[Federal Register Volume 62, Number 179 (Tuesday, September 16, 1997)]
[Notices]
[Pages 48613-48628]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24388]


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COMMODITY FUTURES TRADING COMMISSION


Strategic Plan

AGENCY: Commodity Futures Trading Commission.

ACTION: Request for comments.

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SUMMARY: The Commodity Futures Trading Commission, in accordance with 
the requirements of the Government Performance and Results Act, has 
developed a draft Strategic Plan which was submitted to the Office of 
Management and Budget on August 15, 1997. The Commission is now 
soliciting comments on the draft plan.

DATES: Comments must be received on or before October 16, 1997.

ADDRESS: Comments on the strategic plan may be sent to Jean A. Webb, 
Secretary, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW, Washington, DC 20581. Comments may be 
sent by facsimile transmission to (202) 518-5528 or by electronic mail 
to <a href="/cdn-cgi/l/email-protection#3043555342554451424970535644531e575f46"><span class="__cf_email__" data-cfemail="2a594f49584f5e4b58536a494c5e49044d455c">[email protected]</span></a>. Reference should be made to ``Strategic Plan.''

FOR FURTHER INFORMATION CONTACT: Madge A. Bolinger, Office of Financial 
Management, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW, Washington, DC 20581 (202) 418-5180.

SUPPLEMENTARY INFORMATION: The Government Performance and Results Act, 
5 U.S.C. 306 (``GPRA''), requires all agencies to develop and submit 
strategic plans to the Congress and the Office of Management and Budget 
no later than September 30, 1997. The Commission has developed its 
plan, ``Vision and Strategies for the Future: Facing the Challenges of 
1997 through 2002,'' which establishes the goals, outcome objectives 
and strategies for the next five years. Public comment is now being 
sought on the strategic plan.
    The Commission's draft Strategic Plan is set forth below.

    Issued in Washington, DC, on September 8, 1997, by the 
Commission.
Jean A. Webb,
Secretary to the Commission.

Vision and Strategies for the Future: Facing the Challenges of 1997 
Through 2002

Commodity Futures Trading Commission Strategic Plan 1997-2002

August 1997

Draft

Table of Contents

Vision Statement
Mission Statement
Economic Benefits of Futures Trading
Profile of Market Users
Current Perspective on the Industry
    U.S. Commodity Exchanges
    Map of CFTC-Regulated Commodity Exchanges
    Number of Registered Commodities Professionals
    Number of Contract Markets
    Volume of Trading
    Managed Funds
Strategic Goals & Objectives
    Goal One--The Marketplace
    Goal Two--The Market Users
    Goal Three--The Environment
    Summaries of Outcome Objectives & Activities
Achieving the Goals: Strategies to Mission Performance--1997-2002
    The Environment
    The Strategies
Achieving the Goals: External Challenges--1997-2002.
    The Challenges
    The Strategies
Achieving the Goals: Internal Challenges--1997-2002.
    The Challenges
    The Strategies
Achieving and Measuring Performance
    Achieving Performance
    Measuring Performance: The Annual Performance Plan
Relating General Goals and Objectives to Performance Goals and 
Program Evaluation.
Appendix
    Understanding the Fundamental of Commodity Futures and Options
    Addresses of the Commodity Exchanges & Designated Self-
Regulatory Organizations
    CFTC Offices.
    CFTC Team
    Commission Concurrence
    Publications and Information

Vision Statement

    For the years 1997 through 2002, the Commodity Futures Trading 
Commission will:
    Preserve and promote the vital role America's commodity markets 
play in establishing fair prices for goods and services and managing 
the risks of their production, marketing, and distribution in the world 
economy.

Mission Statement

    The mission of the Commodity Futures Trading Commission (CFTC) is 
to protect market users and the public from fraud, manipulation, and 
abusive practices related to the sale of commodity futures and options, 
and to foster open, competitive, and financially sound commodity 
futures and option markets.

Background

    The Commodity Futures Trading Commission was created by Congress in 
1974 as an independent agency with the mandate to regulate commodity 
futures and option markets in the United States. The agency's mandate 
was renewed and expanded in 1978, 1982, 1986, 1992, and 1995.
    Today, the CFTC is responsible for ensuring the economic utility of 
futures markets by encouraging their competitiveness and efficiency, 
ensuring their integrity, and protecting market participants against 
manipulation, abusive trade practices, and fraud. Through effective 
oversight regulation, the CFTC enables the commodity futures markets 
better to serve their important function in the nation's economy of 
providing a mechanism for price discovery and a means of offsetting 
price risk.
    Futures contracts for agricultural commodities have been traded in 
the U.S. for 150 years and have been under federal regulation since the 
1920s. In recent years, futures trading has expanded rapidly into many 
new markets, beyond the domain of

[[Page 48614]]

traditional physical and agricultural commodities. Futures and option 
contracts are now offered in a vast array of financial instruments, 
including foreign currencies, U.S. and foreign government securities, 
and U.S. and foreign stock indices.

Economic Benefits of Futures Trading

Why Were Futures Markets Created?

    The frantic shouting and signaling of bids and offers on the 
trading floor of a futures exchange undeniably convey an impression of 
chaos. The reality, however, is that chaos is what futures markets 
replaced. Prior to the establishment of central grain markets in the 
mid-nineteenth century, the nation's farmers carted their newly 
harvested crops over plank roads to major population and transportation 
centers each fall in search of buyers. The seasonal glut drove prices 
to give-away levels and, indeed, to throw-away levels as grain often 
rotted in the streets or was dumped in rivers and lakes for lack of 
storage. Come spring, shortages frequently developed and foods made 
from corn and wheat became barely affordable luxuries. Through the 
year, it was each buyer and seller for him- or herself, with neither a 
place nor a mechanism for organized, competitive bidding. The first 
central markets were formed to meet that need. Eventually, contracts 
were entered into for forward as well as for spot (immediate) delivery. 
So-called forwards were the forerunners of present day futures 
contracts.
    Spurred by the need to manage price and interest rate risks that 
exist in virtually every type of modern business, today's futures 
markets have also become major financial markets. Participants include 
mortgage bankers as well as farmers, bond dealers as well as grain 
merchants, and multinational corporations as well as food processors, 
lending institutions, and individual speculators.
    Futures prices arrived at through competitive bidding are 
immediately and continuously relayed around the world by wire and 
satellite. A farmer in Nebraska, a merchant in Amsterdam, an importer 
in Tokyo, and a speculator in Ohio have simultaneous access to the 
latest market-derived price quotations. And, should they choose, they 
can establish a price level for future delivery--or for speculative 
purposes--simply by having their broker buy or sell the appropriate 
contracts. Images created by the fast-paced activity of the trading 
floor notwithstanding, regulated futures markets are a keystone of one 
of the world's most orderly, envied, and intensely competitive 
marketing systems.
    Indeed, it is an example of a classical free market with many 
buyers and sellers, no one of whom has dominant market power, achieving 
an equilibrium price level through open exchange of supply and demand 
information.

