Governing Futures

Vasawat MekaewBA 543 section 1

Spring 2013

Agenda• History of futures trade regulation• Organizations that governing future trade

o CFTCo NFAo Exchange Markets

Introduction

History• 600 BC - Thales of Miletus made the first future

trading in the history of mankind.

History(continued)• 1600s – Tulip Mania, the Dutch created a type of

formal futures markets where contracts to buy bulbs at the end of the season.

History(continued)• 1700s - The Dōjima Rice Exchange, the first

modern organized future exchanges.o -Low rice prices in late 1720s make samurai incomes

declined sharplyo -Shogun Yoshimune finally authorized the first rice

future exchange in Dojima.

History(continued)• 1848 – The Chicago Board of Trade (CBOT) is

founded as a cash market for grain. Forward or “to-arrive” contracts begin trading at the CBOT almost immediately.

• 1859 – The governor of Illinois signs an act of the Illinois, grants the CBOT self-regulatory authority over its members.

History(continued)• 1898 – The Chicago Butter and Egg Board,

predecessor to the Chicago Mercantile Exchange, is founded.

• 1919 – The Chicago Butter and Egg Board is renamed the Chicago Mercantile Exchange.

History(continued)• 1922 – The Grain Futures Act, predecessor to the

Commodity Exchange Act, is enacted.• 1936 – The Commodity Exchange Act is enacted

and replaces the Grain Futures Act.

History(continued)• 1973 – Grain and soybean futures prices reach

record highs. Congress begins to consider revising the Federal regulatory scheme for commodities.

History(continued)• October 23-24, 1974—Congress passes the

Commodity Futures Trading Commission Act of 1974, and creates the Commodity Futures Trading Commission (CFTC or Commission)

History(continued)• September 11, 1975—The CFTC approves the

first futures contract on a financial instrument

• November 26, 1975—The CFTC approves the first futures contract on U.S. government debt

• August 2, 1977—The CFTC approves the first futures contract on long-term U.S. government debt

History(continued)• 1981—The CFTC grants registration to the

National Futures Association as a self-regulatory futures association

December 21, 2000—President Clinton signs into law the Commodity Futures Modernization Act of 2000, which, overhauls the Commodity Exchange and repeals the 18-year-old ban on the trading of single stock futures.

History(continued)• July 21, 2010— President Obama signs the

Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).

Federal Agency

U.S. Commodity Futures Trading Commission

(CFTC)• 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.

U.S. Commodity Futures Trading Commission

(CFTC)• Organization

o The Commission consists of • Five Commissioners appointed by the

President, • The President designates one of the

Commissioners to serve as Chairman. • No more than three Commissioners at any

one time may be from the same political party.

U.S. Commodity Futures Trading Commission

(CFTC)CFTC’s guideline

o Dodd-Frank Act-To promote the financial stability -improving accountability and transparency in the financial system-to end ‘‘too big to fail’’, -to protect the American taxpayer by ending bailouts-to protect consumers from abusive financial services practices

U.S. Commodity Futures Trading Commission

(CFTC)CFTC’s guideline

Commodity Exchange actThe Act provides federal regulation of all

commodities and futures trading activities and requires all futures and commodity options to be traded on organized exchanges.

Some of CFTC’s work• http

://www.cftc.gov/ucm/groups/public/@iodcms/documents/file/rerccfehedgestreetusfe030508.pdf

.

Self-Regulated Organization

NFA• Regulates every firm or individual who conducts

futures trading business with public customers.o Members screening and registrationo Enforcement authorityo Trade practice and market surveillanceo Dispute Resolution

NFA• Who has to be member?

o Futures Commission Merchant (FCM)o Swap Dealer (SD)o Major Swap Participant (MSP)o Retail Foreign Exchange Dealer (RFED)o Introducing Broker (IB)o Commodity Pool Operator (CPO)o Commodity Trading Advisor (CTA)o Associated Person (AP)o Principalo Floor Broker (FB)o Floor Trader (FT)o Notice Registered Futures Commission Merchant and Introducing Broker

Exchange Markets• Create their own sets of rule

CME GroupChicago Climate Exchange (CCE)Kansas City Board of Trade (KCBT)Minneapolis Grain Exchange (MGEX)Nadex (formerly HedgeStreet)

• Must be approved by CFTC

Exchange Markets• CME Group

o Membershipo Trading practice• Mutual Offset System• Block Trades• All-or-None• Forwards Processing• EFP, EOO and EFR Trades

Exchange Markets

Who has the best practice?

• CME Group Named "Best Futures Exchange" by Markets Media Magazine

• As voted by peers and customers. • CME Group's is excellence in client service and

education, technology design and execution, and diverse and innovative products. 

Question• Which organization have the highest authority in

future trading?o CMEo NFAo FBIo CFTC

Summary• CFTC was founded in 1974 and have been

regulating the future trading industry• Dodd-Frank Act• Commodity Exchange Act• NFA, a self regulated organization, Regulates

every firm or individual who conducts futures trading business with public customers.

• Exchange Markets are self regulated and have their own sets of rules

Q&A

?

References• http://www.cftc.gov/index.htm• http://www.nfa.futures.org/• http://en.wikipedia.org/wiki/Thales#Business• http://en.wikipedia.org/wiki/Tulip_mania• http://disciplinas.stoa.usp.br/pluginfile.php/1630/mod_resou

rce/content/2/CHY%20GED_LS-%23795938-v1-Dojima_Rice_Market_Case.pdf

• http://marketsmedia.com/markets-choice-awards/