Commodity Futures Trading Commission Research Articles

How is Trading Behavior in Commodity Futures Affected by the 52-Week High and Low?

We use the Commodity Futures Trading Commission’s Commitment of Traders report to investigate the trading behavior of traders in 12 commodity futures markets. Commercial traders are contrarian, consistent with anchoring and the prevalence of short hedgers. Noncommercial traders follow momentum strategies, reflecting the presence of CTAs trading in attention grabbing futures. Our key contribution is in understanding the effect of trading at the 52-week high and low – technical levels that are known to influence investor behavior – where we find trading is moderated at the 52-week high (anchor reversion) and accentuated at the 52-week low. Our results are consistent regardless of whether the futures market is in backwardation or contango. We find little support for evidence of market timing ability for either trader type.

Analysis of the clearing mechanism of capital markets of USA, the regulations in the derivative segment, major hiccups in the last 10 years and a comparison of sectoral performance and expected performance in the near future

A crucial component of any financial market is the clearing system. It is the method used to match and settle deals, assuring the protection of all parties engaged in a transaction. The Securities and Exchange Commission (SEC) in the United States regulates the clearing system for the stock market, while the Commodity Futures Trading Commission (CFTC) regulates the clearing system for the commodity market. In response to changes in the market and hazards, the laws governing the derivatives sector have changed throughout time. Derivative markets have been subject to much more regulation since the 2008 financial crisis. This occurred as a result of the perception that derivatives had a significant role in the crisis. In the past ten years, there has been some fluctuation in the stock market's and commodities market's sectoral performance in the United States. The S&P 500 index has increased in value by more than double, signaling generally positive stock market performance. The commodity market, on the other hand, has been more erratic, with some commodities, like gold and oil, seeing huge price changes. In the short future, it is difficult to predict how the stock market and commodities markets will perform. While some analysts predict that the stock market will continue to do well, others think a correction is almost due. The commodities market is predicted to be unstable as well, with prices influenced by a variety of variables such as supply and demand, economic expansion, and geopolitical developments. This research paper will examine the clearing system for the US stock and commodities markets, the rules governing the derivatives market, significant setbacks during the past ten years, and a comparison of recent sector performance and anticipated performance. The ramifications of these discoveries for the future of the financial markets will also be covered in the discussion.

Ripple effect: the SEC’s major questions doctrine problem

Objective: to elaborate a new standard for assessing the level of decentralization of cryptoassets in the USA.Methods: dialectical approach to cognition of social phenomena, allowing to analyze them in historical development and functioning in the context of the totality of objective and subjective factors, which predetermined the following research methods: formal-logical and sociological.Results: Crypto assets and blockchain technology have the potential to create unprecedented equitable access to financial institutions. Despite this potential, there is a robust debate regarding federal agencies' jurisdiction over the novel asset class. Without clear statutory guidelines, federal agencies have been forced to resolve this debate through the rulemaking process. However, agency rules regarding jurisdiction over crypto assets could be scrutinized by a reviewing court under the major questions doctrine. Once highly deferential to agency rules, the U.S. Supreme Court in recent terms has repeatedly struck down agency rules when an agency claims an unheralded power to regulate an issue of deep economic and political significance. The U.S. Securities and Exchange Commission (SEC) arguably claims such a power by interpreting most crypto assets to be "investment contracts" and thus under SEC jurisdiction. But although a decision on major questions doctrine grounds in the high-profile case SEC v. Ripple Labs, Inc. could help clarify how we classify crypto assets, it leaves many jurisdictional questions unanswered and could complicate the application of the SEC's disclosure regime to risky crypto asset offerings.Scientific novelty: This Note argues that Congress should pass the Lummis-Gillibrand Responsible Financial Innovation Act to create joint jurisdiction between the SEC and the Commodities Futures Trading Commission over most crypto asset offerings. This may help to balance consumer protection and innovation at the frontier of financial innovation. The author also endorses a new standard to evaluate whether a crypto asset is sufficiently decentralized to further clarify the SEC's role in regulating crypto asset offerings.Practical significance: the main provisions and conclusions of the article can be used in scientific, pedagogical and law enforcement activities when considering the issues related to the activity of the U.S. Securities and Exchange Commission.

