CFTC (Commodities Futures Trading Commission)

The Commodities Futures Trading Commission (CFTC) is a U.S. government agency responsible for overseeing options and futures exchanges and their members within the United States. This article explains the history and role of the CFTC and how to interpret its position reports for trading purposes.

The History and Role of the CFTC

The CFTC operates under the Commodity Exchange Act to regulate futures markets. It was established in 1974 as an independent administrative agency through amendments to the Act, granting it exclusive authority over futures markets.

Before the CFTC was formed, the futures markets were regulated by the Commodity Exchange Authority under the U.S. Department of Agriculture. However, as industrial and financial commodities became more prevalent and scandals surrounding unregulated trading surfaced in the early 1970s, the regulatory framework required a comprehensive review.

Key reasons for creating an independent regulatory body included the diversification of tradable commodities beyond agriculture and the Department of Agriculture's limited expertise in advanced financial markets and technologies.

The CFTC’s mission is to protect market participants and the public from fraud, manipulation, and systemic risks related to futures, options, and swaps while fostering open, competitive, and financially sound markets.

CFTC (Commodity Futures Trading Commission) Organizational Structure

CFTC

The Commodity Futures Trading Commission (CFTC) is organized with five commissioners, including the chairman, and is supported by the chairman's office and several operational departments. Its headquarters is in Washington, D.C., with regional offices in New York, Chicago, and Kansas City.

The CFTC operates through four key regulatory divisions:

Division of Market Oversight (DMO):

Monitors markets to detect and prevent unfair trading practices.

Division of Clearing and Risk (DCR):

Oversees clearing organizations and market participants to manage risks in the clearing process.

Market Participants Division (MPD):

Handles registration and regulatory compliance for futures operators and exchanges.

Division of Enforcement (DOE):

Investigates and prosecutes violations of the Commodity Exchange Act and CFTC rules.

These divisions work together to ensure market integrity and protect participants from unfair practices.

What is the CFTC (Commodity Futures Trading Commission) Position Report?

The CFTC Position Report is a compilation of the position reports from various exchanges in the United States, gathered by the CFTC.

This report is known as the COT (Commitments of Traders).

The actual data may appear as a collection of text and numbers, but it contains important information.

Participants in the CFTC Position Report

The CFTC's position report categorizes market participants into three major groups: Commercial Traders, Non-Commercial Traders, and Nonreportable Traders. Each group has specific objectives for participating in the futures market.

Commercial Traders

Also known as "hedgers" or "physical traders," commercial traders are those who have direct exposure to the risk of price fluctuations in commodities or financial products. For example, companies that need raw materials for production. For these businesses, futures trading acts as insurance against price declines, helping stabilize production costs by hedging important commodity prices. This also applies to financial products, such as interest rate futures. For instance, banks might use futures to hedge against interest rate fluctuations.

Non-Commercial Traders

Also called "large speculators," this group includes hedge funds, commodity trading advisors (CTAs), commodity pool operators (CPOs), and other large traders who engage in futures trading to speculate on price movements rather than to hedge. They are not directly exposed to the underlying assets and often take positions based on market speculation.

Nonreportable Traders

Also referred to as "small speculators," these traders are typically smaller, retail participants in the market. This group includes individuals, proprietary trading firms, small hedge funds, and those holding small positions for speculative purposes. With the development of technology and greater access to electronic markets, this group has been growing rapidly in recent years.

Financial Assets Listed in the CFTC Position Report

The report covers all assets traded on U.S. exchanges. Below is a list of various financial assets categorized accordingly:

Precious Metals

Gold
Silver
Copper
Palladium
Platinum

Stock Indices

Dow Jones Industrial Average
S&P 500
Mini S&P 500 Index
NASDAQ 100 Index
Mini NASDAQ 100 Index
Nikkei Index (USD)
Nikkei Index (JPY)

Currencies

Euro
British Pound
Japanese Yen
Australian Dollar
New Zealand Dollar
Canadian Dollar
South African Rand
Swiss Franc
Mexican Peso

Cryptocurrencies

Bitcoin
Mini Bitcoin
Ethereum

Energy

New York Crude Oil
Natural Gas

Agricultural Products

Wheat
Corn
Soybeans
Oats
Sugar

Bonds

U.S. Treasury Bond Yield (2-Year)
U.S. Treasury Bond Yield (5-Year)
U.S. Treasury Bond Yield (10-Year)
U.S. Treasury Bond Yield (30-Year)

Indices

VIX Volatility Index
U.S. Dollar Index

This list categorizes all the financial assets covered by the CFTC position report, helping traders understand the wide range of markets involved.

How to Use the CFTC Position Report in Trading (Using Gold as an Example)

For commodities like gold, which have significant futures trading activity on the Chicago Mercantile Exchange (CME), changes in speculative positions (Non-commercial positions) recorded in the CFTC report are seen as a concrete reflection of the "investor sentiment" at the time.

This investor sentiment has a substantial impact on price trends in the gold market. This is because the size of the entire market, as well as the proportion of the "futures market" within it, differs greatly from that of the forex market.

The approximate trading volume of the gold market is split as follows: spot/over-the-counter/London trading (forex transactions of USD and gold) accounts for about half, while CME futures trading accounts for the other half. As a result, futures play a significant role in the overall market.

Futures trading requires only a margin deposit to hold positions many times larger than the actual capital, creating leverage that allows fund investors to achieve higher capital efficiency compared to spot/over-the-counter/London trading, which lacks leverage.

Moreover, futures profits and losses are typically realized through reverse trading. In other words, if you hold a long (buy) position, you can close the position (whether to take profits or stop losses) to settle it.

In contrast, spot trading involves the actual delivery of gold and USD every time, which is far more complex and costly than futures trading. Therefore, large investors that have a significant impact on market price structures, such as hedge funds, almost exclusively trade gold futures on CME.

The CFTC's weekly Commitments of Traders Report (COT) provides insight into investor sentiment in the gold market by tracking changes in the positions of fund-centered investors.

Looking at the Non-Commercial gold positions from the COT report published on July 9, 2024, the net long position stands at 254,775 contracts.

One CME gold contract equals 100 ounces, and one ounce equals 31.1035 grams. So, one contract is approximately 3.1 kg. Therefore, 254,775 contracts amount to a net long position of about 789 tons.

This investor position can increase to nearly 1,000 tons (around 300,000 contracts). When CME investors hold a net long position of 1,000 tons, it indicates that nearly all investors are long on gold, and the market is in a very "bullish" state.

As of July 2024, the net long position of 254,775 contracts is close to this scenario.

However, based on past trends, when the investor position nears the 1,000-ton level, the market is almost saturated, signaling that the market is nearing its peak.

When the overall sentiment is extremely bullish, and everyone believes gold will continue to rise, the CFTC's COT report can serve as a tool for calm judgment. It's very valuable in these circumstances. No matter how bullish the market is, when investor positions near 1,000 tons, it's typically the top, and if you're holding long positions, you should consider selling to take profits.

Selling when everyone expects further rises requires courage, and the COT report helps maintain a calm perspective during such times.

Gold investor positions rarely turn negative, i.e., turn into short positions. In the past 10 years, this position has only once turned into a short position.

Since short positions eventually need to be covered, after these three reductions in long positions, gold prices and long positions both rose sharply.

Gold is characterized by investors primarily taking long positions (buying). This is because holding gold as an asset is typically a long-term investment. Therefore, even in futures trading, it is very rare for investor positions to turn into short positions, and if it does occur, it's usually only for a very short period.