Economic Benefits

    In a competitive market economy, there is general agreement among 
economists that a market for a product would be perfectly competitive 
if:
    <bullet> many buyers and sellers met openly, and no one 
individually controlled the market;
    <bullet> the commodity was standardized so all knew the grade and 
quality of the product being traded; and
    <bullet> buyers and sellers could enter the market freely, and 
participants had full knowledge of available supply and demand for 
their product.
    While no market meets that ideal, futures markets come closer to it 
than most others and yield significant economic benefits:
    <bullet> Price Discovery. With many potential buyers and sellers 
competing freely, futures trading is a very efficient means of 
determining the price level for a commodity. This is commonly referred 
to as price discovery.
    <bullet> Hedging Risk. Futures markets give producers, processors, 
and users of commodities and financial instruments a means of passing 
the price risks inherent in their businesses to traders who are willing 
to assume those risks. In other words, commercial users of the markets 
can hedge--enter into an equal and opposite transaction to their cash 
market position in order to reduce the risk of financial loss due to a 
change in price--and, through hedging, lower their costs of doing 
business. This results in a more efficient marketing system and, 
ultimately, lower costs for consumers.
    <bullet> Market Information. Since futures markets are national and 
worldwide in scope, they act as a focal point for the collection and 
dissemination of statistics and vital market information.

Profile of Market Users

Hedgers

    The details of hedging can be somewhat complex, but the principle 
is simple. Hedgers are individuals and firms which make purchases and 
sales in the futures market solely for the purpose of establishing a 
known price level for something they later intend to buy or sell in the 
cash market (such as at a grain elevator or in the bond market). In 
this way, they attempt to protect themselves against the risk of an 
unfavorable price change in the interim. Or hedgers may use futures to 
lock in an acceptable differential between their purchase cost and 
their selling price.
    The number and variety of hedging possibilities are extensive. A 
cattle feeder can hedge against a decline in livestock prices, and a 
meat packer or supermarket chain can hedge against an increase in 
livestock prices. Borrowers can hedge against higher interest rates, 
and lenders against lower interest rates. Investors can hedge against 
an overall decline in stock prices, and those who anticipate having 
money to invest can hedge against an increase in the overall level of 
stock prices.
    Whatever their hedging strategy, a common denominator is that 
hedgers willingly give up the opportunity to benefit from favorable 
price changes in order to achieve protection against unfavorable price 
changes. In essence, they acquire a form of price insurance.

Speculators

    If you were to speculate in futures contracts, the person taking 
the opposite side of your trade on any given occasion could be a hedger 
or another speculator-someone whose opinion about the probable 
direction of prices differs from your own.
    Speculators are individuals or firms who seek to profit from 
anticipated increases or decreases in futures prices. In so doing, they 
help provide the risk capital needed to facilitate hedging.
    Someone who expects a futures price to increase would purchase 
futures contracts in the hope of later being able to sell them at a 
higher price. This is known as ``going long.'' Conversely, someone who 
expects a futures price to decline would sell futures contracts in the 
hope of later being able to buy back identical and offsetting contracts 
at a lower price. The practice of selling futures contracts in 
anticipation of lower prices is known as ``going short.''
    One of the attractive features of futures trading is that it is 
equally easy to profit from declining prices (by selling) as it is to 
profit from rising prices (by buying).

Floor Traders

    Floor traders, or locals, who buy and sell for their own accounts 
on the trading floors of the exchanges, play an important role as 
futures market participants. Like specialists and market makers at 
securities exchanges, they help to provide market liquidity. If there 
is not a hedger or speculator who is immediately willing to take the 
other side of an order at or near the going price, there may be a floor 
trader who

[[Page 48615]]

will do so, in the hope of being able to make an offsetting trade at a 
small profit minutes or even seconds later. In the grain markets, for 
example, there is frequently only one-fourth of a cent per bushel 
difference between the prices at which a floor trader buys and sells.
    Floor traders create more liquid and competitive markets. However, 
it should be noted that unlike market makers or specialists, floor 
traders are not obligated to maintain a liquid market or to take the 
opposite side of customer orders.

Current Perspective on the Industry

U.S. Commodity Exchanges

    There are 11 commodity exchanges in the United States, located in 
six cities. These self-regulatory organizations are responsible, 
subject to CFTC oversight, for the operation of the exchange and the 
business conduct and financial responsibility of their member firms.
History
    As the economy of the United States expanded during the early part 
of the nineteenth century, the commodity exchanges evolved from 
unorganized club-like associations into formalized exchanges. In 1848, 
the first formal exchange, the Chicago Board of Trade, was established 
with 82 members. And on March 13, 1851, the first contract was traded 
on this exchange, encouraged by the trading standards, inspections 
system, and weighing system prescribed by the board members.
    Trading on the Chicago Board of Trade was considerable, and by 1870 
futures trading also began on the New York Produce Exchange and the New 
York Cotton Exchange. By 1885, the New York Coffee Exchange was 
actively trading futures contracts. Since the second half of the 
nineteenth century, the growth of these exchange institutions has been 
steady and continuous-evolving into the 11 U.S. commodity exchanges, 
designated as contract markets by the CFTC, that are used today.
    The total volume of futures contract and option trading on all 
exchanges in the United States now has a notional value of billions of 
dollars per day. The commodity exchanges have become an indispensable 
financial tool for the world's markets.

BILLING CODE 6351-01-P

[[Page 48616]]

[GRAPHIC] [TIFF OMITTED] TN16SE97.000



BILLING CODE 6351-01-C

[[Page 48617]]

Number of Registered Commodities Professionals

    Companies and individuals who handle customer funds or give trading 
advice must apply for registration through the National Futures 
Association (NFA), a Congressionally authorized self-regulatory 
organization subject to CFTC oversight.
    The Commission regulates the activities of over 62,000 registrants:

------------------------------------------------------------------------
                                                                 Number 
                Type of registered professional                  in 1997
------------------------------------------------------------------------
Associated Persons (Sales People).............................    45,850
Commodity Pool Operators (CPOs)...............................     1,351
Commodity Trading Advisors (CTAs).............................     2,606
Floor Brokers (FBs)...........................................     9,299
Floor Traders (FTs)...........................................     1,331
Futures Commission Merchants (FCMs)...........................       233
Introducing Brokers (IBs).....................................     1,538
                                                               ---------
      Total...................................................    62,208
------------------------------------------------------------------------

Number of Contract Markets

    Before an exchange may offer a contract for trading, the Commission 
must review the terms and conditions of the proposed contract, as well 
as subsequent rule amendments to the terms and conditions of the 
contract, to ensure its economic viability. Improperly designed 
contracts can increase the chance of cash, futures, or option market 
disruptions and undermine the usefulness and efficiency of a market.
    During fiscal 1996, the Commission designated 92 new futures and 
option contracts, the highest number of new contracts in any single 
fiscal year.
    The Commission has seen the introduction of new and novel trading 
instruments to handle a variety of financial risks, such as currencies, 
inflation-indexed debt instruments, contracts based on various domestic 
and foreign stock indices, as well as the risks inherent in the 
agricultural sector of the economy. It is expected that this innovation 
will continue as firms, companies, producers, processors, and others 
turn to the commodity futures markets for hedge protection against 
financial risk.
    There are currently over 230 separate actively traded contracts on 
the United States exchanges. This number has grown by 105% over the 
number of contracts traded just a decade ago and is expected to reach 
nearly 280 contracts by the year 1999.

BILLING CODE 6351-01-P
[GRAPHIC] [TIFF OMITTED] TN16SE97.001


BILLING CODE 6351-01-C

Volume of Trading

    Volume of trading is measured in number of contracts traded. The 
volume of trading on the U.S. exchanges has risen nearly 130% in the 
decade since 1986.
    During FY 1996, there were 494,502,868 futures and option contracts 
traded. Volume is expected to rise to over 579 million contracts in FY 
1999.