INVITED PAPER — A CONJECTURE ON THE ORIGINS AND EVOLUTION OF MARKETS

The author shares his theory on market creation and evolution from his perspective as an academic and a practitioner who has been involved in financial innovation for five decades. Rather than being spontaneously created, markets appear to follow a clear set of steps (the “seven-stage” process) from inception to maturity. It is critical that the benefits from transacting are greater than the costs of establishing the market — otherwise the evolution does not occur. Historical examples of the process outlined by the author can be found in commodity, equity, fixed income and environmental markets. The author provides observations and lessons that his evolutionary framework shares with financial inventive activity in new and existing products in our rapidly evolving digital world. Recent digital innovations such as the blockchain have evolved in a framework that did not require a legislative or regulatory framework (or what the author calls a “permissionless” environment). A properly designed regulatory environment can be permissionless regarding inventive activity (withness the Commodity Futures Trading Commission in the United States). A permissionless environment has historical precedent in other “analog” innovations such as wheat trading in the 19th century or financial futures in the mid-1970s. Following the seven-stage process, those innovations arose from structural changes or latent economic demands. Their standards and infrastructure were only much later understood and adopted by the regulators. Given that, the author suggests that since changes now occur at hyper speed, the implications for the future shape of derivatives markets are likely to be profound.

Marionettes behind co-movement of commodity prices: Roles of speculative and hedging activities

Do investors' financial trading behaviors really affect commodity price fluctuations? What is their role behind the financialization of commodities? Adopting weekly data from the U.S. Commodity Futures Trading Commission (CFTC), this paper uses quantile regression to study the nonlinear influence of speculative and hedging activities on the co-movement of commodity returns. Empirical results indicate that, firstly, speculative activities enhance the co-movement while hedging activities weaken the correlation between different commodity prices on average. Moreover, both effects are strengthened when the correlation in the quantile regression increases. In addition, the coefficient change trend of sub samples before the crisis at different quantiles is opposite from that of the whole sample and the sample after the crisis, whether it is speculation or hedging. Lastly, speculative and hedging activities have significant asymmetric effects on the excess co-movement. Some new and interesting conclusions are found, with implications for investors, regulators and policymakers.

Trading Behavior in Agricultural Commodity Futures around the 52-Week High

Utilizing the Commodity Futures Trading Commission’s Commitment of Traders report, we examine the behavior of traders in three large agricultural futures markets (corn, soybean, and wheat) when prices are at a key technical trading level—the 52-week high (the highest price during the past year). Our empirical results confirm that, consistent with hedging behavior, commercial traders tend to be negative feedback traders, while non-commercial traders tend to be momentum traders. In both cases, there is a moderating effect when the market is at the 52-week high. For non-commercial traders, this effect is concentrated in short positions. Although we find no evidence of a broad market timing ability from any trader type, trader positions appear to be more informative when the market is at the 52-week high. Our results have implications for traders attempting to time market entry.

Trading behavior in bitcoin futures: Following the “smart money”

AbstractThe Bitcoin futures market has grown rapidly since its 2017 introduction. Along with enabling institutional traders to access a regulated cryptocurrency product, futures provide a means to improve market efficiency by shorting Bitcoin. We examine trading behavior in Bitcoin futures utilizing the Commodity Futures Trading Commission Commitment of Traders report. Leveraged money traders tend to hold the largest positions, be net short, and their trading behavior plays a key role in the Bitcoin futures market. Our empirical results show that leveraged money traders display market timing ability, largely by adjusting their short positions. It seems that other trader types follow this “smart money” in adjusting their own positions in subsequent periods. We also demonstrate that it is possible to construct profitable trading strategies based on observed variations in leveraged money positions.

