Division of Economic Analysis

One of the Commission's principal responsibilities is to assure that futures markets operate competitively, free of manipulation or congestion, and serve the risk-shifting and price-discovery needs of the U.S. and world economies. Division of Economic Analysis (DEA) programs -- market analysis, market surveillance, and market research -- are designed to accomplish these objectives.

Market Analysis

The market analysis section reviews applications to trade futures or option contracts and all subsequent rule changes that have economic significance. Improperly designed contracts can increase the chance of cash, futures, or option market disruptions and undermine the usefulness and efficiency of a market. To avoid these consequences, the market analysis section considers whether the terms and conditions of a proposed contract or subsequent rule amendments to the contract conform to commercial practice and provide for adequate deliverable supplies. In the case of cash-settlement contracts, the staff evaluates the cash-settlement procedure to assure that it will be based on a reliable price series reflecting the underlying cash market. The market analysis staff considers a contract's potential commercial usefulness for hedging and price basing and other public interest considerations.

During FY 1996, the subprogram completed the economic reviews of 42 applications for new futures contracts and 50 applications for new option contracts. The subprogram also completed 106 rule amendment packages for existing futures and option contracts. The total of 92 new contracts approved in FY 1996 was the highest total for a single fiscal year.

The record number of approvals this fiscal year was made possible by the Commission's commitment to streamline its review process. Aware that the U.S. regulatory system must be responsive to market changes for the domestic futures and option markets to remain competitive, the CFTC has attempted to facilitate innovation and reduce the costs of regulation without reducing its commitment to maintaining the integrity of the markets and customer protection.

The average processing time for applications for contract market designation has fallen by more than half since the program began. In addition, the backlog of pending contracts has been eliminated; new applications are considered promptly upon submission. Most significantly, even though the number of new contracts submitted last fiscal year was at a record level, the average review time for processing this unprecedented number of new contracts remained at about three months.

New Futures Contracts

Electricity Futures. The NYMEX Palo Verde and California Oregon Border electricity futures contracts were the first futures contracts ever approved by the Commission in this commodity. These contracts were designed to meet the specialized hedging needs of firms in the electricity industry, including utilities that are becoming more actively involved in cash market transactions as a result of ongoing deregulation.

Corn Yield Insurance Futures. The Commission approved five CBT corn yield insurance futures contracts based on the States of Illinois, Indiana, Nebraska, and Ohio, as well as the U.S. as a whole. These contracts provide a vehicle for crop insurance companies and other cash market entities to hedge financial risk related to fluctuations in the yields of corn.

Other Agricultural Futures. Also during FY 1996 the CSCE milk and butter futures contracts and the CME fluid milk futures contract were approved. These contracts provide a risk-shifting vehicle for dairy cooperatives, producers, resellers, and end- users. In addition, the NYCE potato futures contract was approved by the Commission.

Other Nonfinancial Futures. Three energy futures, the NYMEX Permian Basin and Alberta natural gas contracts and its New York Harbor conventional gasoline contracts, and a forest product future, the CME oriented-strand board contract were approved.

Debt and Equity Based Futures. During FY 1996, the Commission approved several innovative financial futures contracts based on the debt and equities of emerging markets. These include the NYCE emerging market debt index futures contract, representing the dollar-denominated Brady par bonds of the four largest Brady bond issuers. The Commission also approved three CBT futures contracts based on indexes representing multiple issues of Mexican, Argentine, and Brazil Brady bonds, as well as seven CME contracts, each representing a single issue of Mexican, Argentine, Brazilian, or Venezuelan Brady bond debt. These contracts, the first approved in this commodity area, provide international portfolio managers and other institutional investors with a means of hedging portfolios containing government debt of emerging foreign markets. The Commission approved two stock index contracts based on Mexican equities -- the CME Mexico 30 and the IPC contracts, representing the most active stocks listed in Mexico.

Domestic Stock-Index Futures. Several domestic stock-index futures contracts were approved, including the CME S&P 500/BARRA value index and S&P 500/BARRA growth index, each representing key components of the S&P 500 index. The CME NASDAQ 100 index contract, which represents the 100 largest stocks traded on the NASDAQ over-the-counter market and the NYFE PSE technology index contract, which represents the stocks of firms in the technology sector, were approved. These contracts provide equity portfolio managers and other institutional investors with an additional means of hedging their portfolios.

