Commodity Futures Trading Commission - Explained
What is the Commodity Futures Trading Commission?
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Table of ContentsWhat is the Commodity Futures Trading Commission?How Does the Commodity Futures Trading Commission Work?Challenges facing the CFTCAcademic Research on Commodity Futures Trading Commission (CFTC)
What is the Commodity Futures Trading Commission?
The Commodity Futures Trading Commission (CFTC) is a federal agency in the United States charged with regulating and overseeing trade activities in the futures and options market. The agency was founded in 1974 following the establishment of the 1994 Commodity Futures Trade Commission Act. CFTC formulate regulations which ensure that the commodity future and option prices are fair; without the CFTC regulations, sellers would be having complete control of the commodity futures market which would result in the unfair prices of countless goods in the market. The goal of CFTC is to promote competitive and efficient future markets and protect investors against abusive, manipulative trade policies and fraud.
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How Does the Commodity Futures Trading Commission Work?
In general, CFTC is headed by five commissioners who serve five year terms. The commissioners are usually appointed by the president and approved by the Senate. In addition, no more than 3 of the commissioners can be within the same political party at any one time. The commission has its offices located in different cities including New York, Chicago, and Kansas City. CFTC constitutes five committees whose focus is on agriculture, energy, global markets, technology, environmental markets, and cooperation between SEC and CFTC. The committees constitute individuals that represent the interest of specific traders, industries, commodities exchange, futures exchanges, the environment, and consumers. CFTC committees engage in numerous studies and countless research to provide consumers and investors with reasonable prices of commodity futures in the competitive market. In the US, the trading of commodity futures is regulated by the Commodity Exchange Act (CEA) which was passed in 1936. Since then, the Act has been amended several times. CEA establishes a statutory framework under which the CFTC operates. The Act provides that CFTC has the authority to formulate directives and regulatory frameworks which are published in Title 17, Chapter I of the Code of Federal Regulations (CFR). After the 2008 financial crisis which resulted from the unregulated swap market, the US Congress and President Obama enhanced the regulatory authority of CFTC. Since the passage of Dodd-Frank Act, Dodd-Frank Wall Street Reform and Consumer Protection Act, the commission is now overseeing over $400 trillion swap market.
Challenges facing the CFTC
The CFTC is moving away from its traditional role of regulating commodity products-related futures and options contracts to explore new challenges in the 21st century digital age. One of the challenges that the commission faces is in relation to the new financial technology (FinTech) products and crypto-currencies such as Bitcoin. The CTFC believes that FinTech is driving innovation in the financial markets throughout the globe. New technologies are in a wide-ranging scopes have emerged including algorithm trading, cloud computing artificial intelligence, distributed ledgers, machine learning, and network cartography. These technologies are associated with transformational impact on CFTC-regulated markets. CFTC also plans to play a key role in the oversight of the emerging innovation. CFTC plays a critical role in regulating the financial market. Lack of such regulator and its regulations can increase the risk of fraud among market participants who are exposed to unscrupulous individuals who in turn, can lose faith in the capital market. This phenomenon can make capital markets ineffective at allocating financial resources efficiently to most deserving means of productive economic activities to the detriment of consumers, investors, and the society at large.