Commodity Futures Trading Commission

THE COMMODITY Futures Trading Commission is an independent agency of the federal government created by the Congress in 1974 to regulate commodity futures and option markets in the United States. The CFTC is responsible for ensuring market integrity and protecting market participants against manipulation, abusive trading practices, and fraud.

A futures contract is an agreement to buy or sell in the future a specific quantity of a commodity at a specific price. Most futures contracts contemplate that actual delivery of the commodity can take place to fulfill the contract. However, some futures contracts require cash settlement in lieu of delivery, and most contracts are liquidated before the delivery date. An option on a commodity futures contract gives the buyer of the option the right to convert the option into a futures contract. Futures and options must be executed on the floor of a commodity exchange (with very limited exceptions) and through persons and firms who are registered with the CFTC.

Most of the participants in the futures and option market are commercial or institutional users of the commodities they trade. These users, most of whom are hedgers, want the value of their assets to increase and also want to limit, if possible, any loss in value. Hedgers may use the commodity markets to take a position, which will reduce the risk of financial loss in their assets due to a change in price. Other participants are speculators who hope to profit from changes in the price of the futures or option contract.

Futures contracts for agricultural commodities have been traded in the United States for more than 100 years and have been under federal regulation since the 1920s. In the last 20 years, futures trading has expanded rapidly into many new markets, beyond the domain of traditional physical agricultural commodities. Futures and options are now offered on many energy commodities such as crude oil, gasoline, and natural gas, as well as on financial instruments, including foreign currencies, U.S. and foreign government securities, and U.S. and foreign stock indices. In addition, in recent years, new futures contracts have been offered in nontraditional commodity areas such as electricity, seafood, dairy products, crop yields, and weather derivatives.

The CFTC has responsibility to the markets and their users for contract review and market surveillance. To ensure the financial and market integrity of the nation's futures markets, the CFTC reviews the terms and conditions of proposed futures and option contracts. Before an exchange lists a new futures or option contract for trading, it must certify that the contract complies with the requirements of[Page 186] the Commodity Exchange Act (CEA) and the commission's regulations, including the requirement that the contract terms reflect commercial trading practices and that the contract cannot be readily susceptible to manipulation. The commission conducts daily market surveillance and can, in an emergency, order an exchange to take specific action or to restore orderliness in any futures contract that is being traded.

The CFTC also has responsibility to the markets for regulating futures professionals. Companies and individuals who handle customer funds or give trading advice must apply for registration through the National Futures Association (NFA), a self-regulatory organization approved by the CFTC. The CFTC also seeks to protect customers by requiring registrants to disclose market risks and past performance information to prospective customers, by requiring that customers' funds be kept in accounts separate from those maintained by the firm for its own use, and by requiring customer accounts to be adjusted to reflect the current market value at the close of trading each day. In addition, the CFTC monitors registrant supervision systems, and internal controls and sales-practice compliance programs.

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