Generally regarded as one of the most significant changes in regulations of the futures industry in the last 25 years, the legislation provides the Commodity Futures Trading Commission the authority needed to regulate the U.S. commodity futures and options markets.
“Maintaining the transparency and integrity of the marketplace serves the best interests of American consumers and ensures U.S. competitiveness in the global economy,” says James Newsome, chairman of the Commodity Futures Trading Commission.
Newsome, who testified in a June 5 hearing before the House Agriculture Subcommittee on General Farm Commodities and Risk Management, says he “firmly believes” the legislation provides a workable and effective means of overseeing U.S. commodity markets.
Futures markets provide producers, distributors and users of commodities with the means to manage their exposures to price risk, as well as a means of price discovery. “This is particularly important in many agricultural markets where no other means of price discovery exists outside of the quoted futures prices,” he says.
According to Newsome, a native of Jackson, Miss., the CFTC’s mission is to foster transparent, competitive, and financially sound commodity futures markets that operate free from manipulation or distortion, and to protect users of those markets from fraud and other abusive practices.
In the two and one half years since passage of the Commodity Futures Modernization Act, Newsome says the Commission has done that.
The heart of the Commission’s market surveillance is a large-trader reporting system, which monitors futures and options market activity of all traders whose positions are large enough to potentially impact the orderly operation of a market. “If indications of attempted manipulation are found, the Enforcement Division investigates and prosecutes alleged violations of the Commodity Exchange Act,” Newsome says.
In addition, the Commission conducts ongoing market surveillance. It also monitors the financial and operational integrity of clearinghouses and their members to insure that customer funds are protected, and safeguards are in place to prevent individualized financial problems from being transmitted through the system.
“Passage of the Commodity Futures Modernization Act initiated a period of intense effort at the Commission. Our first task was to modernize the rules affecting trading facilities, both traditional and the new electronic commercial markets,” he says. “Now, the Commission is well underway with effort to modernize the rules affecting clearinghouses, futures commission merchants, pooled investment managers, and other intermediaries in the futures markets.”
Newsome says he foresees more work ahead for the CFTC as trade volumes increase, and market participants are presented with greater choice in risk management products and trading platforms. “While I believe the new era will be one in which market users benefit greatly from innovative uses of technology, better customer service, greater liquidity, and more efficient transactions, I also believe the Commission and its staff will have to work harder than ever to fulfill its important public mission.”