In order for commodity futures, options and swaps markets to fulfill their vital role in the national and global economy, they must operate efficiently, accurately reflect the forces of supply and demand, and serve market users by fulfilling an economic need, typically price discovery or risk management. Through direct market and trade practice surveillance, and through oversight of the surveillance efforts of the exchanges, the Commission works to ensure that markets operate free of manipulation or congestion.
The heart of the Commission’s direct market surveillance is a large-trader reporting system, under which clearing members of exchanges, FCMs, and foreign brokers electronically file daily reports with the Commission. These reports show all trader positions at or above specific reporting levels set by CFTC regulations. Because a trader may carry futures positions through more than one FCM, and due to the possibility that a customer may control more than one account, the Commission routinely collects information that enables its surveillance staff to aggregate information across FCMs for related accounts.
Using these reports, the Commission’s surveillance staff closely monitors the futures and option market activity of all traders whose positions are large enough to potentially impact the orderly operation of a market. For contracts that may be settled through physical delivery—such as contracts in the energy complex—staff carefully analyze the adequacy of potential deliverable supply. In addition, staff monitor futures and cash markets for unusual movements in price relationships, such as cash/futures basis relationships and inter-temporal futures spread relationships, which often provide early indications of a potential problem.
The Commissioners and senior staff are kept apprised of market events and potential problems at weekly surveillance meetings, and more frequently when necessary. At these meetings, surveillance staff briefs the Commission on broad economic and financial developments and on specific market developments in futures and option markets of particular concern.
If indications of attempted manipulation are found, the Commission investigates and prosecutes alleged violations of the CEA or Commission regulations. Enforcement actions may be brought against individuals who are or should be registered with the Commission, those who engage in trading on any domestic exchange, and those who engage in illegal cash market activities that affect or could affect the futures markets. The Commission has available to it a variety of administrative sanctions against wrongdoers, including revocation or suspension of registration, prohibitions on futures trading, and cease and desist orders. The Commission may seek Federal court injunctions, restraining orders, asset freezes, receiver appointments, and disgorgement orders. In both administrative and Federal court actions, the Commission can seek civil monetary penalties and restitution. If evidence of criminal activity is found, it may refer matters to state authorities or the U.S. Department of Justice (DOJ) for prosecution of violations not only of the CEA, but also of state or Federal criminal statutes, such as mail fraud, wire fraud, and conspiracy. Over the years, the Commission has brought numerous enforcement actions and imposed sanctions against firms and individual traders for attempting to manipulate prices, including the well-publicized attempted manipulation cases by several energy companies and the market power manipulation of worldwide copper prices.
Currently, the surveillance activities described above apply only to exchange-traded commodity futures and options. With implementation of Dodd-Frank, this surveillance will be expanded to cover the swaps markets as well, greatly increasing the number of transactions subject to the Commission’s surveillance program.