The Regulation of U.S. Commodity Futures and Options

Abstract

The Commodity Exchange Act (CEA), as amended, 1 is the statute authorizing the Commodity Futures Trading Commission’s (CFTC) regulation of the commodity futures and options markets and their participants. The foundations of this act date back to 1922, when Congress brought agriculture futures into a modern regulatory structure.2 The CEA generally requires that the trading of all futures contracts occur on a registered futures exchange3 under the exclusive jurisdiction of the CFTC.4 This regulatory structure originally was designed for traditional “open outcry” exchanges to ensure that futures trading occurred in specific physical locations under the watchful eye of a federal regulator. This regimented oversight also took aim at off-exchange “bucket shops,” in which individuals would fraudulently solicit funds from customers for futures trading and then pocket, or “bucket,” the money. Requiring that futures trading occur on a registered exchange among registered brokers greatly minimized this illegal activity. The statutory basis for federal regulation of futures trading recognizes that these transactions are “entered into regularly in interstate and international commerce” and provide “a means for managing and assuming price risks, discovering prices, or disseminating pricing information through trading in liquid, fair and financially secure trading facilities.”5 Based on this public mission, the CFTC is charged with responsibility for detecting and preventing price manipulation, ensuring the financial integrity of all transactions, protecting market participants from fraud and other abusive trading practices, and promoting responsible innovation and fair competition.6 These statutory purposes reflect the historic balance the CFTC must seek in preventing wrongful activity in the markets while encouraging fair competition and innovation in the industry. This philosophy is also reflected in the most significant rewriting of the commodities laws in the last 25 years, the Commodity Futures Modernization Act of 2000 (CFMA).7 This legislation amended the CEA to create a principles-based,