[[Page 48618]]

[GRAPHIC] [TIFF OMITTED] TN16SE97.002



BILLING CODE 6351-01-C

Managed Funds

    Investment management professionals have been using managed futures 
for more than 20 years. Recently, there has been a surge in pooled and 
managed money and an increasingly large segment of the population has 
money invested in the futures markets, either directly or indirectly, 
through pension funds or ownership of shares in publicly held companies 
that participate in the markets. Institutional investors such as 
corporate and public pension funds, insurance companies, and banks are 
increasingly using managed futures to diversify their portfolios.
    Over the last decade, from 1986 through 1996, the amounts of money 
under management has grown exponentially from less than $2 billion to 
nearly $26 billion.

[[Page 48619]]

[GRAPHIC] [TIFF OMITTED] TN16SE97.003



BILLING CODE 6351-01-C
    Over the past 15 years, the profile of the typical commodity pool 
has changed significantly. Fifteen years ago, commodity pools were 
offered with the expectation that maximum contributions would be $1 
million. Most pools were single-advisor pools, with the CPO acting as 
CTA for the pool. Pools were designed for speculative trading, and 
there were no ``principal-protected'' pools, tiered pools, or 
dynamically managed pools.
    Today, the pool universe is comprised of:
    <bullet> Single and multiple advisor pools;
    <bullet> Multi-media pools-that is, pools that invest in securities 
and futures as well as other investments, including ``hot issues'' of 
U.S. securities, off-exchange instruments, and international markets;
    <bullet> Pools which use leverage and isolate particular forms of 
return, such as the mortgage pre-payment option;
    <bullet> Principal-protected pools; and
    <bullet> Pools which invest in other pools.

Strategic Goals and Objectives

    The mission of the Commodity Futures Trading Commission is 
accomplished through three strategic goals, each focusing on a vital 
area of regulatory responsibility. The goals are highlighted here, and 
defined in terms of outcome objectives and related activities on the 
charts which follow.

Goal One--The Marketplace

    Protect the economic functions of the commodity futures and option 
markets.
    The focus of this goal is the marketplace. If the United States 
commodity futures markets are protected from and free of abusive 
practices and influences, they will better operate to fulfill their 
vital role in our market economy and the global economy-accurately 
reflecting the forces of supply and demand and serving market users by 
fulfilling an economic need.

Goal Two--The Market Users

    Protect market users and the public.
    The focus of the second goal is protection of the firms and 
individuals--market users--who come to the marketplace to fulfill their 
business and trading needs. Market users must be protected from 
possible wrongdoing on the part of the firms and commodity 
professionals with whom they deal to access the marketplace, and they 
must be assured that the marketplace is free of fraud, manipulation, 
and abusive trading practices.

Goal Three--The Environment

    Foster open, competitive, and financially sound markets.
    The third goal focuses on several important outcomes--effective 
industry self-regulation, firms and financial intermediaries with sound 
business, financial, and sales practices, and responsive and flexible 
regulatory oversight.

         Summaries of Outcome Objectives and Activities--Goal #1        
  Goal #1: Protect the economic junctions of the commodity futures and  
                            option markets.]                            
------------------------------------------------------------------------
       Outcome objective                        Activity                
------------------------------------------------------------------------
Foster futures and option       1. Collect and analyze daily U.S.       
 markets that accurately         futures and options data for all       
 reflect the forces of supply    actively trading contracts to detect   
 and demand for the underlying   congestion and/or price distortion and 
 commodity and are free of       respond quickly to potentially         
 disruptive activity.            disruptive situations.                 

[[Page 48620]]

                                                                        
                                2. Monitor the markets to determine how 
                                 conditions and factors observed may    
                                 impact individual registrants or the   
                                 markets in general (e.g., price        
                                 volatility, supply conditions,         
                                 activities of affiliated companies of  
                                 registrants, over-the-counter          
                                 derivatives trading, manipulative or   
                                 fraudulent practices, etc.), to deter  
                                 potentially negative situations and to 
                                 take appropriate action.               
                                3. Conduct timely review of contract    
                                 market designation applications and    
                                 changes to applications to determine if
                                 they are economically viable and do not
                                 pose a likelihood of disruption in the 
                                 cash, futures, and option markets.     
                                4. Conduct weekly market surveillance   
                                 meetings of the Commission to analyze  
                                 market information, to discuss         
                                 potentially disruptive situations and  
                                 conditions, and to respond quickly to  
                                 market crises.                         
                                5. Respond to market emergencies and    
                                 disruptive activities swiftly and      
                                 effectively.                           
                                6. Maintain a current understanding of  
                                 market functions and developments      
                                 through research.                      
                                7. Identify possible manipulation and   
                                 other abusive trading practices for    
                                 investigation and possible enforcement 
                                 or criminal action.                    
                                8. Investigate possible manipulation and
                                 other abusive trading practices.       
                                9. Institute enforcement cases          
                                 concerning manipulation and other      
                                 abusive trading practices.             
                                10. Sanction violators.                 
2. Oversee markets which can    1. Conduct timely review of contract    
 be used effectively by          market designation applications, and   
 producers, processors,          changes to applications, to determine  
 financial institutions, and     if they are economically viable and do 
 other firms for the purposes    not increase the likelihood of         
 of price discovery and risk     disruption in the cash, futures, and   
 shifting.                       option markets.                        
                                2. Participate in the President's       
                                 Working Group on Financial Markets to  
                                 ensure coordination of information and 
                                 efforts among U.S. financial           
                                 regulators.                            
                                3. Maintain a current understanding of  
                                 market functions and developments      
                                 through research.                      
                                4. Provide materials and information on 
                                 the functions and utility of the       
                                 markets to the public through public   
                                 Commission meetings, through public    
                                 roundtables, advisory committee        
                                 meetings, symposia, U.S. Department of 
                                 Agriculture publications, press        
                                 releases, advisories, etc.             
------------------------------------------------------------------------


         Summaries of Outcome Objectives and Activities--Goal #2        
             [Goal #2: Protect market users and the public.]            
------------------------------------------------------------------------
       Outcome objective                        Activity                
------------------------------------------------------------------------
Promote compliance with and     1. Identify and investigate possible    
 deter violations of federal     fraudulent and other illegal activities
 commodities laws.               relating to the commodity futures and  
                                 option markets and their registrants.  
                                2. Bring injunctive actions, including  
                                 using ``quick-strike'' efforts to      
                                 protect assets and to stop egregious   
                                 conduct.                               
                                3. Bring administrative cases involving 
                                 manipulation, fraud, and other         
                                 violations.                            
                                4. Hear administrative cases.           
                                5. Sanction violators.                  
                                6. Inform the public and the industry   
                                 concerning allegations of wrongdoing   
                                 and associated legal actions, including
                                 through publications and through       
                                 Commission orders and reports          
                                 describing the alleged violations and  
                                 the Commission's legal and policy      
                                 analysis.                              
                                7. Collect sanctions and civil monetary 
                                 penalties against violators.           
                                8. Cooperate with the exchanges, the    
                                 National Futures Association, other    
                                 federal agencies, state governments and
                                 law enforcement entities, and foreign  
                                 authorities to gain information for law
                                 enforcement purposes and to provide    
                                 enforcement assistance as necessary and
                                 appropriate.                           
                                9. Monitor the Internet and other       
                                 communication media for fraudulent     
                                 <radical> <radical> <radical>activities
                                 and other possible violations of the   
                                 Act.                                   
                                10. Resolve appeals in administrative   
                                 enforcement matters and self-regulatory
                                 organization adjudicatory actions.     
2. Require commodities          1. Oversee the National Futures         
 professionals  to  meet  high   Association registration program.      
  stand- ards.                                                          
                                2. Require testing, licensing, and      
                                 ethics training for commodities        
                                 professionals.                         
                                3. Maintain regulations and oversight to
                                 ensure the effective use of disclosure 
                                 documents by commodities professionals.
                                4. Investigate and bring administrative 
                                 registration cases arising out of      
                                 alleged statutory disqualification and 
                                 obtain suspensions, revocations,       
                                 conditions, or restrictions of         
                                 registration.                          