Futures of Europe: The City of London’s Commodity Exchanges, the European Economic Community, and the Global Regulation of Futures Trading (1960s–1980s)

Since the mid-1970s, the U.S. commodity futures exchanges have increasingly been the focus of tight government regulation, which resulted in strong control by a specific agency: the Commodity Futures Trading Commission. In Europe, the regulation of futures diverged from the U.S. model. No regulation at the communitarian level was implemented; at the national level, the United Kingdom emerged as a model of self-regulation of commodity markets. This article explores the historical causes behind this lack of regulation in Europe, placing it in the context of global commodity trading and arguing that the European regulation of futures trading was reshaped by a dialogue established between the European Commission and big players of commodity futures trading in the City of London. Since the mid-1960s, the City of London has become a pivotal global market venue for commodity futures, which has increasingly attracted players from abroad, thanks to its financial integrity and self-regulatory model. Both established London merchants and emerging players in the global trade of financial products cooperated to stave off any attempt at regulating the London futures exchanges. The inference here is that those attempts were instrumental in setting the conditions leading to the regulatory fragmentation that still characterizes futures trading in the global market.

Hedging pressure and liquidity provision in commodity options markets

AbstractThis study examines hedging pressure and liquidity provision in commodity options markets using data from the weekly US Commodity Futures Trading Commission Commitments of Traders and Disaggregated Commitments of Traders reports. The “options‐only” reports are obtained from futures‐only and futures‐and‐options‐combined reports. We build the futures price series based on commodity options expiration dates. There are significant hedging pressure effects in commodity options markets. The empirical results indicate that commercials (swap dealers) provide liquidity to non‐commercials (money managers) in commodity options markets in the short run.

Characterizing implied volatility functions from agricultural options markets

AbstractWe provide the first comprehensive characterization and comparison of implied volatility functions for five major agricultural options markets—corn, soybeans, soft red winter wheat, live cattle, and feeder cattle—using intraday tick data. Our results show that cattle markets exhibit a distinct leftward skew, which is puzzling and indicates that out‐of‐the‐money traded put options are theoretically overpriced. In contrast, we find that grain market implied volatility functions display a flatter, less pronounced smile pattern. We examine market sentiment induced short‐term hedging pressures using Commodity Futures Trading Commission reports, and market uncertainty around Cattle on Feed reports, as potential causes of the cattle markets skew. However, our results show that the explanatory power of our short‐term hedging pressure proxies are only helpful in isolated cases but overall cannot explain the large skews we observe in cattle markets.

Public Comment Letter Filed with Commodities Futures Trading Commission re FTX Application to Clear Margined Trades Directly

Public Comment Letter Filed with Commodities Futures Trading Commission re FTX Application to Clear Margined Trades Directly

On prices and returns in commercial prediction markets

The Commodity Futures Trading Commission (CFTC) has recently licensed a commercial prediction market to operate in the US. With regulatory restrictions lifted, these markets can now play the important role that has been often envisaged for them. For example, investors can use them to hedge various event-related risks directly rather than indirectly via portfolios expected to move a certain way if events occur. Commercial prediction markets charge fees, an element that has not been incorporated into previous theoretical work on these markets. We examine the impact of fees on prediction market prices and returns by introducing them to a model in which the market price equals the true probability when there are no fees. We find that existing fee models mean contract prices for low probability outcomes are below the true probability but the impact of fees means prediction markets feature a form of favorite-longshot bias: Post-fee loss rates depend negatively on the probability of the event being backed. We show this result holds even if prediction market operators set a fee structure that is more generous to contracts with a low probability of success.