Yield Differential Futures. Several futures contracts approved are designed to meet the hedging needs of institutions exposed to risk arising from changes in the yield differentials between U.S. Treasury instruments. These contracts include the CBT's four Treasury yield curve spread futures contracts involving the following maturities: 30-year/3-year, 10-year/3- year, 5-year/3-year, and 3-year/2-year.

Currency Futures. Also approved were futures contracts which address the hedging needs of institutions having exposure to foreign currency exchange rate risk not directly involving the U.S. dollar. These contracts include the four CME currency futures contracts on the following currency combinations: deutsche mark/French franc, deutsche mark/Italian lira, deutsche mark/Swedish krona, and deutsche mark/Spanish peseta. The CME Brazilian real and the MCE Mexican peso currency futures contracts also received approval.

New Option Contracts

The 50 option contracts approved by the Commission in FY 1996 were all options on futures. These include 18 nonfinancial options -- the NYMEX options on its Permian Basin and Alberta natural gas contract and the options on its Palo Verde and California Oregon Border electricity futures contracts, the CBT options on its five corn yield insurance futures contracts and the options on its diammonium phosphate and anhydrous ammonia fertilizer futures contracts, the NYCE option on its potato futures contract, the CME options on its fluid milk, butter, and oriented-strand board futures, the CSCE options on its milk and butter futures contracts and the MGE option on its barley futures contract.

The Commission approved 11 options submitted by the CBT and CME for their Brady bond futures contracts, as well as the NYCE option on the emerging market debt index futures contract. In addition, the Commission approved the CME options on the Mexico 30 and IPC Mexican stock index futures, as well as the CME options on the following financial futures -- the four currency cross rates, the S&P 500/BARRA value index, the S&P 500/BARRA growth index, the NASDAQ 100 stock index and the Brazilian real. Also approved this fiscal year were the CBT's four options on its yield curve spread futures contracts and its option on its 30-day Fed funds futures contract and five NYFE options based on four currency futures contracts and the PSE technology index contract.

Rule Changes

During FY 1996 the staff completed the economic reviews of 98 rule amendment packages for existing futures contracts and 8 rule amendment packages for existing option contracts. The Commission approved:

oMajor revisions to the CME and MCE hogs futures contract to provide for cash settlement in lieu of physical delivery.

oSubstantive revisions to the CME butter and MGE barley futures contracts regarding the delivery points, quality standards, and contract size, as well as proposals to reactivate trading in those dormant contracts.

oAmendments to the CSCE nonfat dry milk and cheddar cheese futures contracts with respect to the quality standards.

oRevisions to the delivery procedures for the CSCE sugar #11 futures contract.

oChanges to the MGE shrimp futures contracts regarding quality standards and delivery procedures.

oA change to the daily price limit provisions for the NYCE cotton #2 futures contract.

oAmendments to the NYMEX New York Harbor unleaded gasoline futures contract to revise the product quality standards regarding the delivery of reformulated gasoline, in connection with the implementation of rules to meet Environmental Protection Agency requirements.

oAmendments to the requirements for eligible delivery facilities on the CBT fertilizer futures contracts.

oProposals to reactivate trading in the dormant CBT Eurodollar and CME Federal funds rate futures contracts, as well as substantive revisions to the terms and conditions of those contracts.

oRevision to the price quotation format and other changes to the NYFE currency futures contracts.

oRevisions to the speculative position limit levels for several futures and option contracts.

oA flexible (flex) option system adopted by the CSCE for the sugar #11 contract, allowing traders to more precisely specify certain option terms to enhance risk management.

Market Surveillance

The objective of the Commission's market surveillance program is to maintain free and competitive futures and option markets. The presence of manipulation and other anticompetitive practices could undermine the capacity of these markets to perform the economic functions of price discovery and risk management. The market surveillance program is designed to protect these functions by monitoring daily all active futures price relationships and fundamental supply and demand conditions. The market surveillance staff works closely with the exchanges and other government agencies to deal with any potential market threats that may develop. The Commissioners and senior CFTC staff are apprised of potential problems and significant market developments at weekly surveillance briefings so that the Commission may take prompt regulatory action when warranted.


