Commodities Market Regulation, Protecting Investors and Traders

Commodities market regulation is very important if existing and potential participants are to have full confidence in the integrity and transparency of the system.

With the advent of electronic trading, the dynamic pace of commodities exchanges has accelerated.

Against such a background the need to maintain a robust system of commodities market regulation which upholds transparency and efficiency is paramount.

United States

The regulation of commodity markets in the United States is undertaken by the Commodities Futures Trading Commission (CFTC).

Created by Congress in 1974, it is a federal financial and regulatory agency, like the Securities and Exchange Commission for stocks.

It acts as an independent body with a mandate to ensure integrity of futures and options markets through proper regulation.

The CFTC protects the market participants, and the wider public from manipulation and fraud.

The regulator is divided into a number of departments or divisions, each with specific responsibilities with regard to the operation commodity futures and options markets in the United States.

Within the CFTC there is a Division of Market Oversight, which aims to help markets so that they fairly reflect the supply and demand movements of any given commodity.

This division also carries out market compliance and surveillance and reviews various products introduced to commodities markets.

So the Clearing and Intermediary Oversight Division monitors the various intermediaries, who act for clients in the commodities market.

The division takes steps to ensure the financial integrity of those registered with the CFTC and is responsible for the protection of retail customer funds.

It also reviews sales methods and use of trading platform software by commodity advisers and brokers.

Traders and other market users can be reassured that rigorous procedures to raise awareness of and to prevent fraud are implemented.

There is a facility available to all users of commodity markets, to complain or report irregular activities.

Intermediaries who fall within the above regulations include futures commission merchants, introducing brokers, commodity pool operators and commodity trading advisers.

United Kingdom

In the United Kingdom commodities trading through various instruments is regulated by the Financial Services Authority (FSA).

The FSA is a statutory body set up under the Financial Services and Markets Act 2000 (FSMA2000).

It aims to promote fair, efficient and orderly markets and help retail investors get a fair deal.

Its objectives are appropriate protection for consumers, fighting financial irregularities, maintaining public confidence in the financial system and helping the public to better understand the financial system.

More recently investment in commodities markets seems to have grown quite considerably, and it is doubtful that it is now just seen as a cyclical opportunity to make gains.

The entry of bigger funds including pension schemes will bring some liquidity and stability and focus on trading in commodities will help it to be seen more as an asset class going forward.

Commodities market regulation tries to mitigate the risk to retail consumers when:

• New products are developed and these lead to more direct exposure to commodity market
• they may purchase a product they do not fully understand

The FSA regulates all specified investments as defined by the FSMA 2000. Contracts for difference (which includes spread betting) futures, options and derivatives are all specified investments and so come within these regulations.

As for UK retail consumers who consider entering these types of contracts, they have the protection under the regulations as the firms offering various products and services must comply with rules set out in the legislation.

If they do not the FSA will take action against them.

There is also an Ombudsman who investigates individual cases and complaints brought by individuals.

He will decide what is fair after taking account the law, the FSA rules and what is considered good industry practice. Any decision will be binding on the firm, not the individual consumer.

With the increasingly integrated, global, 24/7 nature of commodity markets today, we can expect regulatory authorities from various jurisdictions to increase co-operation going forward.

An up to date commodities market regulation framework is one of the important building blocks for a succesful global commodities market for the coming decades.







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