Does the CFTC Report Have Predictive Power: Machine Learning Approach

This article investigates the forecasting power of features extracted from the Commodity Futures Trading Commission (CFTC) Commitments of Traders (COT) report for the most actively traded agricultural commodities: soft red winter wheat, corn, soybean, hard red winter wheat, soybean meal, and soybean oil. By comparing these data with existing CFTC report research papers, this article extracts advanced features from COT reports and applies a nonlinear machine learning approach to estimate the out-of-sample prediction power of the CFTC report. <b>TOPICS:</b>Commodities, information providers/credit ratings, big data/machine learning, performance measurement <b>Key Findings</b> ▪ The COT report does not contain informative features predicting any of the agri-commodities if published on Friday with information from Tuesday. ▪ Shifting report information from Friday to Tuesday significantly improves prediction power for wheat, corn, and soybean. ▪ The performance of money managers and other (non-) reportable position dynamics are the most informative features in predicting the trend using the CFTC’s COT report.

Правоприменительные подходы к юридической квалификации криптовалюты (судебная практика США)

The article deals with law application approaches of the US courts to the characterization of cryptocurrency. Facts of the cryptocurrency case filed by the US Commodity Futures Trading Commission against the ‘Cabbagetech’ Corporation for injunction are analyzed. The court formulated a case-law position according to which cryptocurrency is qualified as a civil turnover object that has the commodity economic and legal characteristics. The legal qualification of cryptocurrency as a commodity and the extension of the economic and legal features and attributes of the commodity to the cryptocurrency allows to structure property risks and to determine the civil law consequences of actions aimed at acquiring proprietary rights to cryptocurrencies. The emphasis on the legal policy of the US public institutions in the field of commodity and finance market security is placed.

In or out? – the CFTC explains when virtual currencies come within its jurisdiction

Purpose To summarize and explain the U.S. Commodity Futures Trading Commission’s (CFTC’s) guidance regarding whether cryptocurrency is subject to CFTC jurisdiction. Design/methodology/approach The article reviews the CFTC’s March 24, 2020 final interpretive guidance, summarizes the history of the agency’s jurisdiction over leveraged, margined or financed retail transactions, and relates it to the CFTC’s guidance and judicial decisions regarding cryptocurrency. Findings We found that the CFTC, in carrying out its leadership role related to developments in the fintech industry, had provided clarity about its jurisdiction over cryptocurrency. The CFTC defines virtual currency as a “commodity,” even if intangible, and finds that many transactions in virtual currency satisfy the exception to the CFTC’s jurisdiction over leveraged retail commodity transactions because “delivery” can be said to occur within 28 days. Originality/value The article provides a useful summary of an important pronouncement from the CFTC in a manner that is readily understandable and relatable to industry participants and legal practitioners in this field.

Resilience in “Flash Events” in the Corn and Lean Hog Futures Markets

The Commodity Futures Trading Commission (CFTC) recently identified large intra‐day price changes or “flash events” in continuously traded commodity futures markets. These flash events fueled discussion on whether futures markets are becoming less effective as human intervention is diminishing in favor of automated trading. Using intra‐day data, we examine liquidity resilience during “flash events” in corn and lean hog futures markets from 2014 to 2019. Overall, we find little evidence that the liquidity provision in these two markets relative to normal days becomes fragile when large price movements occur. Our analysis suggests that flash events are heavily influenced by unanticipated changes in fundamentals that may lead to a new equilibrium price. Liquidity dynamics during these events supports the view that active market making helps absorb the increased volume and stabilize markets.

The Enduring Legacy of the Dodd-Frank Act’s Derivatives Reforms

ABSTRACT Despite the shortcomings of the Dodd-Frank Act, this article argues that the two parts most relevant to derivatives—Titles VII and VIII—are likely to endure. Title VII, which covers the trading of derivatives, especially swaps, generally strikes the right balance between preserving the vibrancy of the US derivatives markets and mitigating risk to market participants and the US financial system. While Title VII’s consolidation of much of the credit risk management function in central counterparties (CCPs) itself poses a systemic risk, this article contends nonetheless that Title VII addresses this risk by giving the Commodity Futures Trading Commission (CFTC) the power to mitigate it through regulations that implement the ‘core principles’ applicable to CCPs. This oversight is complemented by Title VIII, which provides enhanced supervision of systemically important CCPs. The Dodd-Frank Act’s approach to derivatives will endure, it is argued, so long as policymakers understand the interrelationship between Titles VII and VIII. This article focuses on that relationship and closes with a brief discussion of some of the work the CFTC is undertaking to bring finality to the statutory framework created by Titles VII and VIII.

