The CFTC was established in 1974 as an independent agency to supervise futures trading and to protect investors by taking legal action against fraudsters. The CFTC was also granted more powers than its predecessor, the Commodity Exchange Authority. The CFTC is made up of seven divisions: clearing and risk, enforcement, market oversight, market participants division, division of data, legal division, and division of administration. The objective of the CFTC as the Federal government’s regulator is as follows:
- Strengthen the resilience and integrity of markets.
- Regulate markets to promote the interests of all Americans.
- Encourage innovation and enhance the regulatory experience for market participants.
- Ensure fairness, consistency, and predictability on markets.
The CFTC initially regulated the markets of agricultural commodities such as wheat, corn, and cotton. However, in the course of time, the CFTC took charge of supervising the contracts of energy, metals, crude oil, heating oil, gasoline, precious metals, and even financial products (interest rates, stock indices, and currencies). The 2008 credit crisis led to the inclusion of the $400 trillion swap market, dominated by large firms and financial institutions, under its supervision.
The CFTC does not involve itself in the
Irrespective of whether an individual or organization is an NFA member or not, the CFTC has the right to get involved in case of
Who should register?
Any individual or organization willing to do business as futures professionals should compulsorily register themselves with the CFTC. Registration process enables a clear assessment the financial health of the individual or organization. Furthermore, subject to federal regulations, the activities of a registered individual or entity can be tracked quite easily.
The term futures professional refers to an individual or organization with any of the following status:
- Associated Person (AP)
- Commodity Pool Operator (CPO) — an individual or entity, which receives money from multiple investors, pools it into a single trading account, and executes trades on behalf of them. Hedge funds come under this category.
- Commodity Trading Advisor (CTA) — an individual or organization providing trading advice to customers.
- Exempt Non-U.S. Firm
- Floor Broker (FB)
- Floor Trader (FT)
- Futures Commission Merchant (FCM)
- Introducing Broker (IB) — an individual receives commission for bringing new clients to a retail Forex broker. However, an IB will refrain from handling the client’s money and trade executions.
- Notice Registered Broker Dealer, Futures Commission Merchant (FCM) and Introducing Broker (IB)
- Principal
- Retail Foreign Exchange Dealer (RFED) — Forex brokers, who are the counterparty to a trade, come under this category even if they only offer spot FX trading and do not involve themselves in futures trading.
- Swap Dealer (SD)
It should be noted that any individual or entity willing to pursue
What are registration and compliance requirements?
Using the NFA’s online registration system (ORS), an individual or entity can register with the CFTC and apply for the NFA membership. The rules governing a Forex broker are as follows:
- Risk disclosure statement should be given to clients compulsorily. The statement should be similar to the one provided in futures trading.
- A Forex broker should disclose the number of
non-discretionary trading accounts. Furthermore, it is a must for the broker to reveal the number of accounts that were profitable during each of the four preceding quarters. - A broker must maintain a capital of $20 million plus 5% of customer liabilities in excess of $10 million.
- It is necessary to hold enough liquid assets to cover the total amount of the broker's obligation to its traders.
- The leverage is limited to 1:50 for major currency pairs and 1:20 for minor currency pairs on trading accounts.
- All records of communications concerning possible violations of regulations should be maintained and reported to the division of enforcement.
- Individuals and entities acting as IBs should compulsorily enter into a guarantee agreement with the Forex broker.
- All RFEDs/FCMs should compulsorily designate a compliance officer who should make annual certification (stating that the RFED/FCM acts as per regulations) to the Commission and the NFA.
- Pending legal matters, if any, should be disclosed to the CFTC without any delay.
How CFTC monitors for frauds?
The CFTC identifies fraud by administering the activities of designated contract markets, swap execution facilities, derivatives clearing organizations, swap data repositories, swap dealers, futures commission merchants, and commodity pool operators. Furthermore, the agency immediately acts on individuals or entities who fail to comply with the regulations discussed above. The CFTC also relies heavily on its whistleblower program, incentivizing information submission regarding regulatory breaches in companies.
The CFTC also acts on complaints received from the public and other market participants. In this regard, the online NFA BASIC database enables an individual to check whether a Forex broker is registered with the CFTC in any capacity. The CFTC also publishes the Red list, which includes the list of Forex brokers who accept the US clients illegally, without being authorized by the Commission.
What powers are at CFTC’s disposal?
Impose fine
In April 2021, the CFTC fined Glenn Olson $1 million for for his role in a binary options fraud that harmed US customers involving Blue Bit Banc, a United Kingdom company, and Blue Bit Analytics, Ltd, located in Turks and Caicos.
File complaint in the US District Court
In March 2021, the CFTC filed a civil enforcement action in the Washington District Court against Easterday Ranches Inc. and Cody Easterday, its co-owner and formerly president, for a fraud involving selling non-existent head of cattle to a beef processor, making false statements to an exchange, and violating exchange-set position limits.
Ban from trading
In April 2021, the CFTC banned Jozef Gherman of Florida and J Squared LLC for 10 years from registering with CFTC and trading in any of the
Issue cease-and-desist orders
In May 2021, SummerHaven Investment Management LLC was ordered to cease and desist from further violations in wash sales and non-competitive transactions on the InterContinental Exchange (ICE) and various Chicago Mercantile Exchange (CME) exchanges on top of a $500,000 fine.
Refer cases to the Department of Justice for prosecution
Back in 2011, the CFTC charged Lyndon Lydell Parrilla and Green Tree Capital for a fraud in a
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