes information for customers on its website.

Can the CFTC punish fraud by someone who is not registered?

Yes. Its anti-fraud and anti-manipulation authority extends to conduct in the markets it covers, regardless of whether the person is registered.

Where do I find the actual CFTC rules?

Title 17, Chapter I of the Code of Federal Regulations, available on the eCFR, contains the current regulations. Proposed and final rules are published in the Federal Register.