Regulating Bitcoin and Block Chain Derivatives

Bitcoins are scarce digital commodities that enable parties to transmit messages over a network that serves as a universal public ledger. Bitcoins fall within the definition of “commodity” under the Commodity Exchange Act (CEA) such that derivatives contracts that reference bitcoins are subject to regulation by the Commodity Futures Trading Commission. Like other derivatives, Bitcoin derivatives would likely not be subject to the full scope of regulation under the CEA to the extent such derivatives involve physical delivery (as opposed to cash settlement) or are nonfungible and not independently traded. In addition, Bitcoin swaps are currently too illiquid to be subject to mandatory clearing. A growing number of firms are offering Bitcoin derivatives, most of which are for retail traders. In addition to traditional derivatives that reference bitcoins, the Bitcoin (block chain) protocol can potentially enable automated derivatives contracts that securely trade, clear, and settle without the use of trusted intermediaries. The CFTC should consider an exemption for block chain derivatives that meet its policy objectives as a result of the rules that the underlying code applies to the transactions.

From Inactivity to Full Enforcement: The Implementation of the "Do No Harm" Approach in Initial Coin Offerings

This Article analyzes the way the Securities and Exchange Commission (“SEC”) has enforced securities laws with regard to Initial Coin Offerings (“ICOs”). In a speech held in 2016, the U.S. Commodities Futures Trading Commission (“CFTC”) Chairman Christopher Giancarlo emphasized the similarities between the advent of the blockchain technology and the Internet era. He offered the “do no harm” approach as the best way to regulate blockchain technology. The Clinton administration implemented the “do no harm” approach at the beginning of the Internet Era in the 1990s when regulators sought to support technological innovations without stifling them with burdensome rules. This Article suggests that the SEC adopted a “do no harm approach” and successfully pursued two of its fundamental institutional goals when enforcing securities laws in the context of ICOs: investor protection and preservation of capital formation. After providing a brief description of the basics of ICOs and the way they have evolved in the last two years, this Article examines the transition into a new phase of full enforcement action implemented by the SEC. This shift from inactivity to enforcement was gradual, characterized by clearly identifiable steps. Data on ICOs demonstrates that this rigorous enforcement of securities laws has not damaged the industry in the United States and may suggest that entrepreneurs have adapted to this enforcement approach. By contrast, a lack of enforcement would have probably increased uncertainty to the detriment of investors and entrepreneurs and put the UNITED STATES at a disadvantage in the international arena. Furthermore, this paper emphasizes the importance of pursuing specific goals in the short-to-medium term, particularly in order to make securities regulation uniform and avoid differences at the state and federal levels, as well as to encourage industry authorities such as Self-Regulatory Organizations (SROs) to develop high standards for self-regulation.

Moral Contestation and the Regulatory Politics of Rule-Making for Derivatives

A central question facing market societies is how governments can best regulate economic competition in emerging areas. This paper illuminates this general question by examining the public comments submitted to the Commodity Futures Trading Commission (CFTC), 2010-2014, in response to proposed rules for implementing a particularly technical part of the Dodd-Frank Act: the creation of a new regulatory regime for derivatives trading. The literature on regulatory implementation emphasizes the preponderance of concentrated industry actors compared to other groups. The CFTC’s effort to create a new regulatory regime for the derivatives business allows us to compare the commenting activity of the large investment banks to a broad range of firms and other organizations. We develop a more fine-grained typology of industry segments and non-industry groups than other studies of implementation. By combining this typology with a topic-modeling approach, we can systematically map commonalities and divergences among different commenters. We find that the complex cross-cutting patterns within the industry sector are far less conspicuous than a clear cleavage in the willingness of different types of commenters to address the moral dimensions of market behavior.