Greeting traders and welcome back to another Survival Guide.
Chris here, bringing you some more information,
and today, that information is going to come in the form of
finally knowing exactly what the CFTC does, what it stands for,
and all of that juicy stuff.
Maybe you know some things about
the Commodities Futures and Trading Commission already,
but you don't know exactly what they do, as most of us don't.
We just know that they kind of exists somewhere out there
in the ether, and that's about as far as a lot of traders'
education and knowledge of them goes.
Today, we'll be covering who they are, what they are, where
they came from, and why they help us as traders.
All that and more, so make sure you stick around.
But before we go any further, please do me a favor and click
that like and subscribe button down below because it allows
me to keep coming out with videos with informative content
for all of you out there. Now, without further ado, let's get going
so you can be on your way to passing that Gauntlet Mini.
The futures market has evolved to encompass a wide array
of assets in today's day and age.
Commodity futures are only a small part of it, but their
trading has been going on for decades
at this point. They were originally used by producers to
lock in the price of agricultural goods.
As time passed, the number of commodities increased and the
need to develop guidelines for commodity futures became essential.
To this end, the Commodity Futures Trading Commission,
the CFTC, was established. By setting up an independent federal agency,
the commodity space could be managed more efficiently.
In terms of the diversity of assets that are offered,
commodities continue to be the leading asset class that are traded today.
The Commodity Futures Trading Commission, otherwise known
as the CFTC, is an independent body that is responsible for
regulating the futures and options market in the United States.
Any firm or person looking to participate in the commodity
futures market needs to first register with the CFTC.
The agency looks to promote futures trading in the US and
improve competitiveness and efficiency at the same time.
They do this by ensuring a level playing field for all investors.
The CFTC also monitors the commodities trading market for
unfair practices like fraud, market manipulation, and other illegal activities.
With the evolution of technology, the supervisory activity
of the CFTC has become more complicated. Today,
trades happen at a much faster pace than the days of old,
and even more opportunities to exploit the market exist,
and as such, the need for the CFTC is more real than ever.
The scope of the CFTC has expanded quite drastically over the years.
Now it covers different aspects of the commodities derivatives market,
more so than it did before.
The CFTC also oversees other participants in the futures market
like brokers, commodity trading advisors, and commodity pool operators.
This makes their task all the more challenging.
The agency also needs to monitor the activities of stakeholders
outside the marketplace.
For example, a commodity trading advisor, who oversees a managed
futures account may adopt a strategy that may not be in their client's best interests.
The CFTC also has the authority to look into the activities
of asset managers and intervene if their practices are not in line
with the best interests of their clients.
The CFTC consists of five commissioners appointed by
the President of the United States. One among these serves as the
chairman of the committee. These positions are held for a tenure of five years,
and they do not become vacant at the same time.
There are also 13 divisions and offices within the CFTC.
This is the list of those divisions and offices, and we'll
start by talking about what each is. There's the Clearing and Risk,
otherwise known as the DCR, and this stands for
the Division of Clearing and Risk.
This Division is responsible for supervising the participants
involved in the clearing process.
Some of the clearing agents include swap dealers and futures commission merchants.
Then we have the Enforcement, which is the DOE.
As the name suggests, the Department of Enforcement, which
it stands for, is responsible for investigating any alleged
violation and proceeding with punitive measures as well.
Next comes the DMO, the Market Oversight.
This Division ensures that the markets are fair, transparent,
and competitive by overseeing all trading platforms.
It also reviews any new applications and assesses whether
the potential participants are adhering to the regulatory
requirements and system standards.
Next comes the Market Participants Division, otherwise known
as the MPD. This Division looks into the activities of intermediaries
in the derivatives markets, namely commodity trading advisors,
futures commission merchants, and commodity pool operators.
Through its Office of Customer Education, the MPD develops
educational material to support customers and to prevent them
from violating any rules or being victims themselves
of fraud. Next comes the Division of Data.
The Division is responsible for managing the data of the
CFTC via support analytics and other strategic initiatives.
Then, we have the Legal Division, which you might already
have an idea of what it does.
This Division supports all of the agency's legal functions.
This includes providing legal advice and representing the
CFTC in various litigations.
Next comes the Division of Administration, otherwise known
just simply as the DA. The DA manages internal functions like finance security
as well as operations. Then we have the Office of the Chief Economist.
This is known as the OCE. This Office is primarily for the conduction of research.
It provides economic advice on the implementation of any
new regulation. It is also responsible for training staff.
Then we have the Office of International Affairs, otherwise
known as the OIA. This is the face of the CFTC in international forums.
It looks to an international regulatory process and looks
to provide input and insight into these types of things.
Then, we have the Office of Public Affairs, otherwise known
as OPA. This body is essentially the public face of the CFTC
on the domestic front. It provides information to the public
to build trust and to communicate with different stakeholders.
Next comes the LabCFTC, and as trading platforms themselves
become more sophisticated, the LabCFTC promotes innovation
and ensures that the public knows of any new innovation.
Next comes the Office of Legislative and Intergovernmental Affairs,
otherwise known as OLIA. This Office acts as
a bridge between the CFTC, Congress, and Federal agencies.
The OLIA helps in developing the legislation on behalf of the CFTC.
Next, we have the Office of Minority and Women Inclusion.
The OMWI promotes equal opportunity and diversity in the workplace.
This Department also handles any issues related to civil rights.
When futures contracts were first developed in places
like Chicago, Kansas City, and New York during the late 1800s,
the commodity futures market was still fragmented.
It was only during the 1970s
that the scope of futures contracts increased.
Futures contracts on foreign currencies, treasury instruments,
and stocks then became popular
during this time. The CFTC came into existence after
the Commodity Futures Trading Commission Act of 1974.