[[Page 48621]]

                                                                        
3. Provide a forum for          1. Provide a reparations program for    
 effectively and expeditiously   commodities market users to make claims
 handling customer complaints    relating to violations of the Act.     
 against persons or firms                                               
 registered under the Act.                                              
------------------------------------------------------------------------


          Summaries of Outcome Objectives & Activities--Goal #3         
   [Goal #3: Foster open, competitive, and financially sound markets.]  
------------------------------------------------------------------------
       Outcome objective                        Activity                
------------------------------------------------------------------------
1. Ensure sound financial       1. Promulgate regulations to ensure     
 practices of clearing           sound business, financial, and sales   
 organizations and firms         practices in firms participating in the
 holding customer funds.         commodities industry.                  
                                2. Review and oversee self-regulatory   
                                 organization audit and financial       
                                 practices.                             
                                3. Identify possible financial,         
                                 capitalization, segregation, and       
                                 supervision violations for             
                                 investigation and possible prosecution.
                                4. Investigate possible financial,      
                                 capitalization, segregation, and       
                                 supervision violations.                
                                5. Bring cases concerning financial,    
                                 capitalization, segregation, and       
                                 supervision violations.                
                                6. Sanction violators.                  
2. Promote and enhance          1. Ensure effective self-regulatory     
 effective self-regulation of    organization enforcement programs.     
 the commodity futures and      2. Review and approve self-regulatory   
 option markets.                 organization rules and rule amendments.
                                3. Conduct rule enforcement reviews of  
                                 self-regulatory organizations          
                                 (financial practices, sales practices, 
                                 trade practices, and audit trail).     
                                4. Review and oversee self-regulatory   
                                 organization audit and financial       
                                 practices.                             
                                5. Review adequacy of self-regulatory   
                                 organization disciplinary actions.     
                                6. Conduct direct audits of clearing    
                                 organizations and firms handling       
                                 customer money to ensure compliance    
                                 with capitalization and segregation    
                                 rules.                                 
                                7. Promulgate regulations to ensure     
                                 effective self-regulation by exchanges,
                                 clearing organizations, and registered 
                                 futures associations.                  
3. Facilitate the continued     1. Coordinate and cooperate with global 
 development of an effective,    financial services regulators to share 
 flexible regulatory             vital information and develop          
 environment responsive to       appropriate global standards in the    
 evolving market conditions.     commodities industry as markets emerge 
                                 and evolve.                            
                                2. Participate in the International     
                                 Organization of Securities Commissions 
                                 and represent the Commission at        
                                 international meetingsconcerning       
                                 commodity regulation.                  
                                3. Participate in the President's       
                                 Working Group on Financial Markets to  
                                 ensure coordination of information and 
                                 efforts among U.S. financial           
                                 regulators.                            
                                4.Provide exemptive, interpretive, or   
                                 other relief as appropriate to foster  
                                 the development of innovative          
                                 transactions, trading systems, and     
                                 similar arrangements.                  
4. Promote markets free of      1. Identify possible trade practice     
 trade practice abuses.          violations for investigation and       
                                 possible enforcement proceedings.      
                                2. Investigate possible trade practice  
                                 violations.                            
                                3. Bring cases concerning trade practice
                                 violations.                            
                                4. Bring enforcement proceedings against
                                 violators.                             
------------------------------------------------------------------------

Achieving The Goals: Strategies to Mission Performance--1997-2002

The Environment

    The environment in which the Commodity Futures Trading Commission 
operates and works is dynamic. Futures and option markets are fluid. 
New products, as well as changes in terms and conditions of existing 
contracts, are common. Increasing globalization of the financial 
markets also presents challenges and opportunities to the agency's 
mission performance.
    Accomplishing our mission will require a commitment continually to 
assess the external and internal issues and trends that may affect our 
mission and the way in which we must respond to meet it successfully. 
Evaluating and adjusting our plan will ensure that potential problems 
or weaknesses are managed before they develop into crises.

The Strategies

    To fulfill our commitment, we must develop and employ various 
strategies which focus on achieving results. These strategies will 
define the basis for developing policies, making decisions, taking 
actions, allocating resources and defining program direction. They will 
clarify why the organization exists, what it does, and why it does it--
providing a bridge to understanding how we connect to our environment.

Achieving The Goals: External Challenges--1997-2002

The Challenges

    The Commodity Futures Trading Commission faces challenges external 
to the organization which may significantly alter its ability to meet 
its goals, its outcome objectives, and even its mission, depending on 
the weight of their influence and the timing of their occurrence.
    We have identified ten such factors that may impact strategic 
planning at the CFTC.
    The volume of trading in futures and commodity options--which is 
influenced, in turn, by external economic factors such as interest rate

[[Page 48622]]

volatility, commodity price volatility in general, and events and 
conditions specific to individual commodity markets.
    The number and sophistication of market users--including the 
increasing number of institutional users trading as fiduciaries.
    The variety of markets traded--in recent years, the CFTC has 
designated futures and option markets on a wide range of commodities, 
instruments, and indices. These have included: dairy products, such as 
milk and cheese; various energy products including: electricity; 
various currency and cross-currencies; inflation-indexed U.S. Treasury 
bonds; foreign interest rates; boneless beef; pollution rights; crop 
yields; and a wide range of foreign and domestic stock indices.
    The growing use of over-the-counter (OTC) derivatives--such use may 
increase exchange trading volume as dealers in such OTC instruments 
attempt to hedge their resulting risk exposures. Often it also requires 
analysis of such OTC instruments for purposes of determining the 
appropriate regulatory framework.
    Structural changes in the financial services industry--such as the 
diversification into overseas markets, and the convergence of the 
securities, commodities, insurance, and banking industries.
    Events that destabilize the commodity markets--such as the 1987 
stock market break, the 1995 collapse of Barings Bank, and the copper 
market events precipitated by the Sumitomo Corporation in 1996.
    The globalization of financial markets--broadening the needs for 
market surveillance, analysis of intermarket relationships, cross-
border enforcement efforts, and cooperation and information sharing 
with foreign authorities.
    The effect of federal laws and policies--on the U.S. economy, such 
as the deregulation of the energy industry and changes in farm subsidy 
policies, spawning change and innovation such as new types of crop 
insurance.
    The advancement in technology--which continues to introduce 
challenges in many areas-alternatives to the ``open-outcry'' method of 
trading commodity futures on the exchange floor, enhanced methods for 
timing and tracking trading transactions, on-line filing of financial 
information by market users, electronic marketing and trading of 
financial and risk-hedging products, and trading commodity futures and 
options on a global, 24-hour real-time basis.
    The standards, resources, and priorities of other organizations and 
jurisdictions--such as self-regulatory organizations, other federal and 
state law enforcement agencies, and foreign authorities.

The Strategies

    Develop a Responsive and Flexible Regulatory Posture--It is not 
possible to predict which external influences ultimately will affect 
the commodity futures and option industry over the next five years. 
However, certain trends observed in the past few years are likely to 
continue. In order to fulfill its goal of being a flexible and 
responsive regulatory body, the Commission must develop strategies to 
ensure that the appropriate reactions and responses to these trends are 
developed.

