Commodity Futures Trading Commission

Based on Wikipedia: Commodity Futures Trading Commission

The Watchdog That Almost Prevented the 2008 Financial Crisis

In 1998, a woman named Brooksley Born tried to save the global economy. She failed—not because she was wrong, but because she was right too early, and the wrong people were listening.

Born was the head of an obscure government agency called the Commodity Futures Trading Commission, or CFTC. She saw a catastrophe brewing in a corner of finance that almost nobody understood: the unregulated derivatives market. She lobbied Congress and the President to let her agency oversee these exotic financial instruments before they could cause systemic damage.

The response? The Treasury Department, the Federal Reserve, and the Securities and Exchange Commission—the heavy hitters of financial regulation—all opposed her. Congress passed legislation specifically to stop her from regulating derivatives. Shortly after, Born resigned.

A decade later, those same unregulated derivatives helped trigger the worst financial crisis since the Great Depression. The collapse of Long-Term Capital Management, which Born had warned about, turned out to be just a preview of what was coming.

What Exactly Does the CFTC Do?

Before we go further, let's understand what this agency actually regulates, because it's one of those things that affects your life every day without you ever noticing.

The CFTC oversees derivatives markets. A derivative is a financial contract whose value is "derived" from something else—a commodity like wheat or oil, a currency like the euro, or even an interest rate. The simplest example is a futures contract: an agreement to buy or sell something at a specific price on a specific future date.

Why would anyone want that? Imagine you're a farmer growing corn. You won't harvest for six months, and you have no idea what corn prices will be by then. A futures contract lets you lock in today's price, protecting you from a market crash. On the other side, a cereal company might want to lock in prices to protect against a spike. Both parties reduce their risk.

This is useful, practical stuff. Americans have been trading agricultural futures for more than 150 years—since before the Civil War. The federal government started regulating these markets in the 1920s, after some spectacular abuses during the freewheeling years before oversight.

From Grain to Global Finance

For most of the twentieth century, futures trading meant commodities: wheat, corn, cattle, pork bellies, orange juice. If you've seen the movie Trading Places, you've seen a fictionalized version of this world.

But starting in the 1970s, everything changed. Traders realized you could create futures contracts on almost anything with a fluctuating price. Foreign currencies. Government bonds. Stock market indices. The market exploded beyond physical commodities into pure finance.

Congress created the CFTC in 1974 to handle this expanding universe. It replaced a small office within the Department of Agriculture that had been overseeing commodity exchanges since the New Deal era. The new agency was designed to be independent—answerable to Congress but not controlled by any cabinet department.

The first chairman, John T. O'Hara, took office in 1975. The agency set up headquarters in Washington, D.C., with regional offices in Chicago (home of the major futures exchanges), New York (Wall Street), and Kansas City (the agricultural heartland).

The Swaps Revolution and the Regulatory Gap

As derivatives evolved through the 1980s and 1990s, a new instrument emerged that would become enormously consequential: the swap.

A swap is exactly what it sounds like—two parties agree to exchange cash flows based on some underlying variable. The most common type is an interest rate swap: one company pays a fixed rate while receiving a floating rate from another company, or vice versa. This lets businesses manage their exposure to interest rate changes.

Swaps seemed harmless enough. But there was a crucial difference from futures: they traded "over the counter," meaning directly between parties rather than through regulated exchanges. Nobody was watching. Nobody was keeping track of who owed what to whom. Nobody was making sure that if one side of a swap couldn't pay, the other wouldn't collapse too.

By the time Brooksley Born raised her alarms in 1998, the swaps market had grown into the trillions of dollars. She issued what's called a "concept release"—basically asking whether regulation might be appropriate and what form it should take.

The reaction was swift and hostile. The Treasury, Fed, and SEC viewed swaps as their territory, or nobody's territory, or simply too sophisticated to regulate. Congress responded by explicitly prohibiting the CFTC from making rules about swaps. The legislation literally stated that "the Commission may not propose or issue any rule or regulation" restricting swap activity.

Born was silenced. She left office. And the swaps market kept growing—eventually to a notional value exceeding $400 trillion.

