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History of the CFTC and Derivatives Regulation in the United States

Derivatives have a long history in the United States, dating back to the founding of the Chicago Board of Trade in 1848. Grain traders created a “to-arrive” contract to allow farmers to lock in their grain price. Farmers took advantage of the contracts to hedge against poor spot prices following the fall harvest when there wasn’t enough storage capacity in Chicago for grain. In 1859, Illinois granted the CBOT status as a self-regulating authority. Other exchanges would be founded in the second half of the 19th Century, including the Kansas City Board of Trade, the New York Cotton Exchange, the Minneapolis Grain Exchange and the Butter and Cheese Exchange of New York, predecessor to the New York Mercantile Exchange.

Efforts to regulate futures trading started in Congress in the 1880s but were slow to be adopted. The first legislative attempts to tax futures, the Cotton Futures Act in 1914 and the Future Trading Act in 1921, were both initially struck down by the Supreme Court as unconstitutional and needed to be reworked. The 1920s and 1930s brought the start to federal regulation of commodities. In 1922, the U.S. adopted the Grain Futures Act to ban off-contract-market futures trading and establish an agency within the Department of Agriculture to administer it. Following the Great Depression and two years after the adoption of the Securities Exchange Act of 1934, the U.S. replaced the Grain Futures Act with the Commodity Exchange Act. It provided for regulation of a list of specific commodities and adopted a number of restrictions on market practices to strengthen the markets.

Major changes to the regulation of derivatives would happen in the late 1960s and early 1970s. In 1968, the Commodity Exchange Act was amended to add livestock products for regulation, imposes minimum financial requirements on futures commission merchants, and strengthen the enforcement provisions. It was the first major legislation dealing with commodities since the Commodity Exchange Act. In 1974, President Gerald Ford signed the Commodity Futures Trading Commission Act of 1974 to amend the Commodity Exchange Act, create the CFTC and authorize it to regulate futures trading over all commodities. It was enacted because of excessive speculation in grain and soybean futures as well as concerns over market manipulation.

The bankruptcy of some of the nation’s largest financial institutions, necessary financial bailouts and the resulting harm to the nation’s economy led Congress and the President to put in place rules to enable the government to better detect and prevent future issues. In 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act to reform various aspects of the regulatory system following the financial crisis of 2008. The Dodd-Frank Act greatly expanded the CFTC’s role regulating financial products by placing the power to regulate the swaps marketplace under the CFTC. Unregulated swaps trades played a critical role in the financial crisis that led to the Lehman Brothers collapse and AIG bailout. The Dodd-Frank Act also established the CFTC whistleblower program to investigate and reward tips dealing with violations of the nations derivatives laws. The impetus for the change was the SEC’s failure to identify and stop the Bernie Madoff ponzi scheme despite the evidence collected by Harry Markopolos and provided to the SEC repeatedly over the course of several years. The Dodd-Frank Act also established the SEC Whistleblower Office.