Regulatory Conflict and Entry Regulation of New Futures Contracts

Abstract

When an automobile manufacturer decides to introduce a new product such as a new model of car, it is free to do so. It does not have to convince a regulatory body that the new model has an economic purpose or is in the public interest. Nor does it have to demonstrate that the car will not break down excessively or that consumers who purchase the car are making a sound financial decision. When an exchange that sells transactional services decides to offer a new product such as a new futures contract, however, it must convince one or more regulatory agencies that the proposed contract meets each of the above tests. Under guideline 1 of the Commodities Futures Trading Commission (CFTC),' every application by an exchange for a new futures contract must contain a description of the cash market, an analysis of the terms and conditions of the contract, an explanation of how the contract would fulfill an economic purpose, and a statement of how the contract furthers the public interest. As required by statute, the CFTC has focused primarily on the susceptibility of a particular contract to manipulation. The larger the deliverable supply, the lower the probability of manipulation.