Now that we have learned about the common economic definitions of futures and other derivatives, it’s time to see how the relevant US laws and regulations define these financial instruments. The legal and regulatory definitions of derivatives and other financial instruments are often different from the common economic definitions of those selfsame instruments. Why is that? Contrary to what one might think, it is not because Congress wants to make life difficult for law students, or to confuse people. Instead, the differences between how various financial instruments are conceptualized in everyday life and how they are described in statutes and regulations are largely (although not solely) the result of Congress trying to make sure that people cannot easily evade applicable laws and regulations by simply creating look-alike financial instruments that would escape the regulatory framework that Congress had intended for such instruments. In many cases, the legal and regulatory definitions of financial instruments are more expansive and ambiguous than the definitions in common usage.

The federal regulation of futures markets dates back to the Grain Futures Act of 1922, and thus is older than the US government’s securities laws. In the beginning, the primary emphasis of the regulatory regime was to push all futures trading on exchanges that were licensed by the government, with the belief that the exchanges would police trading on their markets for manipulation of the prices of commodities and related misconduct. With time, the government took a more active role in regulating the markets, but the system’s overall emphasis on self-regulation – by exchanges and, starting in the 1980s, also by the NFA – remains to this day. While the primary purpose of federal regulation of futures and derivatives has been the elimination (or, more accurately, the attempted elimination) of market manipulation and disruptive trading practices, other important purposes of the CEA include reducing systemic risk and preventing fraud.