Invited Editorial: The CFTC and commodity-based exchange-traded funds
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Vol. 11 No. 4, 2006, pp. 303–307 䉷 Palgrave Macmillan Ltd 1747–4426/06 $30.00
When the Commodity Futures Trading Commission (CFTC) was created in 1975, there was little reason to think that its interests and those of the Securities and Exchange Commission (SEC) would ever clash. After all, there were no futures contracts on securities in the US, and the SEC would have little reason to want to regulate transactions in soybeans, silver or sugar. A few of us knew at the time, however, that the Chicago Board of Trade was designing a futures contract based on a mortgage-backed security known breathlessly as the Government National Mortgage Association modified pass-through certificate or ‘Ginnie Mae’, and that the CBOT’s next step would be futures on US Treasury securities.1
When these new products were launched under CFTC jurisdiction and over SEC objections, a campaign lasting many years was conducted by the SEC to wrest from the CFTC any authority over futures which involved securities by striking a phrase in the Commodity Exchange Act giving the CFTC ‘exclusive jurisdiction’ over all futures contracts, irrespective of the underlying asset.2 The effort failed entirely until 1982, when certain futures markets expressed for the first time a strong interest in listing futures contracts on equity stock indexes such as the Dow Jones Industrial Averages and the S&P500 index of corporate stocks. Congress, while not receptive to the SEC’s earlier proposals for wholesale transfer of jurisdiction from the
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CFTC to the SEC for all security-related futures, had expressed misgivings on several occasions about the role of the CFTC if and when futures contracts were proposed that related to corporate stocks and bonds. Thus, the futures markets were proposing in 1982 to cross that Rubicon, and a bitter conflict between the two agencies, likely to be won by the larger SEC, loomed. To assuage that concern, the SEC and the CFTC entered into an ‘Accord’3 which confirmed the CFTC’s exclusive jurisdiction over certain futures contracts on large stock indexes and on most government securities but banned both agencies from authorising futures trading in single corporate securities or in smaller stock indices. Although not part of the inter-agency Accord, Congress engrafted onto the deal a right of the SEC to veto the CFTC’s approval of any stock index futures contract if the SEC believed that it did not meet agreed standards. While the Accord gave the SEC a role to play when futures contracts involve securities, it did not vest in the SEC any day-to-day regulatory authority. By 2000, however, several futures markets were urging Congress to lift the ban on single-stock and narrow-based stock index futures, expressing for the first time their willingness to involve the SEC in those products’ regulation. With the enactment of the Commodity Futures Modernization Act of 2000 (the CFMA), the SEC became co-regulator with the CFTC over these instruments.4 Such is the his
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