Controlling the FutureA look into governing the Futures Market
Russ DeboodtBA 543
May 18, 2011
Governing Futures before 1974 3 levels of control
Commodity Futures Trading Commission National Futures Association, U.S. Commodity
Exchanges, Clearing Organizations Floor Level Controls (the pit)
Conclusion
Topics
• 1848:Chicago Board of Trade (CBOT) is founded as a cash market for grain• 1859:The birth of the “Futures Trading” for corn, wheat, and oats at CBOT• 1865:Formal trading rules are created at CBOT governing margin and delivery
procedures• 1868:Cutting “Corners”• 1880’s: Congress steps in• 1883:First clearing organization is created at CBOT • 1921:The Future Trading Act• 1922:The Grain Futures Act• 1923:Each clearing member is required to report the position of every large trader on
a daily business• 1936:The Commodity Exchange Act• 1938:The Commodity Exchange Commission promulgates the first Federal
speculative position limits for futures contracts in grains• 1963:The Great Salad Oil Swindle• 1974:The Commodity Futures Trading Commission Act
Pre 1974
“The CFTC's mission is to protect market users and the public from fraud,
manipulation, abusive practices and systemic risk related to derivatives that are subject to the Commodity Exchange
Act, and to foster open, competitive, and financially sound markets.”
Commodity Futures Trading Commission
Independent Agency Consists of five Commissioners appointed by the
President No more than 3 may be from the same political
party Serve Staggered 5 years terms Co-locates near exchanges to increase oversight
Commodity and Futures Trading Commission
Division of Enforcement Investigates and prosecutes alleged violations
Division of Market Oversight Foster markets that accurately reflect the forces of
supply and demand Oversees trade execution facilities Performs market surveillance
Divisions within CFTC
Office of the General Counsel Represents Commission in litigation and bankruptcy
hearings Advises Commission on application and interpretation of
the CEA and administrative statutes Division of Clearing and Intermediary Oversight
Oversees compliance of the self regulatory agencies which include: National Futures Association U.S. Commodity Exchanges Derivatives clearing organizations
Divisions within CFTC
Created under the CFTC Designed to protect the public Regulates every firm or individual who conducts futures
trading business with public customers (Futures Commission Merchant)
Membership in NFA is mandatory Serve as a "one-stop" background check from government and
self-regulatory sources about the disciplinary history and other background of 150,000 individuals and 10,000 firms that either are now or have been involved in the futures industry.
National Futures Association
Designated contract markets (DCMs) Allow access to all types of investors May list futures and options contracts for all
commodities CBOT, CME, COMEX, KCBT
Derivatives transaction execution facilities (DTEFs) Limit access and have lower level of regulation
U.S. Commodity Exchanges
Exempt Boards of Trade Restricts transactions to eligible contract participants and commodities CME Alternative Marketplace, Inc. and Swapstream Operating Services Ltd
(cleared by CME) Exempt Commercial Markets
Limit trading to principal-to-principal transactions between eligible commercial entities in exempt commodities
WorldPulp.com, EOXLive Responsible for visually observing trades and have the primary
responsibility for ensuring market participants are adhering to rules and regulations Backroom audits and matching trades
U.S. Commodity Exchanges
“A derivatives clearing organization (DCO) is a clearinghouse, clearing association, clearing corporation, or similar entity that enables each party to an agreement,
contract, or transaction to substitute, through novation or otherwise, the credit of the DCO for the credit of the parties; arranges or provides, on a multilateral basis, for the
settlement or netting of obligations; or otherwise provides clearing services or arrangements that mutualize or transfer credit risk among participants.”
Clearing Organizations
Futures• Both buyer and seller are
obligated to perform• Clearing organization acts as both
the seller and buyer• Individual Exchanges• CME Group
• Combination of the CME, CBOT, and NYMEX
• Provides services to other exchanges for a fee
Options• Option buyer has the right but
not the obligation to perform• The option writer (seller) is
obligated if buyer exercises the right
• Options Clearing Organization• National Corporation• Provides clearing services
to 14 exchanges
vs.
Self regulating Members themselves oversee floor operations
and conduct in each pit Pit members do not want a poor reputation A look into the pit
Regulating the Pit
3 tier governing system CFTC and the NFA
Set broad overarching regulations and perform audits on individual members who trade with the public
U.S. Commodity Exchanges Primary enforcers of futures and options regulations Backroom audits Clearing houses
Self regulating pits
Conclusion
Questions?