Innovation

    <bullet> Respond to innovation through the timely review of new and 
novel trading instruments.
    <bullet> Develop a capability of understanding the underlying 
economic effects and benefits of new product development, new markets, 
and new complex trading mechanisms.

Globalization

    <bullet> Maintain watchful surveillance activities to monitor 
systemic risk of expanding markets, intermarket linkages, and cross-
border trading systems.
    <bullet> Foster and sustain strong relationships with foreign 
authorities to ensure rapid communication and responsive actions in the 
event of global financial uncertainty.
    <bullet> Participate in international efforts to standardize world-
wide market surveillance and information sharing practices.

Competitiveness

    <bullet> Consider refinements to the regulatory framework to take 
into account the growing use of over-the-counter derivatives.
    <bullet> Respond to structural changes in the financial services 
industry to ensure a level playing field as the commodities, 
securities, and banking industries become more integrated.

Dynamic Economic Forces

    <bullet> Monitor general economic events and trends in order to 
understand dynamics affecting commodity futures and option trading.
    <bullet> Respond to the changing needs of the U.S. agricultural 
community resulting from the passage of the Federal Agricultural 
Improvement Reform (FAIR) Act of 1996 and the changes it will spawn in 
this sector of the U.S. economy.
    <bullet> Develop an automated market surveillance system capable of 
collecting and assimilating data from option trading, as well as 
commodity futures trading.
    <bullet> Respond rapidly and effectively to destabilizing events, 
either in the United States markets or in the global marketplace, to 
ensure the protection of U.S. interests and customers.
    <bullet> Monitor the increasing volume of the public's funds 
invested either directly or indirectly through commodity pools.

Advancing Technology

    <bullet> Develop capability of overseeing rapidly evolving 
technological changes and innovations influencing the markets--
electronic trading mechanisms, increasingly linked trading 
relationships, real-time trading, electronic commerce, expansion of the 
Internet and other advancements.
    <bullet> Ensure that the Commission has state-of-the art computing 
power to collect and analyze the increasing volume of data generated by 
the commodity futures and option markets.
    Develop and Sustain Vital Partnerships--Strong working 
relationships with other organizations and jurisdictions involved not 
only in commodity futures and option trading, but domestic and 
international finance and law enforcement, increase the Commission's 
ability to build knowledge and insight, share information, and 
participate in developing standard practices and policies.

Federal and State

    <bullet> A key relationship that ensures regulatory consistency 
across the federal government is the Commission's participation in the 
President's Working Group on Financial Markets. This critical forum for 
coordination of regulation across financial markets brings together the 
leaders of the federal financial regulatory agencies to consider issues 
concerning risk assessment, capital requirements, internal controls, 
disclosure, accounting, market practices relating to trading in 
derivative instruments, bankruptcy law revisions, and contingency 
planning for market emergencies.
    <bullet> Another key federal liaison is with the U.S. Department of 
Agriculture. Consistent with the mandate of the Act, the FAIR, CFTC 
will work with USDA staff in a risk management education effort to 
reach agricultural producers seeking risk management services or advice 
to deal with the changes resulting from its passage.

[[Page 48623]]

    <bullet> Commission staff works through various established 
intergovernmental partnerships to share information and to consult on 
issues of importance both to the Commission and to other financial 
regulators. Some meetings are recurring, such as biweekly conference 
calls and quarterly meetings held among the CFTC, the Securities and 
Exchange Commission, the Department of the Treasury, the Board of 
Governors of the Federal Reserve System, the New York Federal Reserve 
Bank and the Federal Deposit Insurance Corporation. Others are 
occasional as needed, but nonetheless valuable, such as those with the 
Department of Energy, the Department of Agriculture, and the Department 
of Labor's Bureau of Labor Statistics on other matters.
    <bullet> The working relationships with other federal law 
enforcement entities are also fundamental to an effective law 
enforcement effort. The Commission coordinates its enforcement efforts 
with agencies such as the Department of Justice, the Federal Bureau of 
Investigation, the Federal Trade Commission, the Securities and 
Exchange Commission and the U.S. Postal Inspection Service.
    The CFTC is also represented on several interagency task forces 
designed to keep participants abreast of new developments in financial 
crimes and to coordinate the government's response.
    <bullet> Enforcement efforts are coordinated with state authorities 
as well, including state commissions responsible for the regulation of 
corporations, securities, insurance, and banking.

Self-Regulatory

    The National Futures Association (NFA) has been granted 
registration by the Commission as a futures association with specific 
self-regulatory responsibilities under the Commodity Exchange Act. The 
NFA has existed since 1982 and works in partnership with the Commission 
to assure high standards for industry professionals. The Commission 
works closely with the NFA in a variety of areas to augment scarce 
government resources--registration, ethics training for industry 
professionals, the review of disclosure documents, and issues 
concerning statutory disqualification of registrants.

International

    <bullet> In the past several years, the Commission has cooperated 
with a large number of foreign regulatory authorities through formal 
memoranda of understanding (MOUs) and other arrangements to combat 
cross-border fraudulent and other prohibited practices that could harm 
customers or threaten market integrity. Cross-border information 
sharing among market regulators forms the linchpin of effective 
surveillance of global markets linked by products, participants, and 
information technology. The Commission currently has 18 formal 
arrangements for the sharing of information on enforcement matters, 
three arrangements related to financial information sharing, and nine 
cooperative arrangements for the sharing of information on matters 
related to foreign firms and exemptions from certain CFTC rules and one 
letter relating to the use of foreign settlement banks.
    <bullet> A key partnership in our efforts to remain abreast of 
global financial issues is our membership in the International 
Organisation of Securities Commissions (IOSCO), an organization of more 
than 120 members from over 75 countries. IOSCO's main purposes are to 
provide machinery for exchanging information and expertise between 
regulatory authorities for the supervision of world securities and 
derivatives markets, to establish standards of best practice, to ensure 
market integrity, and to promote effective supervision and enforcement. 
IOSCO deals with issues affecting both developed and emerging markets.

Advisory

    The Commission sponsors three advisory committees that facilitate a 
dialogue between the CFTC and three key groups of interested persons--
the American agricultural community, the financial community, and the 
states.
    <bullet> The Agricultural Advisory Committee (AAC) represents a 
vital link between the Commission, which regulates agricultural futures 
and option markets, and the agricultural community, which depends on 
those markets for hedging and price discovery. The AAC's 25 member 
organizations represent a major portion of the American agricultural 
community. For the last 14 years, the AAC's twice yearly meetings have 
fostered an ongoing dialogue between that community and the Commission.
    <bullet> The Financial Products Advisory Committee provides a means 
of receiving invaluable information and obtaining advice and 
recommendations on issues related to financial markets. In this regard, 
the Committee has served as a channel for communicating to the 
Commission diverse viewpoints within the financial community, including 
the views of broker-dealers, pension fund sponsors, investment 
companies, futures commission merchants, commodity pool operators, and 
commodity trading advisors. The Committee has also served a conduit for 
the views of federal financial market oversight agencies, futures 
exchanges, and accounting firms.
    <bullet> The CFTC-State Cooperation Advisory Committee (CSCAC) 
continues to play a highly productive role in facilitating the 
cooperation between federal and state regulatory authorities. In the 
context of diverse state laws and enforcement authorities, it provides 
a forum for the Commission to solicit the advice and recommendations of 
knowledgeable state officials in efforts to protect investors from 
fraud and secure the integrity of futures markets. Similarly, it helps 
the various state regulators learn about changes to federal laws and 
regulations as well as federal enforcement activities. This facilitates 
the exchange of information and the coordination of policies and 
enforcement efforts among the CFTC, the SEC, and the Department of 
Justice. Some of the issues addressed in recent years include:

--misleading advertising in the broadcast media;
--bank-financed precious metal investing;
--commodity pool operations; and,
--public availability of disciplinary actions in the futures industry.