After the Crash: A Second Chance

The 2008 financial crisis vindicated Born's warnings in the most painful way possible. Derivatives like credit default swaps—essentially insurance policies on bonds, traded without any of the regulations that apply to actual insurance—amplified losses throughout the financial system. The collapse of Lehman Brothers sent shockwaves through interconnected derivatives contracts that regulators couldn't even track.

Congress finally acted. The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010, gave the CFTC the authority Born had requested twelve years earlier. The agency could now regulate the swaps market—requiring trades to go through regulated clearinghouses, mandating that participants maintain adequate capital, and forcing transparency into what had been an opaque marketplace.

This was a massive expansion of responsibility. The CFTC went from overseeing traditional futures exchanges to supervising an entirely new category: swap execution facilities, swap data repositories, and swap dealers themselves. The agency now sets capital standards for these dealers—meaning it has a say in whether firms are financially sound enough to participate in the market.

How the CFTC Works

The Commission consists of five commissioners, appointed by the President and confirmed by the Senate. Each serves a five-year term, and the terms are staggered so they don't all expire at once. No more than three commissioners can belong to the same political party—a rule designed to ensure bipartisan oversight.

The President designates one commissioner as chairman. This matters because the chairman sets the agenda, runs the meetings, and serves as the public face of the agency.

Beneath the commissioners, the CFTC divides its work among several divisions:

The Division of Enforcement is the cop on the beat. These are the investigators and prosecutors who go after fraud, market manipulation, and violations of trading rules. They can bring cases before the agency's own administrative judges or in federal court. When they find evidence of actual crimes—as opposed to civil violations—they refer cases to the Justice Department.

The Division of Market Oversight watches the exchanges themselves. When a new futures exchange wants to open, or an existing one wants to add new products, this division reviews and approves the applications. They also conduct "rule enforcement reviews"—basically auditing whether exchanges are following their own rules.

The Market Participants Division (formerly called the Division of Swap Dealer and Intermediary Oversight—regulators love renaming things) handles the firms that operate in these markets. Futures commission merchants, commodity pool operators, commodity trading advisors, swap dealers—all the middlemen and major players. The division registers them, sets conduct standards, and monitors compliance.

The Division of Clearing and Risk focuses on the clearinghouses that stand between buyers and sellers. When you trade through a clearinghouse, you're not exposed to the risk that your counterparty might default—the clearinghouse guarantees the trade. But this means the clearinghouse itself becomes systemically important. If it fails, everything connected to it fails. So this division watches the clearinghouses like hawks.

Bitcoin, Ethereum, and the Cryptocurrency Question

Here's where things get interesting for anyone following modern finance.

In March 2014, as Bitcoin was emerging from obscurity into mainstream awareness, the CFTC announced it was considering how to regulate cryptocurrency. By 2015, the agency had reached a conclusion: for trading purposes, cryptocurrencies are commodities.

This is a bigger deal than it sounds. Under American law, securities—like stocks—are regulated by the Securities and Exchange Commission. Commodities are regulated by the CFTC. Where a new asset falls determines which rules apply, which agency has jurisdiction, and how traders can legally operate.

The CFTC declared Bitcoin a commodity, which meant Bitcoin futures could trade on CFTC-regulated exchanges. In 2017, that's exactly what happened, with both the Chicago Mercantile Exchange and the Chicago Board Options Exchange launching Bitcoin futures contracts.

In October 2019, then-Chairman Heath Tarbert went further, declaring that Ethereum—the second-largest cryptocurrency—was also a commodity under the agency's jurisdiction. (Tarbert later left to become Chief Legal Officer at Citadel Securities, one of the largest trading firms in the world.)

The cryptocurrency classification remains contested. The SEC has argued that many crypto tokens are actually securities, which would give the SEC authority. This jurisdictional fight continues today, with billions of dollars and the structure of the crypto industry hanging in the balance.

The CFTC has been active in prosecuting cryptocurrency fraud, even without comprehensive regulatory authority. When promoters make false promises about digital tokens, when exchanges manipulate prices, when operators abscond with customer funds—the CFTC's enforcement division treats these as commodity fraud cases and brings civil charges.

