Commodity Futures Trading Commission (CFTC)

The purpose of the CFTC is to assure the economic utility of the futures markets. They do this by encouraging competitiveness and efficiency within the marketplace, and protecting participants from fraud, manipulation and abusive trading practices while maintaining the financial stability of the clearing process. By carrying out this important function, the CFTC enables the futures markets to serve the important function of price discovery and offsetting price risk for its participants.

The CFTC “consists of the Commissioners, the offices of the Chairman, and the agency’s operating units”.¹

The CFTC has five Commissioners.  The president appoints the commissioners of the CFTC, but they must also be approved by the Senate¹. The Commissioners each serve five-year terms.¹   The President selects one of Commissioners to serve as the Chairman, and no more than three of the five Commissioners can be from the same political party to ensure impartiality¹. 

The Offices of the Chairman are the Office of External Affairs, the Office of International Affairs, the Office of the Inspector General, and the Office of the Secretariat¹. The Office of External Affairs handles all liaisons with the “media, producer and market user groups, educational and academic groups, and the general public”. It provides public information about the CFTC and its activities and is in charge of customer protection initiatives¹.  The Office of International Affairs handles the Commission’s global oversight efforts and helps in the formation of international policies¹. The Office of the Inspector General is in charge of audits of the CFTC activities and reviews all legislation and regulations the Commission is part of¹. The Office of the Secretariat handles the creation and distribution of policy documents and deals with “requests filed under the Freedom of Information Act and the office of Equal Employment Opportunity”¹.

Other Offices of the Commissioner include the Office of General Counsel which serves as the CFTC’s legal counsel and as such represents them in courts of law, and helps with the interpretation and implementation of administrative statutes¹. The Office of the Executive Director handles all the administrative functions of the CFTC as well as their budget¹. The Division of Clearing and Intermediary Oversight monitors “compliance activities of the futures industry self-regulatory organizations”¹. The Division of Market Oversight is charged with maintaining markets in tune with the principles of supply and demand and are free of “abusive trading activity”¹. The Division of Enforcement handles the investigation and prosecution of violations against CFTC regulations and the Office of the Chief Economist functions as a supporting advisory body and provides training for CFTC staff¹.

The CFTC maintains offices not only in Washington D.C., but also in Chicago, Kansas City, and New York (cities that house futures exchanges are located)¹.

One financial instrument whose use is closely monitored by the CFTC is futures contracts. According to investopedia.com, a futures contract is a contractual agreement between two parties, typically made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a pre-determined price in the future. Futures contracts lay out the quality and quantity of a particular commodity or financial instrument, as well as promise a set price of that same commodity or financial instrument in the future. Some future contracts require a physical delivery of the asset it describes on the call date of the contract, but most are settled simply in cash.

Position limits represent the maximum position that may be held or controlled by on person or group of investors acting jointly¹. Position limits were designed for the purpose of maintaining stable and fair markets¹. Recently, the CFTC has been the source of debate in the media over their pending proposal on position limits as dictated by the Dodd-Frank Act. The Dodd-Frank Act specified that the CFTC produce a proposal on position limits by January 2011¹. They have failed to do so, claiming that insufficient information is available to make an informed decision¹.

A cousin to position limits, position accountability levels deal with market control of individuals and the effect it has on the markets themselves¹. Unlike position limits, position accountability levels are dictated by the exchanges, and not an oversight committee¹. As such each exchange or market will have its own accountability levels. A position accountability level is said to have been violated when an investor, or group of investors acting jointly, control enough supply of the good in question to dictate the price free of the forces of supply and demand¹. When this happens, the investor(s) in question are required to lower their position in the market to a level that allows the market to operate freely. While not directly set and monitored by the CFTC, position accountability levels and their violations are something the Commission pays close attention to¹.

Until such time as the Commission publishes its proposal on new position limit legislation, there are interim systems that have been proposed to temporarily fill the void the proposal’s absence creates¹. One such system is a Speculative Position Point System. Supported by Commission Chilton¹, a speculative point system would be a benchmark system and “not the hard fast levels of a comprehensive position limit proposal”¹. Under s point system, violations of position points would serve primarily as a red flag for the CFTC. Once flagged, an investor’s activities would be analyzed and the CFTC would decide if any action needed to be taken¹.

The Commodities Futures Trading Commission and its activities can have a profound impact on the stock market. Because every company is impacted by at least one commodity, fluctuations in the price of those commodities will affect their financial performance and potentially their stock price. 

One of the primary purposes for the futures market is price discovery. Because commodities have such a wide array of uses in a broad range of industries, a change in the price of a commodity can have a tremendous impact on the stock market.

For example in the case of a bread making company; the price of wheat is very important. When the price of a bushel of wheat goes up or down, it affects the final cost of the bread produced by the bread company. When the price of wheat goes up it costs the bakery more to make the bread. If everything else stays the same, that increase in costs translates to less profit for the company. Less profit reported in the financial statements of the bread company potentially translates into a lower price for that companies stock. As you can see, a fluctuation in the price of commodities translates across markets and can impact the performance of stocks in the stock market.