US Futures Trading and Regulation Before the Creation of the CFTC
April 3, 1848 – The Chicago Board of Trade (CBOT) is founded as a cash market for grain. Forward or “to-arrive” contracts begin trading at the CBOT almost immediately.
1856 – The Kansas City Board of Trade is established by local Kansas City merchants as a means of trading grain.
1858 – Standardized terms are created for forward or “to-arrive” contracts.
February 18, 1859 – The governor of Illinois signs an act of the Illinois legislature that grants a corporate charter to the CBOT. This charter, among other things, grants the CBOT self-regulatory authority over its members, standardizes grades and provides for CBOT-appointed inspectors of grain whose decisions are binding on members. This is one of several steps in the evolution of forward contracts to modern standardized futures contracts. CFTC Annual reports published before 2004 considered 1859 to be the beginning of futures trading in CBOT wheat, corn, and oats.
October 13, 1865 – Formal trading rules are instituted at the CBOT, particularly concerning margin and delivery procedures, another step in the evolution of futures contracts.
October 13, 1868 – The CBOT adopts a rule banning “corners” (defined as “making contracts for the purchase of a commodity, and then taking measures to render it impossible for the seller to fill his contract, for the purpose of extorting money from him”). This is the first known regulatory attempt to deter manipulation.
1870 – The New York Cotton Exchange is founded. The NYCE cotton futures contract is traded today on ICE Futures US.
1872 – The Butter and Cheese Exchange of New York, predecessor to the New York Mercantile Exchange, is founded.
1876 – Futures trading begins at the Kansas City Board of Trade.
1877 – The CBOT begins publishing futures prices on a regular basis. Future CBOT documents considered this to be the beginning of “true” futures trading at the CBOT.
1881 – The Minneapolis Chamber of Commerce establishes an exchange designed to promote trade in grains and to prevent abuses. In 1947, it became the Minneapolis Grain Exchange.
1882 – The Butter and Cheese Exchange of New York is renamed the New York Mercantile Exchange.
1883 – The first clearing organization is established to clear CBOT contracts, initially on a voluntary basis.
1880s – The first bills are introduced in Congress to regulate, ban, or tax futures trading in the U.S. Over the next 40 years, approximately 200 such bills will be introduced.
1898 – The Chicago Butter and Egg Board, predecessor to the Chicago Mercantile Exchange, is founded.
July 1, 1898 – The first federal tax on futures (and cash) transactions is imposed, at a rate of one basis point (0.01 percent) of the notional amount. It remains in effect until June 30, 1902. For example, the tax on a 5,000-bushel grain futures contract priced at $1.00 per bushel would be 50 cents.
May 4, 1908 – The U.S. Bureau of Corporations, predecessor to the Federal Trade Commission, issues the first part of the Report of the Commissioner of Corporations on Cotton Exchanges, “Methods of Establishing Grade Differences for Future Contracts.” Additional parts are released on May 29, 1908 and December 6, 1909. These reports describe the cotton cash and futures markets and make various recommendations for improvement.
August 18, 1914 – The Cotton Futures Act, which imposes a prohibitive tax on cotton futures contracts that do not meet certain regulatory requirements, is enacted.
December 1, 1914 – A one basis point federal tax is imposed on futures transactions that remains in effect until September 8, 1916.
October 13, 1915 – The Supreme Court declares the Cotton Futures Act unconstitutional on the grounds that it was a revenue bill that originated in the Senate rather than the House of Representatives.
August 11, 1916 – A new version of the Cotton Futures Act is enacted that addresses the constitutional concerns, but is otherwise similar to the 1914 act.
December 1, 1917 – A two basis point federal tax is imposed on futures transactions. The tax rate fluctuates at various levels between one and five basis points before being repealed effective July 1, 1938.
1919 – The Chicago Butter and Egg Board is renamed the Chicago Mercantile Exchange.
