Futures contracts first appeared in the United States in the mid-1800s and were based on grains. They provided producers (farmers) and commodity users with a means of reducing the risk of financial loss arising from adverse fluctuations in commodity prices, called hedging. They also provided a more efficient and transparent means of determining commodity prices based on supply and demand factors, called price discovery. Because of concerns about price manipulation and other trading abuses in the futures market, including the operation of bucket shops, Congress passed the CEA in 1936 to amend the Grain Futures Act of 1922. Like its predecessor, the CEA required that futures trading in specified commodities—such as corn, rye, and wheat—be conducted only on federally designated markets. To receive such a designation, an exchange had to meet certain self-regulatory requirements that included providing for the prevention of manipulation and fraud. Congress periodically amended the act to bring futures trading in additional commodities under the CEA. For example, Congress amended the act in 1968 and brought futures trading in livestock, livestock products, and frozen concentrated orange juice under federal regulation. By the early 1970s, futures trading had expanded to include nonagricultural commodities, such as precious metals and foreign currencies. Although contracts on these commodities were traded on futures exchanges, they were not covered by the act and, thus, were not federally regulated. In 1974, Congress amended the CEA to ensure that all futures contracts—whatever their underlying commodity—would be federally regulated. It accomplished this goal by expanding the list of commodities covered by the act to include virtually anything, tangible or intangible. As a result, the class of instruments that could be defined as futures and subject to the act’s exchange-trading requirement was broadened. Any contract that was legally categorized as a futures contract could be traded only on federally designated exchanges, making the off-exchange trading of futures illegal. The 1974 amendments to the CEA also created CFTC to administer the CEA.The CEA gives CFTC exclusive jurisdiction over futures and establishes a comprehensive regulatory structure designed to protect the futures market and its participants. Historically, CFTC’s regulatory structure was designed to assure that all futures contracts were traded on self-regulated exchanges and through regulated intermediaries, which were subject to capital, examination, recordkeeping, registration, reporting, and customer protection requirements. The CEA’s exchange-trading requirement was intended to foster both market integrity and customer protection by creating a centralized market that could be protected against excessive speculation, price manipulation, and other abusive trade practices. According to the act, regulation of the futures market was necessary to protect the public interest, because futures prices were susceptible to excessive speculation and could be manipulated to the detriment of producers, consumers, and others. Moreover, the act’s legislative history noted that the fundamental purposes of the act were to ensure fair practices and honest dealing in the futures market and to control those forms of speculative activity that demoralize the market to the detriment of producers, consumers, and the markets. While providing for their regulatory oversight, the CEA does not define the term futures contract. Instead, CFTC and the courts have identified certain elements as necessary, but not always sufficient, for defining a futures contract. These elements are the obligation of each party to fulfill the contract at a specified price set at the contract’s initiation, the use of the contract to shift or assume the risk of price changes, and the ability to satisfy the contract by either delivering the underlying commodity or offsetting the original contract with another contract. CFTC and the courts have also identified additional elements of exchange-traded futures contracts, including standardized terms, margin requirements, use of clearinghouses, open and competitive trading in centralized markets (such as futures exchanges), and public price dissemination. These additional elements facilitate futures trading on exchanges but do not define what makes a contract a futures contract. Also, according to CFTC and the courts, the requirement that a futures contract be exchange-traded is what makes the contract legal, not what makes it a futures contract. Because CFTC and the courts have defined a futures contract in a way that reflects its risk-shifting function, the CEA potentially covers a broad range of risk-shifting products that are not exchange-traded. The CEA also provides CFTC with jurisdiction over commodity options,except options on securities and options on foreign currencies traded on a national securities exchange. CFTC’s options jurisdiction is further limited by the recent U.S. Supreme Court decision in CFTC v. Dunn. Commodity options include options to acquire futures contracts (called options on futures) and options to acquire the actual commodity, excluding securities. CFTC has issued regulations to allow futures exchanges, subject to its approval, to trade options on futures in any commodity and options on actual commodities