How are futures regulated in the US?

To put it simply, a futures contract is exactly what it sounds like. Derivatives are a kind of financial transaction in which two parties make arrangements to exchange one investment or commodity for another at a certain future date and price. Futures are just a contract for future transactions. Most contracts for future delivery of a security or commodity never materialize. Most traders who engage in futures trading do so for speculative reasons, using them to make a profit or reduce their exposure to risk rather than to acquire the underlying asset.

In a futures contract, like in the case of options, there are two parties involved: a buyer and a seller. When a futures contract expires, the buyer must purchase and get the underlying asset, and the seller must furnish and deliver the underlying item, while an option’s value may disappear upon expiry. Futures are quite popular in the U.S. However, the futures market is centralized, which means that the trading process is regulated by authorities. In this article, we’ll cover how futures are regulated in the United States.

The legal framework of futures contracts in the U.S.

The derivatives markets in the United States are governed by the Commodity Futures Trading Commission (CFTC), an autonomous government agency. Objectives include fostering markets that are both competitive and efficient while also shielding investors from deceptive activities. The CFTC was created in 1974 by the Commodity Futures Trading Commission Act.

Ten commodities exchanges provide trading via open outcry and competitive bidding. The CFTC was given legal authority to function under the 1974 act through the end of the 1978 fiscal year, and new legislation is needed to continue the agency’s work beyond that date.

The ICE Futures U.S. Board of Directors is responsible for ensuring that the exchange complies with all applicable laws and regulations in carrying out its role as a designated contract market. In addition to that, the commission is responsible for regulating the best brokers for futures trading in order to make the market and trading process much safe for U.S. citizens. The Board of Directors carries out its functions in accordance with the processes and standards established by the governance papers of the exchange. The Board of Directors may make such changes to these documents from time to time as they see fit or as may be required by relevant laws and regulations or to the greatest advantage of the exchange.

Five commissioners make up the CFTC; each is nominated by the president and must be confirmed by the Senate. Terms of office for commissioners are staggered and last five years. At any one moment, no more than three commissioners may be from the same political party, and the president appoints one of them to serve as chair.

The Commission must also recognize:

  • As contract markets any exchange providing evidence that futures trading in the contract among other things, does not go against what’s best for society as a whole;
  • Examining the statutes, rules, regulations, trading requirements, and decisions made by designated contract markets;
  • Imposing rules on financial dealings including uniform margins or contracts for gold and silver bullion held in margin accounts gold or silver coins;
  • Confirming the health and legitimacy of individuals via registration managers of commodity pools, futures commission merchants, and traders’ accounts entity similar to a mutual fund that invests in securities) and experts in commodities trading.

More about futures

The emergence of regulated grain markets in the middle of the 19th century is often seen as the beginning of futures trading in the United States. Farmers were permitted to sell their produce at a predetermined price for either immediate delivery (spot trade) or future delivery. As a result, this enabled farmers better manage the production risk associated with their uncertain future crop prices. Financial assets including Treasury bonds, stock market indices, currencies, and more may now be traded in the futures market alongside agricultural commodities.

Futures are widely used by retail traders and investors to bet on the direction of the underlying asset’s price. They hope to make money by speculating on the future price of a certain commodity, index, or financial instrument. Futures are used as a hedge by some investors to protect their portfolios or businesses from the adverse effects of market fluctuations in a specific commodity.