September 15, 1920 – The Federal Trade Commission releases the first of seven volumes of its Report on the Grain Trade. Several volumes discuss the grain futures markets (referred to at that time as “future markets”) and make recommendations regarding the regulation of grain futures contracts (including the establishment of speculative position limits). The final volume is released in 1926.
August 24, 1921 – The Future Trading Act which provides for the regulation of futures trading in grain (corn, wheat, oats, rye, etc.) is enacted. Under the Future Trading Act, the Secretary of Agriculture is empowered to designate exchanges that meet certain requirements enumerated in the Act as “contract markets” in grain futures. The Future Trading Act also imposes a prohibitive tax of 20 cents per bushel on all options trades and on grain futures trades that are not executed on a designated contract market.
May 15, 1922 – The U.S. Supreme Court declares the Future Trading Act unconstitutional in Hill v. Wallace. The Future Trading Act imposed a prohibitive tax whose primary purpose was to force boards of trade to submit to Federal regulation rather than citing the interstate commerce clause of the Constitution to establish Federal jurisdiction. The Supreme Court ruled that this use of Congress’s taxing power was unconstitutional.
September 21, 1922 – The Grain Futures Act, predecessor to the Commodity Exchange Act, is enacted. The provisions of the Grain Futures Act, including the requirements for designation as a contract market, are similar to those of the Future Trading Act. Unlike the Future Trading Act, the Grain Futures Act is based on the interstate commerce clause and bans off-contract-market futures trading rather than taxing it. The Grain Futures Administration is formed as an agency of the U.S. Department of Agriculture (USDA) to administer the Grain Futures Act. The Grain Futures Act also creates the Grain Futures Commission, which consists of the Secretary of Agriculture, the Secretary of Commerce, and the Attorney General. The authority to suspend or revoke a contract market designation is vested in the Grain Futures Commission.
April 16, 1923 – The Supreme Court rules in Chicago Board of Trade v. Olsen that the Grain Futures Act unlike its predecessor, the Future Trading Act, is constitutional.
June 22, 1923 – The Grain Futures Administration implements a large trader reporting system, under which each clearing member is required to report on a daily basis the market positions of each trader exceeding a specified size. This large trader reporting system remains an integral part of the CFTC’s oversight scheme to this day. Using this data, the Grain Futures Administration begins publishing in its annual reports information similar to that contained in today’s Commitments of Traders reports.
February 26, 1927 – The Secretary of Agriculture temporarily suspends large trader reporting requirements, effective until November 1, 1927, in response to complaints that the requirements were preventing large bullish speculators from entering the market, thus allegedly depressing grain prices. Following the suspension, the Grain Futures Administration determines that large trader reporting requirements did not discourage bullish speculators.
1933 – The Commodity Exchange (COMEX) is founded from the merger of the National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the New York Hide Exchange (the oldest of these exchanges was founded in 1882). By the 1970s, COMEX becomes an exchange that primarily trades gold, silver, and copper futures. Since 1994, COMEX has operated as a subsidiary of the New York Mercantile Exchange (NYMEX), which in turn became a subsidiary of the CME Group in 2008.
October 22, 1932 – The Secretary of Agriculture again temporarily suspends large trader reporting requirements, in response to complaints that the requirements are depressing grain prices (which at this point in the Great Depression are at historically low levels, but are not yet at record lows). Wheat, corn, and oat futures prices decline to all-time record lows during the period in which the suspension is in effect. The reporting requirements are reinstated on July 20, 1933.
June 15, 1936 – The Commodity Exchange Act is enacted. The Commodity Exchange Act replaces the Grain Futures Act and extends Federal regulation to a list of enumerated commodities that includes cotton, rice, mill feeds, butter, eggs, and Irish potatoes, as well as grains. All references to “grains” in the Grain Futures Act are changed to “commodities.” The Grain Futures Commission becomes the Commodity Exchange Commission and continues to consist of the Secretary of Agriculture, the Secretary of Commerce, and the Attorney General. The Commodity Exchange Act grants the Commodity Exchange Commission the authority to establish Federal speculative position limits, but not the authority to require exchanges to set their own speculative position limits. The Commodity Exchange Act, among other things, also requires futures commission merchants to segregate customer funds that are deposited for purposes of margin, prohibits fictitious and fraudulent transactions such as wash sales and accommodation trades, and bans all commodity option trading. The option ban remains in effect until 1981.
