Summary: During the past 25 years, technological advances and fundamental changes in the global financial markets have accelerated the development and use of financial products known as derivatives. Derivatives include futures contracts that traditionally have been traded on organized exchanges and are regulated by the Commodity Futures Trading Commission (CFTC). They also include swaps and other over-the-counter derivatives contracts that resemble exchange-traded futures but are privately negotiated between counterparties outside organized exchanges. Because of their resemblance to exchange-traded futures, swaps and other over-the-counter derivatives faced the possibility of falling within the judicially crafted definition of a futures contract. As a result, they faced the legal risk of being unenforceable under the Commodity Exchange Act, which requires that futures be traded on exchanges to be legal and thus enforceable. The Futures Trading Practices Act of 1992 provided CFTC with the authority to reduce this legal risk, which the agency later used. At the same time, developments brought regulated financial institutions into the exchange-traded future markets and over-the-counter derivatives markets, leading to a greater array of derivatives contracts and greater competition among those providing such contracts. Consequently, some of the distinctions among market participants and between exchange-trade futures and over-the-counter derivatives have become blurred--raising questions about the appropriate regulatory structure for these contracts, markets, and market participants. This report discusses (1) the extent to which CFTC has reduced the legal risk surrounding the enforceability of over-the-counter derivatives under the Commodity Exchange Act and (2) issues related to the appropriate regulation for exchange-traded futures and over-the-counter derivatives contracts, including their markets and market participants.