This Act replaced the Commodity Exchange Act of 1936.
The original 1936 Act had already undergone several changes
before the CFTC Act passed.
The primary objective of the Commodity Futures Trading Commission Act
was to establish an independent agency that could oversee
the commodity futures market.
This gave the agency more authority to regulate the commodity futures market.
The CFTC has come a long way since the Grain Futures Act of 1922
and this is something that continues to be the case.
The CFTC is always striving to change and adapt to current market dynamics.
The way the CFTC is structured should give a broad indication
of its major functions. With time, the scope of what the CFTC does has expanded greatly,
as we mentioned. Some of the things that the CFTC is known for is overseeing
the commodity futures market activities.
The CFTC ensures that unfair practices are not employed and
the market is transparent and fair.
They also are highly responsible for creating the regulations.
The legislative wing assists Congress in framing regulations,
governing the market it regulates.
The Chief Economist carries out the assessment of such legislations.
They're also responsible for prosecuting participants
who do not adhere to the rules.
They also are protecting customers' interests.
On top of that, they are engaging with external bodies.
As friction among the markets worldwide eases, it becomes
essential to understand how other markets operate.
The CFTC engages with local bodies, like the FRB, and is
involved in consultations with other international bodies as well.
The CFTC is also responsible for educating customers.
There have been numerous instances in which clients have
become victims of fraud and other inappropriate activities,
and in most of these cases, these people were not aware of
the products that they invested in in the first place.
The CFTC is constantly providing updates and educational content
so that the investors do not lose wealth
because of unscrupulous agents.
They are constantly pioneering digital initiatives as well,
and on top of that, they're always providing ancillary services.
This could include things like data analytics and other
consultation papers that can provide insights into the commodity
futures market. The CFTC has been proactive in bringing digital assets like
Bitcoin under its jurisdiction and categorizing it as a commodity.
The Commodities Exchange Act is still the regulatory framework
governing commodity futures in the United States.
We have various organizations that fall under who the CFTC regulates,
such as trading organizations, and these include
designated contract markets, which we refer to as DCMs. As well as this,
they have Swap Execution Facilities, otherwise known as SEF.
DCMs are essentially exchanges that list commodity futures
and options to allow traders to participate.
The SEFs cater to the swap market.
The CFTC then goes ahead and reviews each DCM and SEF regularly
to make sure that they're within compliance in their rules and regulations.
They also regulate the Clearing Organization.
The Derivatives Clearing Organization,
the DCO, must comply with the core principles of the CEA,
which states that the DCO should be adequate in terms of
operational and financial resources.
They also regulate data repositories. The facility to store data
is given to SDRs or Swap Data Repositories.
The data includes storage, and trades both cleared,
as well as uncleared, are stored here.
Then we have the Intermediaries, which includes a very wide
list of different types of organizations, such as the Commodity Pool Operator,
which most of us know as the CPO.
We have the Commodity Trading Advisors falling underneath
this branch as well, which is a CTA.
We also have Futures Commission Merchants, the FCM, which are
also under this tree, as well as the Introducing Broker,
that's the IB, Major Swap Participants, the MSP, as well as
the Swap Dealer itself, that is the SD.
In addition to the nature of the market participants
that the commodity futures space has inside it that's regulated
by the CFTC, the CFTC is also responsible for regulating
futures on cryptocurrencies even.
Over time, the CFTC has expanded and the number of products
just continues to grow at the same rate at which things can be traded.
The CFTC definitely affects futures trading in multiple ways.
As a regulator, it ensures that the market is a level playing field for all participants.
It ensures enough liquidity is there and keeps on upgrading
the lists of products that are offered based on what the economy needs.
The CFTC has led the digitalization of trades, and today
this is very important because trading mainly happens through
online channels and the CFTC's contributions are undeniable.
The open outcry channels that once were used to dominate
the market have become incredibly outdated.
Today, trading pits are so rare they're almost nonexistent.
The CFTC also plays a critical role in expanding the commodities
futures market by drawing the interest of foreign investors.
It's not a surprise that the commodities futures market
in the US is the most active in the world.
The underlying assets for futures that they offer
can be very diverse, and the volume has also increased.
The execution, time, and efficiency of trading platforms has
also improved considerably.
The CFTC also keeps a check on fraudulent activities, and they
do so via risk management systems that keep tabs on activities of traders.
It also ensures that anyone looking to obtain a license should have
the adequate technology in place. By collaborating with international regulators,
the CFTC has also helped reduce the friction existing between markets across the world.
There has been an influx of foreign investors into the US
due to the actions directly contributed by the CFTC.
You might be wondering, how does the CFTC get people to respect
all of these different rules that they're creating?
Well, due to the fact that they are working so closely with
federal regulators, as well as the legislation of
the United States government. It isn't likely that something is going
to pass in regards to trading legislation without first having
some type of input by the CFTC, which means they do, in turn,
have an impact on the laws that are being passed,
which means if you don't adhere to the rules that are being
regulated by the CFTC, it is possible for you to face
not only legal action, but heavy financial burden.
If you don't listen to the CFTC, that is the first and foremost way that they get you.
Generally, it's going to be a very heavy fine with the possibility
of leading to some type of lengthy jail sentence
depending on the severity of the crime at hand and the type
of crime. The CFTC is definitely an integral part of our
trading system here in the US, and it allows worldwide investors
to seek asylum as a safe haven as a trader by trading
our markets in the US, which further adds to the liquidity, which is
good for you and I. But until next time folks, thank you for joining me
as always. Best of luck out there in the markets,
and I wish you well on your Gauntlet Mini.