July 1, 1936 – The Commodity Exchange Administration is formed within the USDA to succeed the Grain Futures Administration and administer the Commodity Exchange Act.
April 7, 1938 – The Commodity Exchange Act is amended to add wool tops (a type of processed wool that is ready to be manufactured into textiles) to the list of regulated commodities.
December 22, 1938 – The Commodity Exchange Commission promulgates the first Federal speculative position limits for futures contracts in grains (then defined as wheat, corn, oats, barley, flaxseed, grain sorghums, and rye), following an extended public comment period and hearings on the record.
August 26, 1940 – The Commodity Exchange Commission establishes a Federal speculative position limit for cotton futures contracts.
October 9, 1940 – The Commodity Exchange Act is amended to add fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, and soybean meal to the list of regulated commodities.
February 23, 1942 – The Commodity Exchange Administration is merged with other agencies to form the Agricultural Marketing Administration. The organization is now known as the Commodity Exchange Branch of the Agricultural Marketing Administration.
December 5, 1942 – The Agricultural Marketing Administration is merged into the Food Distribution Administration, with the Commodity Exchange Branch renamed the Compliance Branch.
March 26, 1943 – The Food Distribution Administration is consolidated with three other agencies to form the Administration of Food Production, which is renamed the War Food Administration on April 19, 1943. Several more reorganizations in USDA affect the regulatory organization for commodity futures trading over the next few years.
1947 – The Minneapolis Chamber of Commerce is renamed the Minneapolis Grain Exchange.
February 1, 1947 – Responsibility for administering the Commodity Exchange Act is transferred to the Commodity Exchange Authority, an agency of USDA.
December 19, 1947 – The Commodity Exchange Act is amended to enable the Secretary of Agriculture to submit to Congress (pursuant to a congressional subpoena issued two days earlier) and make public the names, addresses, and market positions of large traders (which the Commodity Exchange Act normally requires be kept confidential). Shortly thereafter, the Secretary submits and publishes 35,000 large trader reports.
August 28, 1954 – The Commodity Exchange Act is amended to add wool (as opposed to wool tops) to the list of regulated commodities.
June 16, 1955 – The Commodity Exchange Act is amended to grant the Commodity Exchange Authority the authority to issue investigative subpoenas prior to filing a formal administrative proceeding.
July 26, 1955 – The Commodity Exchange Act is amended to add onions to the list of regulated commodities.
August 5, 1955 – The Commodity Exchange Act is amended to allow the Commodity Exchange Authority to set the level of registration and renewal fees for futures commission merchants and other registrants. Prior to this, these fees were fixed legislatively at $10.
June 18, 1956 – The Commodity Exchange Authority issues a complaint charging Vincent W. Kosuga, Sam S. Siegel, and National Produce Distributors with manipulating and/or attempting to manipulate three onion futures contract months. The complaint charges the respondents with one attempted upward manipulation (of the November 1955 contract), one attempted price stabilization manipulation (of the November and December 1955 contracts), and one successful downward manipulation. The March 1956 futures contract, the subject of the alleged downward manipulation, fell from near $2 per 50-lb. bag in late 1955 to 15 cents on the last trading day in March 1956. On June 3, 1960, a USDA Judicial Officer found that the respondents performed the attempted stabilization and successful downward manipulation, but did not find sufficient evidence for the upward manipulation. Following the issuance of the complaint, Congress held hearings to consider banning onion futures trading.
