Futures, FX & Trading Conduct

The framework: CFTC, NFA, and the Commodity Exchange Act

The Commodity Futures Trading Commission, created in 1974, regulates U.S. derivatives markets. Its jurisdiction encompasses futures contracts, options on futures, swaps under Title VII of the Dodd-Frank Act, and certain retail foreign exchange activities. The National Futures Association is the self-regulatory organization for the futures industry, designated by the CFTC under Section 17 of the Commodity Exchange Act.

NFA registers and oversees Futures Commission Merchants (firms that accept customer funds for derivatives trading), Introducing Brokers (firms that solicit orders without accepting customer funds), Commodity Pool Operators (operators of pooled investment vehicles trading derivatives), Commodity Trading Advisors (persons advising others on derivatives), and the associated persons of each. Exchange-level oversight occurs at the Designated Contract Market, Swap Execution Facility, and Derivatives Clearing Organization level under CFTC core principles; each exchange operates its own regulatory program within and reporting to the CFTC’s overarching framework.

This Foundation addresses substantive conduct in these markets — what is permitted, what is prohibited, and how violations are addressed at the trade level. Firm-level supervisory obligations are treated separately in Foundation Two (Trading Conduct & Supervision); enforcement procedures are treated in Foundation Three (Disputes & Enforcement).

Derivatives instruments

Futures contracts are standardized contracts to buy or sell a commodity at a future date at a specified price, traded on Designated Contract Markets. They are subject to position limits, large-trader reporting, and exchange-level surveillance. Options on futures are contracts giving the holder the right but not obligation to enter a futures position, subject to similar registration and conduct rules.

Following Title VII of the Dodd-Frank Act, swaps markets are regulated by the CFTC for most categories — commodity swaps, interest-rate swaps, credit default swaps on broad-based indices — and by the SEC for security-based swaps. Swap dealer regulations are codified at 17 C.F.R. Part 23 and include reporting, recordkeeping, business conduct, and clearing requirements.

Foreign exchange markets

Spot foreign exchange transactions between sophisticated counterparties — the institutional FX market — are largely outside CFTC jurisdiction. FX forwards and FX swaps, while excluded from the statutory definition of “swap” by Treasury determination, remain subject to the CFTC’s anti-fraud and anti-manipulation jurisdiction.

Retail foreign exchange — transactions between dealers and retail customers — is subject to CFTC jurisdiction under Section 2(c)(2) of the Commodity Exchange Act. Retail Foreign Exchange Dealers register with the CFTC and become NFA members. CFTC Regulation 5 establishes minimum net capital, segregation, disclosure, and anti-fraud requirements for retail FX activities, and NFA Compliance Rule 2-39 addresses forex transactions at the SRO level.

The FX Global Code

The FX Global Code is a non-binding code of conduct for the wholesale foreign exchange market, developed by the Global Foreign Exchange Committee and central banks (including the Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan). First published in May 2017, and subsequently revised, the Code articulates principles for ethics, governance, execution, information sharing, risk management, and confirmation and settlement.

The Code applies on a “comply or explain” basis. Major market participants — buy-side institutions, sell-side dealers, prime brokers, and FX platforms — sign Statements of Commitment indicating adherence. The Code is not directly enforceable as U.S. law, but adherence to or departure from Code principles is referenced in enforcement actions, particularly those addressing communication standards, conflicts of interest, and execution practices.

Market manipulation: the doctrinal framework

Manipulation in futures and foreign exchange markets is prohibited under multiple overlapping statutory and regulatory provisions.

Section 6(c)(1) of the Commodity Exchange Act (7 U.S.C. § 9) prohibits the use of any manipulative or deceptive device or contrivance in connection with any swap, contract of sale of any commodity, or contract for future delivery. The provision is modeled on Section 10(b) of the Securities Exchange Act, and CFTC Rule 180.1 implements it. Section 6(c)(3) of the Commodity Exchange Act is a standalone anti-manipulation provision prohibiting any person from manipulating or attempting to manipulate the price of any swap or commodity. CFTC Rule 180.2 implements this provision and articulates the elements of a manipulation claim. Together, the provisions cover the spectrum of price-distorting conduct in U.S. derivatives markets.

Spoofing and other manipulation forms

Section 4c(a)(5)(C) of the Commodity Exchange Act, established by Dodd-Frank in 2010, specifically prohibits bidding or offering with the intent to cancel the bid or offer before execution. Criminal spoofing prosecutions under Section 4c(a) became increasingly common after United States v. Coscia, 866 F.3d 782 (7th Cir. 2017), the first criminal spoofing conviction, and have continued through major actions against individual traders and global banks.