other than domestic agricultural commodities. Futures exchanges have been trading options since 1982, and virtually all options traded on futures exchanges are options on futures. CFTC has also issued regulations to allow certain options on commodities other than domestic agricultural commodities (called trade options) to be traded off-exchange. These OTC options are to be offered and sold to commercial counterparties who enter into transactions for purposes related solely to their business. Since the 1974 amendments to the CEA and the creation of CFTC, the U.S. futures market has evolved far beyond its agricultural origins and is now dominated by futures based on financial products. In 1975, the largest commodity group was domestic agricultural commodities, accounting for nearly 80 percent of total trading volume. By 1996, the largest group was interest rate contracts, accounting for 54 percent of total trading volume. At the same time, agricultural commodities accounted for about 19 percent of total trading volume. According to the exchanges and others, the participants in the futures market have changed as the market evolved. They noted that the participants are now largely institutions and market professionals, with retail customers representing a smaller proportion of total market participants than they did when the act was amended in 1974. During this period, the CEA has remained the primary statute specifically created to regulate the trading of derivative products. OTC derivatives and exchange-traded futures have similar characteristics and economic functions but differ in other ways. The market values of both products are determined by the value of an underlying asset, reference rate, or index. The economic uses of both products include hedging financial risk and investing with the intent of profiting from price changes, called speculating. OTC derivatives and exchange-traded futures differ in the way they are traded and cleared as well as in their degree of standardization. OTC derivatives, which include forwards, options, and swaps, are privately negotiated contracts. They are entered into between counterparties, also called principals, outside centralized trading facilitiessuch as futures exchanges. Counterparties negotiate contract terms—such as price, maturity, and quantity—to customize the contracts to meet their specific economic needs. Because OTC derivatives are entered into on a principal-to-principal basis, each counterparty is exposed to credit risk—the risk of loss resulting from the other party’s failure to meet its financial obligation. In contrast, futures traditionally have been traded on organized exchanges as well as cleared and settled through clearinghouses. Clearinghouses manage counterparty credit risk, in part by substituting themselves as the buyer to every seller and the seller to every buyer. They also guarantee daily settlement of price changes, thereby eliminating the need for the original counterparties to monitor each other’s creditworthiness. Exchange-traded futures generally have standardized terms—except for price, which the market determines. The exchange-traded futures and OTC derivatives markets have followed similar evolutionary paths. Exchange-traded futures developed from forward grain contracts that were customized and traded on a principal-to-principal basis. They evolved into contracts that have standardized terms, except for price, and are traded on centralized exchanges. Similarly, OTC derivatives originated as customized contracts that involved brokers finding and matching counterparties. Today, almost all OTC derivatives are traded through dealers. An industry association has developed standardized documentation for certain OTC derivatives, including swaps. However, each contract, including its material terms, continues to be privately negotiated between the two counterparties. The less complex interest rate and foreign-exchange swaps, called plain vanilla swaps, have become more homogeneous in terms of underlying reference rates or indexes and maturities. The majority of both swaps and exchange-traded futures are settled without delivery of the underlying commodity or financial asset. Because OTC derivatives and exchange-traded futures serve similar economic functions, they can be used as substitutes for one another and thus may compete in the marketplace. However, they are not perfect substitutes because of potential differences in their contract terms as well as transaction costs, regulations, and other factors. OTC derivatives and exchange-traded futures can also complement each other. For example, swaps dealers use exchange-traded futures to hedge the residual risk resulting from unmatched positions in their swaps portfolios. Similarly, food processors, grain elevators, and other commercial firms use exchange-traded futures to hedge their forward positions. To address our two objectives, we reviewed the CEA and its legislative history, Federal Register notices, comment letters, and other material related to CFTC’s exemptions for hybrid, OTC energy, swaps, and exchange-traded futures contracts. We also interviewed CFTC officials, including past commissioners, about the agency’s use of its exemptive authority for OTC derivatives and exchange-traded futures as well as the legal and regulatory issues raised by these markets.