Commodity Trading Rules
Commodity markets and the commodity futures market are tightly regulated market places that trade everything from corn to gold. The market, however, is constantly evolving and has recently included more esoteric commodities, such as carbon and weather trades. The versatility of the commodity market creates innovation and growth, as well as volatility, risk and heavy regulation.
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Regulatory Authority
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The regulatory agency that oversees the commodities market is the Commodities Futures Trading Commission (CFTC). The CFTC is considered an independent agency of the U.S. federal government.
History
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Commodities have been traded in the United States for more than 150 years, starting with simple agricultural products such as wheat and corn. Regulations stretch back to the 1920s. The CFTC was created in 1974 to protect against fraudulent trading practices. The mandate of the agency continues to expand. In 2000, for example, Congress passed the Commodity Futures Modernization Act.
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Regulation Resources
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Regulations that govern commodity trading can be found in Title 17 of the CFTC's list of codes. This extensive list of regulations covers everything from regulations of commodity options transactions to rules on new, hybrid commodity instruments. The commission regulates the paperwork that traders must maintain about trading activities. The CFTC may review reports filed by any trader who owns a reportable futures or options position in a commodity. Traders must keep books and records showing all details about commodity positions and transactions.
Regulations on Leveraged Positions
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Leveraged commodity positions are a particular concern of the CFTC. Traders, who offer into, enter into or confirm the execution of a leverage contract or accept a leverage contract, must register with the CFTC. Later additions to this regulation covered silver bullion, gold bullion, bulk silver coins, bulk gold coins or platinum.
If the trader doesn't comply with these regulations, the CFTC may suspend registration of a leverage commodity for 6 months.
Another concern of the CFTC is the coverage of leveraged positions. According to regulations, each leverage transaction merchant must cover at least 90 percent of the amount of physical commodities.
Membership
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The 5 members who make up the commission are appointed by the President of the United States and are tasked with protecting the public from fraud, manipulation and abusive practices in the commodity market.
Changing Regulatory Environment
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The commodity market is always subject to changing regulations. After the credit collapse of 2008, there have been more calls for stricter regulation of the commodity market. The CFTC is investigating and will likely draft new rules governing the commodity market.
Sunshine Act
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The Sunshine Act requires openness in government proceedings and meetings. Since the CFTC is a federal agency, it must routinely post meeting results and other information for public review.
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Resources
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