The Funding Problem

Here's an uncomfortable truth about American financial regulation: the CFTC operates on a shoestring budget.

Unlike the Federal Reserve or the SEC, the CFTC does not fund itself through fees on the industry it regulates. Every dollar comes from congressional appropriations. And Congress has been stingy.

In 2007, the agency had a budget of $98 million and 437 employees. After the financial crisis, when Dodd-Frank dramatically expanded the CFTC's responsibilities, funding increased—but not proportionally. By 2014, the agency received $215 million to oversee markets worth tens of trillions of dollars.

To put this in perspective: the CFTC gained authority over the entire swaps market, previously unregulated, while receiving a budget that one outgoing commissioner called "woefully insufficient." Another commissioner estimated they needed 100 more employees than Congress was willing to fund.

The consequences are real. During the government shutdown in October 2013, the SEC and Federal Reserve stayed open because they have their own funding sources. The CFTC essentially closed, leaving futures and swaps markets "with essentially no cop on the beat," as one observer put it.

Year after year, the agency requests a transaction fee—a small charge on trades that would give it reliable, industry-funded revenue like other regulators have. Year after year, Congress does nothing.

The Inspector General Scandal

No discussion of the CFTC would be complete without mentioning a more recent controversy that reveals something about institutional rot.

Roy Lavik served as the CFTC's Inspector General—the internal watchdog responsible for preventing waste, fraud, and abuse within the agency itself—from 1990 to 2023. That's 33 years in a position designed to hold the agency accountable.

In May 2023, the Wall Street Journal reported that Lavik had been suspended after an oversight body alleged "substantial misconduct." The complaints, some dating back to 2018, were serious:

• He allegedly revealed the identities of whistleblowers on multiple occasions—a fundamental betrayal of people who trusted the system to protect them
• He allegedly misappropriated approximately $165,000 in funds for an employee who did little or no actual work
• He allegedly violated security policies by letting others use his login credentials to access sensitive systems

The irony is almost too perfect: the person responsible for catching wrongdoing within the agency allegedly engaged in exactly the kind of misconduct he was supposed to prevent.

Why This Matters for Prediction Markets

If you're interested in prediction markets—like Kalshi, the company that's been pushing to let Americans bet on everything from election outcomes to economic indicators—the CFTC is the agency you need to understand.

Prediction markets are, structurally, derivatives. You're making a contract that pays off based on some future event. That makes them commodities under the CFTC's jurisdiction. Kalshi operates as a CFTC-regulated designated contract market, which is why it can legally offer products that would otherwise be considered gambling.

The agency's decisions about what prediction contracts to allow—and what to prohibit—shape what these markets can become. The CFTC has blocked some proposed contracts (like betting on individual political candidates) while allowing others (like contracts on whether a hurricane will make landfall).

This obscure agency, with its inadequate budget and its complicated history, is the gatekeeper for an entirely new form of financial product. Whether prediction markets fulfill their promise of aggregating information and pricing the future depends, in no small part, on what five commissioners in Washington decide to permit.

The Legacy of Brooksley Born

We started with Brooksley Born, and it's worth ending with her too. After resigning from the CFTC in 1999, she watched from the sidelines as everything she predicted came true. The derivatives market she tried to regulate blew up the global economy. The swaps she warned about became toxic assets that brought down major financial institutions.

In 2009, she received the John F. Kennedy Profile in Courage Award for her prescient warnings. PBS Frontline produced a documentary, "The Warning," about her failed effort to prevent the crisis.

Born's story illustrates something important about regulatory agencies. They're not just bureaucratic machinery. They're battlegrounds where fundamental questions get decided: Who gets to take risks? Who bears the consequences when those risks go wrong? How much transparency do markets need? How much freedom do traders deserve?

The CFTC, for all its obscurity, sits at the center of these questions. It regulates markets worth hundreds of trillions of dollars with a budget smaller than what some Wall Street traders earn in a good year. It has authority over the future of cryptocurrency and prediction markets. It learned, the hard way, what happens when financial innovation outpaces regulatory oversight.

The next crisis is always brewing somewhere. Whether regulators see it coming—and whether anyone listens when they do—remains an open question.