The Commodity Futures Trading Commission (CFTC), is the federal agency charged with regulating futures, options, and other financial derivatives. The CFTC serves as a bulwark against market manipulation and fraud that causes market instability. In the aftermath of the 2008 financial crisis, regulatory reforms were instituted to address systemic market vulnerabilities. The CFTC, endowed with expanded authority under the Dodd-Frank Act, plays an essential role in mitigating systemic risks inherent in derivatives markets. By overseeing clearinghouses, regulating swap markets, and monitoring systemic risk exposures, the commission helps bolster the financial system against shocks.
Despite its importance in ensuring the stability of the nation’s financial system, the CFTC’s authorization lapsed in 2013. As emerging issues and unclear authority have piled up over a more than a decade, Congress appears poised to reauthorize the CFTC in the next Farm Bill. The CFTC has consistently been at the forefront of identifying and working to address market changes, such as the use of financial derivatives, algorithmic trading, and cryptocurrencies, but has been hamstrung by outdated authority, political opposition, and limited funding. Reauthorization is an opportunity for Congress to take stock of the CFTC’s mission and provide the CFTC new authorities to address emerging issues.
Carbon markets are an increasing area of focus for the CFTC. In December, the commission issued proposed guidance regarding the listing of voluntary carbon credit (VCC) derivatives on CFTC-regulated exchanges. The guidance outlines commodity integrity characteristics that exchanges should consider to help ensure compliance with existing regulations governing the products that an exchange can list when listing a VCC derivative. These characteristics include transparency, additionality, permanence, and more. However, this guidance is non-binding and issues with consumer confidence in the guarantees of VCCs persist. Congress could require that VCC issuers provide audited, CFTC-regulated disclosures to improve consumer trust in these products.
In January, the commission issued a request for comment on the current and potential uses and risks of AI in the markets that the CFTC regulates, with the goal of helping the CFTC “understand current and potential AI use cases and the associated potential risks to [its] jurisdictional markets and the larger financial system.” Public comments are due by April 24, 2024. While controversial, expanded authority to regulate the use of AI and crypto commodities could provide peace of mind for consumers and increase the use of these technologies.
Internal capacity has plagued the CFTC for years. The commission’s budget and funding have remained mostly flat in the last decade while its regulated market has skyrocketed. In 2010 (pre-Dodd-Frank), the CFTC oversaw a domestic commodity futures market consisting of approximately $39 trillion. At that time, it had a budget of $169 million and 605 full-time equivalent employees (FTE). In 2021, the CFTC’s regulated domestic market was estimated to be $319 trillion in swaps and $23 trillion in futures for a total market responsibility of $342 trillion, more than eight times the size of its pre-Dodd-Frank levels. By then, the CFTC’s budget had increased to only $304 million and 718 FTE. Increased resources may be hard to come by in what’s expected to be a relatively flat appropriations year, but a demonstration of congressional support for the commission in authorizing legislation could set a powerful precedent.
As financial markets continue to evolve and confront new challenges, the role of regulatory oversight becomes increasingly indispensable. By reaffirming the mandate of the CFTC and updating its authority, policymakers demonstrate a commitment to safeguarding the resilience and integrity of derivatives markets, thereby bolstering investor confidence and advancing the collective interest of market participants and the broader economy.
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