Derivatives markets are designed to provide a means for market users to offset price risks inherent in their businesses and to act as a public price discovery platform from which prices are broadly disseminated for public use. For derivatives markets to fulfill their role in the national and global economy, they must operate efficiently and fairly, and serve the needs of market users. The markets best fulfill this role when they are open, competitive, and free from fraud, manipulation, and other abuses such that the prices discovered on the markets reflect the forces of supply and demand.
The Commission strives to assure that Goal 1 is effectively met through the combined use of four oversight strategies: 1) the review of new contracts and rules and changes to contracts and rules; 2) continual surveillance of trading activity in the futures and swaps markets; 3) the review of regulated exchanges, designated contract markets (DCMs), and SEFs to ensure that they are fulfilling their self-regulatory obligations; and 4) the adoption of policies and strategies to promote market transparency.
The Commission routinely reviews new rules and rule changes adopted by exchanges to assure that they meet the statutory core principles of the CEA and the CFTC’s regulations. The Commission also reviews and/or approves newly listed contracts and rules for compliance with applicable core principles related to susceptibility to manipulation and speculative position limits.
In addition to the Commission’s traditional role in the oversight of DCMs, the recent enactment of the Dodd-Frank Act created a new market category of designated trading facility, referred to as a swap executive facility (SEF). As with traditional exchanges, staff will be responsible for reviewing new SEF registration applications and for conducting annual examinations of their operations to ensure compliance with the core principles. The Commission, based on industry comments, expects that 30-40 entities will apply to become SEFs, adding to the current number of 17 DCMs, potentially tripling the CFTC’s oversight requirements in this area.
The Commission monitors trading and the positions of market participants on an ongoing basis. Under the Dodd-Frank Act, the Commission’s oversight will expand from futures and options contracts traded on DCMs to also include swaps traded on DCMs and SEFs. Commission staff, through their surveillance programs, screen for potential market manipulations and disruptive trading practices, as well as trade practice violations such as wash trading, prearranged trading, accommodation trading, customer fraud, fictitious sales, trading ahead, and trading against and front running customer orders. Staff also monitor changing market conditions and developments, such as shifting patterns of commercial or speculative trading, or the introduction of new trading activities, such as index trading or high frequency and algorithmic trading, to assess possible market impacts. Where appropriate, staff adapt its surveillance and trading review techniques to account for and target these areas of change, and also consider the impact that such changes may have on exchange trading rules and contract design.
Under the Dodd-Frank Act, the Commission must establish new regulations to register SDRs and ensure that swaps data is reported consistent with the Dodd-Frank Act. Such data must be collected, maintained, and made available to the Commission and other regulators consistent with new statutory and regulatory mandates which include requirements for real-time public reporting. Initial estimates are that the Commission will receive at least five SDR applications—one for each major asset class of swaps—and possibly as many as 10, if some current international data repositories seek to register as SDRs. This will require a significant number of staff and information technology (IT) effort to develop the systems to permit the Commission to access this data from SDRs and to compile and analyze it to carry out the Commission’s statutory responsibilities.
The CFTC will continue to increase its use of technology to implement new procedures and automated market surveillance systems to monitor and analyze trading patterns and ownership and control of positions within and across the futures, options, and swaps markets. Staff are developing a rule to establish SDRs, which will provide them with real-time access to trades and aggregation of positions as required under the Dodd-Frank Act.
To ensure that DCMs, and in the future SEFs, are enforcing their rules, the Commission conducts regular reviews to assess ongoing compliance with core principles through the self-regulatory programs operated by the exchange in order to enforce its rules, prevent market manipulation, and customer and market abuses, and ensure the recording and safe storage of trade information. These reviews are known as rule enforcement reviews (RERs).
In conducting an RER, Commission staff examine trading and compliance activities at the exchange in question over an extended time period, typically the 12 months immediately preceding the start of the review. Staff conduct extensive review of documents and systems used by the exchange in carrying out its self-regulatory responsibilities, interview compliance officials and staff of the exchange, and prepare a detailed written report of their findings. In nearly all cases, the RER report is made available to the public and posted on www.CFTC.gov.
The CFTC is committed to transparency in the marketplace, and has a long history of publishing reports and data on market activity. The most well known report published by the Commission is the Commitments of Traders report. This report, published on a weekly basis, provides a breakdown of each Tuesday’s open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. On September 4, 2009, the Commission enhanced the report when it began disaggregating the data to break out managed money and swap dealer activity in the futures and option markets. The Commission also produces an index investment data report, which summarizes index investment activity in commodity markets, a bank participation in futures and option markets report, and a Cotton On-Call report. As the Commission implements the elements of the Dodd-Frank Act, staff will continue efforts to promote transparency in the swaps market through the development and publication of similar reports for that market.