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Commission at a Glance: Commodity Futures Industry

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The first derivatives—called futures—began trading at the time of the Civil War, when grain merchants came together and created this new marketplace. When the Commission was founded in 1974, the vast majority of derivatives trading consisted of futures trading in agricultural sector products. These contracts gave farmers, ranchers, distributors, and end-users of products ranging from corn to cattle an efficient and effective set of tools to hedge against price risk.

Over the years, however, the derivatives industry has become increasingly diversified. The agriculture sector continues to use the futures markets as actively as ever to effectively lock in prices for crops and livestock months before they enter the marketplace. However, highly complex financial contracts based on interest rates, foreign currencies, Treasury bonds, securities indexes and other products have far outgrown agricultural contracts in trading volume. Latest statistics show that approximately nine percent of on-exchange commodity futures and option trading activity occurs in the agricultural sector. Financial commodity futures and option contracts1 make up approximately 76 percent. Other contracts, such as those on metals and energy products, make up about 15 percent.

The increase in trading activity, the number of participants and complexity, and the number of contracts traded transformed the futures marketplace into a $40 trillion industry in notional amount. The rapid evolution in trading technologies, cross-border activities, product innovation and competition have made the futures markets a significant part of the global economy.

In addition to the rapid growth of the futures marketplace, the global economy saw the development of an over-the-counter (OTC) derivatives market. The first swap transaction took place in 1981. The Office of the Comptroller of the Currency estimates that, as of the second quarter of 2011, swaps entered into by U.S. commercial banks have a notional amount of $300 trillion. Parts of this market were responsible for the global financial crises when existing risk controls for the OTC market proved inadequate in the 2008 global financial meltdown.

1 A timeline of significant dates in the history of futures regulation before the creation of the CFTC and significant dates in CFTC history from 1974 to the present is located at: http://www.cftc.gov/About/HistoryoftheCFTC/index.htm (back to text)

 

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