Headline: Who is the CFTC?

Date: 7/21/2022

Body:  So, we sometimes enter the world of derivatives, and no, I am not hearkening back to calculus class, I promise.  Derivatives have a value that changes based upon the value of another thing.  One type of derivative is the futures contract, where one investor agrees to purchase a certain volume of commodity for a certain price some time in the future.  In another type of derivative, interest rates are swapped.   For instance, there might be a swap between the holder of a 7% fixed mortgage with the holder of a 4% adjustable rate mortgage.  (Essentially swapping certainty for a higher rate of interest.)  All of these agreements and others are regulated by the Commodity Futures Trading Commission.   It is important to get to know this agency because they are pushing hard to be key players in the cryptocurrency environment.

What Is the Commodity Futures Trading Commission?

The Commodity Futures Trading Commission (CFTC) is an independent federal agency that regulates the derivatives markets, including futures contracts, options, and swaps, in the United States.   Often forgotten is that it also regulates the over-the-counter markets too.  Its goals include the promotion of competitive and efficient markets and the protection of investors against manipulation, abusive trade practices, and fraud. The Commodity Futures Trading Commission Act established the CFTC in 1974.  Each of the 5 Commissioners, once selected by the President and approved by the Senate,  serve staggered 5-year terms.

They have a few major responsibilities:

  • They require filings from intermediaries in an effort to maximize transparency.
  • They regulate the clearing procedures  ensuring fair play and timely execution.
  • They maintain data about the swaps already executed, and this helps cut down on fraud.
  • They do market observations to ensure that fraud is not a major problem.                                                                                                                
  • They prescribe  anti-money laundering (AML) procedures and monitor the markets for potential money laundering through derivatives.

Is there an interesting history behind the CFTC?

The CFTC was established in 1974, mainly to oversee selling of futures contracts on the agricultural markets.  It is important to note that the trading of actual commodities has become much less central than the trading of risk and the financial products related to that risk.  The CFTC also has expansive enforcement powers with respect to trading of physical commodities where it is empowered to pursue cases for alleged market manipulation or other potential wrongdoing.  When there is wrongdoing and manipulation, they often work in concert with the DOJ, and from 2017 to 2020 brought 46 cases to Court in such a partnership.

Given the international expansion of U.S. companies and the growing interdependency of global economies—particularly as a result of the increasing digitization of the international markets—the CFTC’s outlook has in turn become more global. The CFTC now seeks to more regularly enforce U.S. laws against U.S. and non-U.S. persons for potentially problematic trading in overseas markets, including when that trading is alleged to have had an adverse impact on U.S. persons and markets.

How is this agency organized?

This Office has 13 divisions, but 5 of them are pre-dominant.  I will introduce them in the chart below:

DivisionWhat do they do?
Division of Clearing & RiskClearing is essentially the matching up of consideration swapped in a transaction, and distributing those assets appropriately.    The 4 divisions of this Division are tasked with decreasing the systematic risk (i.e. due to  market processes, not individual investments) associated with the derivative markets.  They do a lot of compliance work and evaluate applications for regulatory relief.   This division seems to have a large technology component also, and this might relate to cryptocurrency sometime in the future.
Market Participants DivisionOK, this one is a new kid on the block, formed in 2020.  They seem to be largely concerned with financial intermediaries (usually a Bank.)    They maintain standards for registration and oversee some of the industry’s self-regulatory mechanisms.  They also explain the meanings of regulations to these intermediaries. 
Division of Market OversightThis Division has 5 branches, but they all relate to keeping the markets stable and transparent.  As most of these exchanges are now virtual, this would also be a division related to cryptocurrency, if it is added to their portfolio.
Division of DataNot to be confused with the other DoD, this division does everything involved with data.   They collaborate with others to develop good data, they train others to develop good data, and construct many different presentations of the data.
Division of  EnforcementThey develop and prosecute cases involving fraud and false statements.  They sometimes partner with state and  international partners.


What Is the Difference Between the SEC and CFTC?

OrganizationIndependent federal agencyIndependent federal agency
What do they regulate?Commodity options, futures and swaps.Stock and bond markets.
How do they add to transparency in the markets?Maintains data on commodity options and futures, and swap contracts.Maintains filings for all public companies, including annual reports (10-K), quarterly statements (10-Q) and statements of significant events (8-K).  Their EDGAR site is really user friendly.
Do they have a complaint filing/resolution procedure?yesyes
What is their budget?$355 Million$3 Billion


What is likely to happen in the future?

Well, there are all sorts of federal agencies actively trying to make the case that they are the one  best suited to  regulation cryptocurrencies.   But, given their practice in tracing futures contracts and options, it seems likely that they will figure largely into any regulation of the cryptocurrencies market. (In point of fact, they classified bitcoin as a commodity in 2014.) They already have much experience overseeing exchanges that look a lot like cryptocurrency exchanges, so, it seems like a natural fit all around.  But, not planning to play dead, the SEC, in 2021, said that cryptocurrencies were neither currencies or commodities.   Rather, they were securities.   So, the squabbling continues.

Just recently, the CFTC commissioner launched a program called LabCFTC to study digital assets.    This should be an interesting one.

The Verdict

The CFTC makes several warnings regarding cryptocurrencies. According to the CFTC website: “Several studies and news reports indicate that a large number of Initial Coin Offerings (ICOs) are fraudulent or the underlying products or services fail to live up to their promises. Estimates of fraud range from 5 percent to more than 80 percent of ICOs.”   With statements like this, we can be sure that proceeding with caution is likely a central idea.    That said, the CFTC is charging very hard to begin to regulate the cryptocurrencies, and the 3 vacant commissioner positions are likely to be filled by the President with people familiar with and sympathetic to the power and vicissitudes of the cryptocurrency markets.    The CFTC will certainly be monitoring developments and we should be too.






Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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