In the Fall of 1995 serious surveillance concerns regarding the copper market developed into a formal, multi-jurisdictional investigation of copper trading. Following the opening of U.S. delivery points on the LME copper contract, a sharp increase in the price backwardation on that market (with the price of near months exceeding the price of later months), and the establishment of an LME cash price premium over Comex copper prices led to a depletion of Comex copper stocks. The Commission sought the assistance of British regulators in assessing the international scope of the copper problem and worked extensively with Comex surveillance on domestic market concerns. In the midst of the Commission's investigation, Sumitomo Corporation announced that it had fired its head copper trader, who reportedly caused that Japanese company to lose about $2.6 billion. Market surveillance staff provided extensive support to the Commission's examination of the copper market.

Agricultural Markets

Corn and wheat cash and futures prices increased sharply in the spring of 1996 to historically high levels due to strong domestic and export demand and serious losses to the winter wheat crop. Deliverable supplies on all of the CBT grain and soybean contracts diminished to very low levels as the crop year progressed. Aggressive surveillance, by both Commission and exchange staff, was necessary to assure that no price distortion occurred.

The closing of several grain elevators regularly used for delivery on the CBT contracts accentuated surveillance concerns and prompted extensive review by CFTC of the need for revisions to the delivery terms for wheat, corn, and soybean futures contracts.

Record-high corn prices also exacerbated problems with hedge-to-arrive contracts between grain producers and elevators. Surveillance staff monitored the extent to which these forward and deferred delivery contracts were hedged in the corn futures market and the possible impact on futures prices as those hedges were liquidated or rolled forward.

Declines in cattle futures prices in the spring, while feed costs were rising significantly, renewed cattlemen's concerns about the impact of futures trading on the cash price of cattle. The surveillance staff compiled special analyses of the aggregated futures and option positions and net trades of packers, feeders, and commodity funds and presented the results at meetings with cattlemen's groups.

An increase in coffee prices as certificated stocks for delivery fell to the lowest levels of the decade due to a drop in Brazilian coffee production also prompted enhanced surveillance of that market.

Energy Markets

Sharp price increases in several energy futures led CFTC to a special review of fundamental supply and demand factors, as well as closer surveillance of those markets. Crude oil prices reached post-Gulf War highs in April 1996, due to increased oil demand, curtailed production, and low inventories. Gasoline prices also rose sharply on the basis of preseasonal strength in demand, refinery outages, and a decline in inventories to fifteen-year lows. Natural gas prices increased sharply at futures delivery points after the long, cold winter in the eastern U.S. depleted stocks and created an usually high demand.

Financial Futures Markets

Surveillance staff devoted a substantial amount of time to monitoring events and large trader activities in financial cash and futures markets during FY 1996. Financial markets experienced considerable volatility and increased trading volume as stock index levels periodically incurred several large declines on the road to successive record highs. Long-term interest rates fell until February, when the Federal Reserve tightened monetary policy, and then rose substantially. The surveillance staff monitored these markets and shared pertinent information with other financial regulators.

Other Activities

The surveillance staff published final rules amending large trader reporting requirements, particularly the identification of large trader accounts, and is in the process of redesigning the large trader reporting system.

Surveillance staff continued to monitor and review margin levels for stock index futures and option contracts. The staff also prepared material for the annual report to the Federal Reserve Board on the Commission's exercise of this delegated margin authority.

Market Research

The market research section conducts research on major policy issues facing the Commission, assesses the economic impact of CFTC regulatory changes on the futures markets and other sectors of the economy, participates in the development of Commission rulemakings, provides expert economic support and advice to other Commission divisions, and conducts special market studies and evaluations.

During FY 1996, staff provided critical technical support for the assessment of exchange audit trail systems undertaken by the Commission in FY 1995. As members of the Commission's off- exchange task force, research staff were active in the economic analysis of newly-developed derivative instruments to the extent that such instruments raised questions of regulatory jurisdiction. Also, staff provided analytic support to the Division of Trading and Markets in their administration of new risk assessment rules.

The research section made significant contributions to several Commission enforcement efforts involving various types of derivative instruments. The research staff also provided support in several cases involving the alleged sale of illegal off- exchange futures.

In addition, the research staff examined economic issues relating to exchange-proposed amendments to various futures and option contracts, and conducted an analysis of the potential hedging uses of several newly-proposed futures contracts.