    CSCAC's membership includes representatives of federal and state 
law enforcement agencies, futures industry associations, and private 
futures brokerage firms.

Achieving the Goals: Internal Challenges--1997-2002

The Challenges

    Many of the internal challenges identified may not be unique to the 
CFTC, but nonetheless are possible barriers to success which must be 
analyzed and met in order to succeed in its mission.
    Diminishing Resources--with a declining pool of budgetary resources 
slated for domestic discretionary programs, every federal entity faces 
the same task of streamlining the way it operates. The Commission will 
continue to review its requirements and program initiatives to ensure 
that its fiscal perspective is sound. It must also continue to seek 
ways of improving performance, delegating responsibilities, and 
becoming more efficient.
    Recruitment and Retention of Qualified Professionals--nearly 80% of 
the staff of the CFTC falls into four categories of professional 
employment: law, economics, financial audit, and futures trading. The 
complexity of the work at the Commission demands highly skilled 
workers, many with

[[Page 48624]]

advanced educational degrees. Competition for these individuals has 
always been keen, and there is no indication that this challenge will 
abate. Indeed, the Commission is the only federal financial regulator 
which does not have the authority to pay professionals at premium pay 
levels.
    In some instances, as with lawyers and economists, the Commission 
has experienced the effects of a ``brain drain,'' when highly talented 
and skilled employees are hired away from the CFTC by other federal 
financial regulators who can offer premiums.
    Potential for Significant Numbers of Retirements--the CFTC is in 
its 23rd year of operation. Many of the employees who started with the 
Commission in its early days are approaching retirement age. Over 12% 
of CFTC's on-board staff will become eligible for retirement in the 
next five years. This level of turnover will require significant levels 
of recruitment and training, particularly to fill behind the loss of so 
much ``institutional memory.''
    Another challenge associated with a significant turnover in staff 
is the question of reengineering. Allocation of staff resources in the 
future needs to be considered in light of changes in the organization's 
tasks and responsibilities.
    Remaining Abreast of Current Technology--perhaps more so than many 
other federal agencies, the Commission is dependent on a significant 
level of advanced technology to manage the volume and complexity of 
financial information we collect and analyze. Data are voluminous, 
require timely handling, and must be thoroughly analyzed for anomalies 
in trading patterns, relationships, and strategies.
    Over the years, the Commission has developed and maintained an 
impressive technological infrastructure and has employed automation 
when feasible to enhance its work product and to enhance productivity 
in light of a static level of staffing.
    The sophisticated market surveillance and market analysis the 
Commission performs are accomplished through the use of databases and 
econometric modeling. Fact patterns for enforcement investigations are 
supported by computer programs, and many other responsibilities could 
not be accomplished without the significant level of information 
technology at the CFTC. The need for this level of support will 
increase over the coming five years as technology continues to evolve 
and to offer new capabilities.
    Commission staff must be knowledgeable as to current technologies 
in order adequately to perform oversight of the exchanges as they 
increase their use of technology. This technological trend has been 
reflected in the increasing linkage of global markets and the 
introduction of overnight trading capabilities by major U.S. exchanges 
linked to foreign counterparts. Advances in technology will improve the 
ability of the exchanges to handle their work electronically. The 
Commission must be knowledgeable in these technologies to fulfill its 
mission of fostering innovation and a flexible and responsive 
regulatory environment.
    Remaining Educated and Informed as Innovation Changes the 
Industry--it has always been necessary for Commission staff to continue 
to improve their knowledge of developing economic trends, new trading 
instruments, trading strategies, and the interrelationship of markets, 
domestically and internationally. Without such continued investment in 
skill and information building, they may not be fully capable of 
understanding the marketplace, the economic influences on it, and its 
changing needs and uses. This level of skill and knowledge will need to 
increase over the next five years as new markets emerge around the 
world and market users seek new hedging strategies.

The Strategies

    Strategies to Develop a Responsive Commission Culture--At the 
center of the Commission's mission accomplishment are the core business 
processes and responsibilities. Meeting these responsibilities and 
performing them well provides an ongoing level of regulatory presence 
and support to the industry and its users. These core business 
processes are many and include: daily market surveillance, the 
detection and prosecution of wrongdoing, contract market designation, 
rule review, market research, and audits of industry firms.
    To accomplish the day-to-day activities associated with these 
processes, the Commission must maintain a positive culture within which 
to work. Over the next five years, the following strategies will guide 
us and help us meet the internal challenges we face.
    Build a professional and highly trained staff--
    <bullet> Set standards for the recruitment of qualified staff.
    <bullet> Develop a recruitment and promotion strategy to build a 
new professional base for filling behind the anticipated high level of 
retirements in the next five years.
    <bullet> Provide technical and advanced training to ensure that 
CFTC staff skills keep pace with advances in the commodities industry 
and permit promotion to higher levels of responsibility.
    Build a strong technological infrastructure--
    <bullet> Implement the Commission's Five-Year Automated Data 
Processing (ADP) Plan. The plan establishes: the Commission's systems 
development priorities; agency standards for various software 
applications; policies and procedures related to support provided by 
the Office of Information Resources Management (OIRM); and priorities 
for acquisition and utilization of external databases and other 
electronic information services.
    <bullet> Sustain the Commission's End-User Advisory Group (EAG) to 
gain broad input into planning and prioritizing technological 
developments. The EAG provides: assistance and guidance to OIRM in the 
development of the Five-Year ADP Plan; annual review and prioritization 
of OIRM's systems development workload; establishment of Commission-
wide standards for the use of software applications and support 
provided by OIRM; and priorities for acquisition and utilization of 
databases and information services.
    <bullet> Implement and refine the CFTC's automated Market 
Surveillance System.
    <bullet> Maintain and enhance expertise capable of overseeing the 
technological advancements in the domestic and international markets.
    <bullet> Review and replace hardware and software with current 
technology to support Commission goals.
    Reengineer business processes to streamline regulatory requirements 
and to create internal efficiencies--
    <bullet> Identify areas which may benefit from reengineering, to 
create efficiencies for the regulated industry or for the CFTC's 
internal processes.
    Recent examples include: the implementation of ``fast-track'' 
procedures for processing certain contract designation applications and 
rules-cutting in half the average period such contracts and rules are 
pending with the Commission; streamlining of the risk disclosure 
process; and streamlining the administrative opinions process to reduce 
the backlog of pending cases.
    Restructure organizationally to improve performance and respond to 
changing mandates and trends--
    <bullet> As warranted, reorganize the internal structure of the 
Commission to strengthen program initiatives.
    Recent examples include: the strengthening of the enforcement

[[Page 48625]]

program through a reorgani-zation, concentrated hiring and renewed 
training efforts; and the establishment of an Office of International 
Affairs to enhance the Commission's ability to meet the increasing 
challenge of playing an active role in international initiatives.
    Plan effectively to maximize the use of scarce budgetary 
resources--
    <bullet> Continually review resource requirements for operations 
and program initiatives to ensure sound fiscal management and the 
optimal allocation of resources to mission requirements.
    <bullet> Enhance the capability of the financial management system 
to aid in analyzing inputs and outputs in order to improve the 
measurement of outcomes at the Commission.
    <bullet> Make increasing use of the data flowing from our payroll/ 
personnel system in order to determine how we are using our most 
significant resource-staff-years.
    <bullet> Develop advanced planning skills to assure an emphasis on 
results-oriented management.
    Communicate accountability to CFTC managers and staff--
    <bullet> Institute a new Performance Management System to create a 
more effective and responsive communication tool for managers and 
staff.
    <bullet> Employ the Annual Performance Plan to improve the commu-
nication of specific goals and performance levels to staff to improve 
performance.
    <bullet> Provide training at all levels of the Commission so that 
employees have the skills and current information to enable them to 
perform at a high level.