Section 4c(a)(1) of the Commodity Exchange Act prohibits wash trading — transactions that have the appearance of a trade but involve no change in beneficial ownership, or that are pre-arranged. CFTC Regulations 1.38 and 1.39 elaborate. Marking the close describes conduct designed to influence the closing or settlement price on which a position is marked to market or contracts are settled, addressed primarily through CFTC Rules 180.1 and 180.2 and through exchange-level rules on order entry timing. Banging the close is a specific form of marking the close in which a trader executes a large, aggressive order in the closing range to push the settlement price. Layering involves placing multiple orders at different price levels to create a false appearance of market depth, then cancelling them; layering is often charged in conjunction with spoofing.

Section 6(c)(1)(A) of the Commodity Exchange Act separately prohibits delivery of false or misleading reports concerning crop or market information, particularly relevant to benchmarks and physical commodity markets.

The foreign exchange fix scandal

The 4 p.m. London Fix scandal of 2013 to 2015 was the most significant FX market manipulation matter in modern memory. Investigators at the U.S. Department of Justice, the Federal Reserve, the CFTC, and the Office of the Comptroller of the Currency, together with counterparts at the U.K. Financial Conduct Authority, Switzerland’s FINMA, and other foreign authorities, documented coordinated manipulation by FX traders at major global banks of the WM/Reuters 4 p.m. London Fix and the European Central Bank’s 1:15 p.m. fix.

The investigations produced collective penalties exceeding $10 billion across multiple banks, criminal pleas for currency manipulation including by individual traders, and significant changes to FX market structure and conduct standards. The conduct included sharing of confidential customer order information in trader chat rooms (the “Cartel” and the “Bandits’ Club”), front-running of customer orders ahead of fix windows, and coordinated price-influencing trading during the fix calculation windows.

Doctrinally, the FX fix matters established that FX spot trading — though largely outside CFTC swaps jurisdiction — remains within reach of the Commodity Exchange Act’s general anti-fraud and anti-manipulation provisions for cross-asset effects, the Sherman Act for the horizontal restraint of trade in trader-chat-room conduct, wire fraud and bank fraud statutes, and the supervisory authority of the Federal Reserve and OCC over major banks. The matters also catalyzed the development of the FX Global Code described above and significant changes to internal communication standards at major FX dealers.

Market microstructure issues

Modern electronic, multi-venue futures and foreign exchange markets involve issues that extend beyond simple manipulation framing. Order-type interaction — how limit orders, market orders, stop orders, hidden orders, iceberg orders, and conditional orders behave together — can be exploited or can cause systemic effects; exchange rules govern permissible order types and their behavior. Queue priority rules — first-come, first-served at a given price level — create incentives for low-latency trading and for order-placement strategies that may be challenged as manipulative in spoofing and layering cases.

Differences in latency — physical distance from exchange matching engines, measured in microseconds — can affect trading outcomes. Co-location and direct-feed access raise fair-access issues addressed under SEC Rule 15c3-5 (the Market Access Rule) for securities and under exchange-level rules for futures. Self-trading — transactions between accounts under common control — is generally prohibited where intentional under CFTC Regulation 1.39 and exchange self-trade-prevention requirements; inadvertent self-trades are common and generally addressed through exchange-level review.

These issues, often involving microsecond-scale order behavior and complex algorithmic strategies, frequently arise in exchange-led market regulation investigations and in CFTC enforcement matters. They are common expert-witness topics, often involving statistical analysis of trading patterns and evaluation of execution quality.

Account-level disputes

Account-level disputes in futures and foreign exchange accounts often arise from margin and liquidation events. Initial and maintenance margin are required by CFTC regulations and exchange rules; insufficient margin can trigger margin calls and ultimately liquidation. Customer accounts whose margin falls below required levels may be liquidated by the FCM, generally with notice (CFTC Regulation 1.55 addresses risk disclosure).

Disputes arise over whether margin calls were properly issued, whether the timing of liquidation was reasonable, whether executions during liquidation occurred at proper prices, and whether prior commercial relationships excused strict application of margin rules. Trading errors — wrong contract, wrong direction, wrong quantity in order entry — generate disputes when resulting positions move adversely; exchange-level rules typically provide for trade-bust procedures within narrow time windows. Customer-FCM disputes are commonly resolved through NFA arbitration under the NFA Code of Arbitration.

How this Foundation connects

Foundation Six addresses trade-level conduct in derivatives markets — the substantive doctrine that translates the institutional architecture of Foundation One (Market Regulation) into specific market practice. It overlaps with Foundation Two (Trading Conduct & Supervision), which addresses firm-level supervisory and conduct obligations; with Foundation Three (Disputes & Enforcement), which addresses the enforcement procedures responding to violations; with Foundation Four (Expert Witness Practice), since manipulation and microstructure questions are common expert-witness topics; and with Foundation Five (Whistleblower Programs), since spoofing, manipulation, and false reporting are among the most common subjects of CFTC whistleblower submissions. The Glossary’s entries on CFTC, NFA, Manipulation, Futures Commission Merchant, and Introducing Broker provide quick definitional reference.