July 24, 1956 – The Commodity Exchange Act is amended to allow for the exemption from speculative position limits of anticipatory hedges (i.e., long hedges of anticipated needs for a commodity by processors or manufacturers). On the same day, the Bank Holding Company Act of 1956 makes some technical amendments to the Commodity Exchange Act.
August 28, 1958 – The Onion Futures Act bans futures trading in onions, but does not amend the Commodity Exchange Act. Onions remain on the list of regulated commodities until 1974 and the Onion Futures Act remains in effect to this day.
June 13, 1962 – The Commodity Exchange Authority publishes the first monthly Commitments of Traders report, replacing the annual reports that had been published in previous years.
December 1963 – In what is known as the Great Salad Oil Swindle, Anthony (Tino) DeAngelis, owner of the Allied Crude Vegetable Oil Refining Corp., is indicted for, among other things, creating phony warehouse receipts for non-existent soybean oil (through a variety of methods including filling storage tanks with water and covering the water with a thin layer of soybean oil on top) and using those receipts as loan collateral to finance heavy trading of soybean, soybean oil, and cottonseed oil futures (including a 1962 attempt to corner the soybean market). The scandal causes 16 firms (including two Wall Street brokerage houses and a subsidiary of American Express) to go bankrupt and leads to calls for increased regulation of the commodity futures markets. DeAngelis is convicted in 1965 and sentenced to ten years in prison.
July 21, 1964 – The Senate passes a bill (introduced by Senator Edmund Muskie) to ban futures trading in potatoes, but it does not become law.
February 19, 1968 – In the first major commodities legislation since 1936, the Commodity Exchange Act is amended to, among other things, add livestock and livestock products (e.g., live cattle, pork bellies) to the list of regulated commodities and institute minimum net financial requirements for futures commission merchants. The 1968 amendments also enhanced the enforcement provisions of the Act in various ways, including enhanced reporting requirements, increases in criminal penalties for manipulation and other violations of the Act, and a provision allowing for the suspension of contract market designation of any board of trade that fails to enforce its own rules.
July 23, 1968 – The Commodity Exchange Act is amended to add orange juice to the list of regulated commodities.
1973 – Grain and soybean futures prices reach record highs. This is blamed in part on excessive speculation and there are allegations of manipulation. Congress begins to consider revising the Federal regulatory scheme for commodities.
a. When located at a terminal market where cash grain is sold in sufficient amount and under such conditions as to reflect the value of the grain in its different grades, and where there is recognized official weighing and inspection service.
b. When the governing body of the board adopts rules and enforces them, requiring its members to make and keep the memorandum of all transactions in grain, whether cash or for future delivery, as directed by the Secretary.
c. When the governing body prevents the dissemination by the board or any member thereof of false, misleading, or inaccurate report, concerning crop or market information or conditions that affect or tend to affect the price of commodities.
d. When the governing board provides for the prevention of manipulation of prices, or the cornering of any grain by the dealers or operators upon such board.
e. When the governing body admits to membership on the board and all its privileges any authorized representative of any lawfully formed and conducted co-operative associations of producers having adequate financial responsibility:
f. 'Provided, that no rule of the contract market against rebating commissions shall apply to the distribution of earnings among bona fide members of any such associations.'
g. When the governing body of the board shall make effective the orders and decisions of the commission appointed under section 6.
a. The keeping of a record with prescribed details of every transaction of cash and future sales of grain of the Board or its member in permanent form for three years, open to inspection of representatives of the Departments of Agriculture and of Justice.
b. The prevention of the dissemination by the Board or any member of misleading prices.
c. The prevention of manipulation of prices or the cornering of grain by the dealers or operators on the Board.
d. The adoption of a rule permitting the admission as members of authorized representatives of lawfully formed co-operative associations of producers having adequate responsibility engaged in the cash grain business, complying with and agreeing to comply with, the rules of the Board applicable to other members, provided that no rule shall prevent the return to its members on a pro rata patronage basis the money collected by such association in the business, less expenses.