Achieving and Measuring Performance

Achieving Performance

    The Commission may measure the success of its performance through 
four broad indicators:
    <bullet> Markets free of disruption.
    <bullet> Registered and fit market professionals and financial 
intermediaries.
    <bullet> Self-regulatory organizations with sound financial 
practices and effective enforcement programs.
    <bullet> Swift and aggressive investigation and prosecution of 
wrongdoing, with sanctions and fines levied for the maximum remedial 
and deterrent effect.

Measuring Performance: The Annual Performance Plan

    On an annual basis, work of the Commission is directed through the 
Annual Performance Plan (APP). The APP establishes a full set of 
performance indicators and targets to ensure that day-to-day activities 
are appropriately defined and measured. Activities are outlined by 
performance indicators and performance targets for five years, FY 1998 
through FY 2002.

Relating General Goals and Objectives to Performance Goals and Program 
Evaluation

    Program evaluation, or determining how well the performance targets 
CFTC has established are being achieved, is necessary to measure the 
effectiveness and efficiency of our work. Many program priority and 
resource allocation decisions hinge on the knowledge of what is going 
well and what is not. For the first three years of this plan, the 
Commission will use methods and processes already in place to evaluate 
how we are progressing on the implementation of the Strategic Plan and 
the Annual Performance Plan.

Quarterly Objectives Review Process

    The Quarterly Objectives reporting process provides executive 
management with a review of program accomplishments for the fiscal 
quarter just completed and program priorities for the current fiscal 
quarter. Also included is a summary of performance statistics, a series 
of output measures provided by program. This reporting process will be 
evaluated to determine how it may be used as the method for reporting 
on program progress toward meeting the goals, outcome objectives, and 
activities in the Strategic Plan as well as a method for setting 
overall priorities and allocating resources consistent with those 
priorities.

Management Accounting Structure Code System

    Information concerning the distribution of labor at the Commission 
is captured through the financial reporting system called MASC--
Management Accounting Structure Code System. This input data, provided 
by every employee on a bi-weekly schedule, reflects the hours they 
dedicate to various Commission activities and projects. The information 
is intended for use by agency program managers in their resource 
management activities, as well as to provide a database for 
documentation and support of the CFTC fee structure for such fee-
generating activities as the designation of contract markets for 
trading on exchanges and rule enforcement reviews of the exchanges.
    The MASC system will be reviewed with the goal of reengineering the 
present system to conform to the activity structure defined by this 
Strategic Plan. This evaluation will assess the current system's 
utility as the primary method for capturing the distribution of labor 
costs.

Status of Funds Reporting Process

    The Status of Funds, a financial management reporting process, 
executed from the Commission's automated financial management system 
and presented to executive management, is the basis for periodic 
reports of the agency's financial condition and usage of its chief 
resource--staff-years. This process will be evaluated to determine how 
it may best facilitate the reporting of resource usage under the new 
framework of the Strategic Plan.

Stakeholders

    The Commission's stakeholders-the public, the Congress, the 
Administration, other federal departments and agencies, market users, 
registrants, the exchanges, the National Futures Association, and 
foreign authorities-are valuable resources which must be tapped to 
provide critical feedback on Commission goals and priorities. 
Understanding their perspectives will assist the Commission in 
clarifying its mission and directing its resources. We will evaluate 
how best to use these partnerships effectively.

Leadership

    The outcome envisioned by the Government Performance and Results 
Act is improved efficiency and effectiveness of federal programs 
through the establishment of a system to set goals for program 
performance and to measure the results.
    As this planning and reporting process evolves, the Commission will 
evaluate how best to provide the leadership and direction to integrate 
program, cost, and budget information into a reporting framework that 
allows for fuller consideration of resource allocations, operational 
costs, and performance results.

Monitoring External and Internal Factors

    The Commission will evaluate the most effective method to 
continually review key factors, external and internal to the agency, 
which may affect how it achieves its mission. This evaluation process 
will ensure that the Commission anticipates future challenges and makes 
adjustments to its goals, outcome objectives, and activities before 
potential issues and problems escalate.
    As part of this evaluation the Commission will continue its 
refinement of vital systems such as the Market Surveillance System 
which

[[Page 48626]]

provides invaluable front-line information on commodity futures and 
option trading on a daily basis, and will look to defining other 
systems that may provide assistance in anticipating issues and 
directing resources.

Appendix

Understanding the Fundamentals of Commodity Futures and Options

    What is a Futures Contract?
    What is an Option Contract?
    What is Price Discovery?
    What is Daily Cash Settlement?
    What is Leverage?
    What is Margin?

Addresses of the Commodity Exchanges

Addresses of CFTC Offices

CFTC Team

Organizational Structure
Staffing
Occupations

Commission Concurrence

Publications and Information

Understanding the Fundamentals of Commodity Futures and Options

What Is a Futures Contract?

    A futures contract is an agreement between two parties to buy and 
sell in the future a specific quantify of a commodity at a specific 
price. The buyer and seller of a futures contract agree now on a price 
for a product to be delivered and/or paid for at a set time in the 
future, know as the ``settlement date.'' Although actual delivery of 
the commodity can take place in fulfillment of the contract, most 
futures contracts are actually closed out or ``offset'' prior to 
delivery.

What Is an Option Contract?

    An option on a commodity futures contract is an agreement between 
two parties which gives the buyer, who pays a market determined price 
known as a ``premium,'' the right (but not the obligation), within a 
specific time period, to exercise his option. Exercise of the option 
will result in the person being deemed to have entered into a futures 
contract at a specified price known as the ``strike price.'' In some 
cases, an option may confer the right to buy or sell the underlying 
asset directly, and these options are known as options on the physical 
asset.

What Is Delivery vs. Cash Settlement?

    There are two types of futures contracts, those that provide for 
physical delivery of a commodity or other item and those which call for 
cash settlement. The month during which delivery or settlement is to 
occur is specified in the contract. Thus, a July futures contract is 
one providing for delivery or settlement in July.
    It should be noted that even in the case of deliverable futures 
contracts, very few actually result in delivery. Not many speculators 
have the desire to take or make delivery of, for example, 5,000 bushels 
of wheat, or 112,000 pounds of sugar, or even one million dollars worth 
of U.S. Treasury bills. Rather, the vast majority of speculators in 
futures markets choose to realize their monetary gains or losses by 
buying or selling offsetting futures contracts prior to the delivery 
date.
    Selling a contract that was previously purchased liquidates a 
futures position. Similarly, a futures contract that was initially sold 
can be liquidated by an offsetting purchase. In either case, gain or 
loss is the difference between the buying price and the selling price.
    Even hedgers generally do not make or take delivery. Most find it 
more convenient to liquidate their futures positions and (if they 
realize a gain) use the money to offset whatever adverse price change 
has occurred in the cash market.

What Is Price Discovery?

