Commodities Futures Trading Commission (CFTC) and the Issue it Faces

Lauren Pena
Kenneth Abbott
FIN/LAW 3240,
28 April 2023
Regulators
The agency mandated to regulate the derivatives market in the United States is the Commodities Futures Trading Commission (CFTC). It was founded in 1974 to promote the integrity, resilience, and vibrancy of the US derivative markets (including swaps, futures, and options) through stringent regulation. The commission seeks to deter and abuse customer funds and lower the risk of derivatives, particularly futures and swaps markets. These markets significantly impact the US economy and the prices of essential products and services traded daily, such as food and energy. The derivatives markets also enable businesses, including exporters and importers, to manage volatility in foreign currency exchange rates. Consequently, besides protecting customer funds, the CTFC protects the economy and the public from derivative market abuses.
One of the biggest issues facing the commission is the broad nature of potential violations concerning futures, options, and swaps. For instance, the actions or behaviors classified as violations under the Commodity Exchange Act (CEA) include affinity schemes, misappropriation of customer funds, fraudulent solicitation, mishandling customer funds, misappropriation of customer funds, Ponzi schemes, and issuing false customer account statements. Examples of actions that would constitute market manipulation are illicit trading strategies, spoofing, fictitious and noncompetitive transactions, and any other attempts at manipulating derivative prices (Büyükşahin et al.). Moreover, the CTFC is charged with preventing trade practice violations like unauthorized swap transactions, undercapitalization, violation of position limits, wash sales, improper separation of customer funds, insufficient monitoring of traders, refusing to accede relevant book-keeping rules, creating false trading records, as well as inadequate controls and supervision. These are challenges that hinder proper functioning of the derivatives market.
The extensive list of violations can be challenging to address, given the high number of transactions occurring at any given moment. While the CFTC is committed to preventing abuses in the derivatives market, regularly investigating every matter involving listed violations can be overwhelming. However, the commission has established cooperative enforcement efforts with state, federal, and global regulations and law enforcement to ensure market oversight. Another challenge related to the difficulty of deterring financial abuses concerns the amount of data generated from recording information about trades every day. This big data is just a fraction of the information the commission gathers daily. The amount of data is set to increase as the derivatives markets continue to increase in scope and sophistication (Commodity Futures Trading Commission). The list of possible violations has forced the CFTC to expand its range of market scrutiny, thus creating data management challenges. For instance, most of the growing data streams at the commission can be traced to new surveillance outlined in the Dodd-Frank Act.
The CFTC to gather information on over-the-counter swaps from various industry sources across all markets and in a broad set of formats as mandated by the Dodd-Frank Act. Moreover, the agency's data challenges are exacerbated by other issues like data integrity, storage, and manpower. The CFTC is dealing with problems of data inconsistency, data duplication, insufficient storage and analysis systems, lack of data management experience, and staff shortages. The lack of human a...