    Futures prices increase and decrease largely because of the myriad 
factors that influence buyers' and sellers' judgments about what a 
particular commodity will be worth at a given time in the future 
(anywhere from less than a month to more than two years).
    As new supply and demand developments occur, and as new and more 
current information becomes available, these judgments are reassessed, 
and the price of a particular futures contract may be bid upward or 
downward. The process of reassessment-price discovery-is continuous.
    Thus, in January, the price of a July futures contract would 
reflect the consensus of buyers and sellers at that time as to what the 
value of a commodity or item will be when the contract expires in July. 
On any given day, with the arrival of new or more accurate information, 
the price of the July futures contract might increase or decrease in 
response to changing conditions and expectations.
    Competitive price discovery is a major economic function and 
benefit of futures trading. The trading floor of a futures exchange is 
where available information about the future value of a commodity or 
item is translated into price. In summary, futures prices are an ever-
changing barometer of supply and demand and in a dynamic market, the 
only certainty is that prices will change.

What Is Daily Cash Settlement?

    Once a closing bell signals the end of a day's trading, the 
exchange's clearing organization matches each purchase made that day 
with the corresponding sale and tallies each member firm's gains or 
losses based on that day's price changes--a massive undertaking 
considering that well over one million futures contracts are bought and 
sold on an average day. Each firm, in turn, calculates the gains and 
losses for each of its customers having futures contracts.
    Gains and losses on futures contracts are not only calculated on a 
daily basis, but they are also credited and debited on a daily basis. 
This process is known as a daily cash settlement and is an important 
feature of futures trading. It is also the reason a customer who incurs 
a loss on a futures position may be called to deposit additional funds 
into his account--a margin call.

What Is Leverage?

    To say that gains and losses in futures trading are the result of 
price changes is an accurate explanation, but by no means a complete 
explanation. Perhaps more so than in any other form of speculation or 
investment, gains and losses in futures trading are highly leveraged. 
An understanding of leverage is crucial to an understanding of futures 
trading.
    The leverage of futures trading stems from the fact that only a 
relatively small amount of money (known as initial margin) is required 
to buy or sell a futures contract. On a particular day, a margin 
deposit of only $1,000 might enable you to buy or sell a futures 
contract covering $25,000 worth of soybeans. Or for $20,000 you might 
be able to purchase a futures contract covering an index of common 
stocks valued at $200,000. The smaller the margin in relation to the 
underlying value of the futures contract, the greater the leverage.
    If you speculate in futures contracts and the price moves in the 
direction you anticipated, high leverage can produce large profits in 
relation to your initial margin. Conversely, if prices move in the 
opposite direction, high leverage can produce large losses in relation 
to your initial margin.

What Is Margin?

    The margin required to buy or sell a futures contract is a deposit 
of good faith money that can be drawn on by your brokerage firm to 
cover losses that you may incur in the course of futures trading. It is 
similar to money held in an escrow account.

[[Page 48627]]

    Minimum margin requirements for a particular time are set by the 
exchange on which the contract is traded. They are typically about 5% 
of the current value of the commodity or asset underlying the futures 
contract. Exchanges continuously monitor market conditions and risks 
and, as necessary, raise or reduce their margin requirements. 
Individual brokerage firms may require higher margin amounts from 
customers than the exchange-set minimums.

Addresses of the Commodity Exchanges & Designated Self-Regulatory 
Organizations

Chicago

Chicago Board of Trade, 141 West Jackson Boulevard, Chicago, IL 60606
Chicago Mercantile Exchange, 30 South Wacker Drive, Chicago, IL 60606
MidAmerica Commodity Exchange, 141 West Jackson Boulevard, Chicago, IL 
60604

Kansas City

Kansas City Board of Trade, 4800 Main Street, Kansas City, MO 64112

Minneapolis

Minneapolis Grain Exchange, 400 South Fourth Street, Minneapolis, MN 
55415

Philadelphia

Philadelphia Board of Trade, 1900 Market Street, Philadelphia, PA 19103

New York

AMEX Commodities Corporation, 86 Trinity Place, New York, NY 10006
Coffee, Sugar & Cocoa Exchange, Inc., Four World Trade Center, New 
York, NY 10048
New York Cotton Exchange, Four World Trade Center, New York, NY 10048
New York Futures Exchange, Four World Trade Center, New York, NY 10048
New York Mercantile Exchange, One Northend Avenue, World Financial 
Center, New York, NY 10282
COMEX Division
NYMEX Division

Registered Futures Association

National Futures Association, 200 West Madison Street, Suite 1600, 
Chicago, IL 60606

CFTC Offices

Headquarters, Three Lafayette Centre, 1155 21st Street, N.W., 
Washington, D.C. 20581, Telephone: 202-418-5000
Eastern Regional Office, One World Trade Center, Suite 3747, New York, 
NY 10048, Telephone: 212-466-2061
Central Regional Office, 300 South Riverside Plaza, Suite 1600 North, 
Chicago, IL 60606, Telephone: 312-353-5990
Southwestern Regional Office, 4900 Main Street, Suite 721, Kansas City, 
MO 64112, Telephone: 816-931-7600
Sub-Office, 510 Grain Exchange Building, Minneapolis, MN 55415, 
Telephone: 612-370-3255
Western Regional Office, Murdock Plaza, 10900 Wilshire Boulevard, Suite 
400, Los Angeles, CA 90024, Telephone: 310-235-6783

CFTC Team

Organizational Structure

    Based in Washington, D.C. the Commodity Futures Trading Commission 
maintains regional offices in Chicago and New York, and has smaller 
offices in Kansas City, Los Angeles, and Minneapolis. The CFTC consists 
of five Commissioners, appointed by the President to serve staggered 
five-year terms. One of the Commissioners is designated by the 
President, with the consent of the Senate, to serve as Chairperson. No 
more than three Commissioners at any one time may be from the same 
political party.
    The Chairperson oversees the management of the agency and its five 
major organizational units:
    <bullet> Division of Economic Analysis
    <bullet> Division of Enforcement
    <bullet> Division of Trading and Markets
    <bullet> Office of the General Counsel
    <bullet> Office of the Executive Director

Staffing

    The Commission is requesting 621 full-time equivalent staff-years, 
or FTEs, in FY 1999. A regional staffing distribution is shown below:

Washington, D.C. (DC)............................................    370
Chicago, IL (CH).................................................    131
New York, NY (NY)................................................     90
Los Angeles, CA (LA).............................................     21
Kansas City, MO (KC).............................................      7
Minneapolis, MN (MN).............................................      2
                                                                  ------
  Total Staff Years..............................................    621
                                                                        


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[[Page 48628]]

Occupations

    The principal professional occupations at the Commission are 
attorney, economist, futures trading specialist and investigator, 
auditor and computer specialist. These professionals are assisted in 
their work by a wide range of administrative and support personnel.\1\

    \1\ Executives include Chairperson, Commissioners, and managers 
in the Senior Executive Service. Other Professionals include 
computer analysts, budget and finance professionals, human resource 
specialists, and contracting officials.
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Commission Concurrence

----------------------------------------------------------------------
Brooksley Born, Chairperson

----------------------------------------------------------------------
Joseph B. Dial, Commissioner

----------------------------------------------------------------------
John E. Tull, Jr., Commissioner

----------------------------------------------------------------------
Barbara Pedersen Holum, Commissioner

----------------------------------------------------------------------
David D. Spears, Commissioner

Publications and Information

    For a list of other CFTC publications or for more information on 
the CFTC, please visit the CFTC's home page on the World Wide Web. Our 
address is http://www.cftc.gov.
    Or contact the Office of Public Affairs, Commodity Futures Trading 
Commission at: Three Lafayette Centre, 1155 21st Street, N.W., 
Washington, D.C. 20581, (202) 418-5080.

[FR Doc. 97-24388 Filed 9-15-97; 8:45 am]
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