Proposed Transaction Fee on Futures Contracts

Proposed Transaction Fee on Futures Contracts

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Pr
epared for Members and Committees of Congress

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The Bush Administration has revived a proposal, made by every President since Ronald Reagan
but never enacted by Congress, to impose a user fee on trading in the futures markets in order to
help fund the Commodity Futures Trading Commission (CFTC). Fees paid by other financial
market participants already provide funding for the Securities and Exchange Commission (SEC)
and the federal banking regulators. To fund the CFTC at the level requested for FY2008 would
require a fee of about three cents on each futures contract and option traded on the exchanges that
the CFTC regulates. The futures industry argues that such a fee would be anticompetitive and
could divert trading to foreign markets or to the unregulated over-the-counter market. However, it
is not clear that a fee of this relatively modest size would have a significant impact on trading
decisions in a market where the value of a single contract may rise or fall by hundreds or
thousands of dollars in a day. This report summarizes the arguments for and against the proposal
and will be updated as legislative developments warrant.

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The Size of the Fee.................................................................................................................... 1
Transaction Fees in the Stock Market ....................................................................................... 2
Arguments For and Against the Fee .......................................................................................... 2
Likely Impact of the Fee ........................................................................................................... 3

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Author Contact Information ............................................................................................................ 3

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s part of its budgets for FY2007 and FY2008, the Bush Administration has proposed that
the Commodity Futures Trading Commission (CFTC) be funded by a transaction fee on
A futures contracts, rather than by appropriated funds. The CFTC is the federal regulator of
the futures markets, where financial contracts based on the price of commodities, currencies,
interest rates, and other financial indicators are traded. Its budget authority for FY2007 is $98
million. For FY2008, the Administration has requested an increase to $116 million, in recognition
of growth and change in the markets that the agency regulates.
The same futures transaction fee proposal was included in the Administration’s FY2003 budget
but was not enacted by Congress. Indeed, every Administration since Ronald Reagan’s has called
unsuccessfully for such a fee.
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The FY2007 budget did not specify any particular fee amount or rate, but simply notes that the
proposed fee would “cover the cost of the CFTC’s regulatory activities.”1 Assuming that this
means the entire CFTC budget, and that a uniform fee is to be imposed on each futures and
options contract traded on U.S. futures exchanges, a fee of 5.1¢ per contract would have been
required to cover the CFTC’s FY2006 budget, or a fee of 6.7¢ to cover the proposed increase to
$127 million.2 (This calculation is based on trading volumes reported by the CFTC for FY2005:
1.554 billion futures contracts and 353 million options.)3
For FY 2008, the Administration proposes a smaller fee—enough to cover the costs of two CFTC
functions (market oversight and clearing and intermediary oversight), which are projected to
account for $55 million, or 47%, of the agency’s $116 million budget request.4 Using the same
calculation performed above, a fee of about 3¢ per contract would be sufficient.
How significant is a fee of this magnitude in the context of futures trading? Futures contract size
varies according to the underlying commodity, but the amounts involved in a single contract are
substantial. For example, a corn futures contract on the Chicago Board of Trade represents 5,000
bushels of corn. Prices are quoted in increments of 1/4 cent per bushel (called the tick size),
meaning that the smallest possible price fluctuation is $12.50 per contract. On the Chicago
Mercantile Exchange, a futures contract based on the Standard and Poor’s (S&P’s) 500 stock
index represents $250 times the current S&P index value. The tick size is 0.1 index point, so that
the minimum price fluctuation per contract is $25. Of course, over the life of a contract, prices
normally fluctuate much more than a single tick: when the S&P 500—currently about 1,400—
rises or falls by 0.5 %, each futures contract changes in value by $1,750 (assuming 7 index points
times $250).
The fee would also be quite small in relation to other trading costs. On the Chicago Board of
Trade, exchange and clearing fees average about 50¢ per contract.5 The brokerage fees paid by

1 The Budget for Fiscal Year 2007, Appendix, p. 1119.
2 Since CFTC funding was by continuing resolution in FY2007, the $127 million figure was not approved by Congress.
3 Stock options are not included in this total: they are traded on securities exchanges regulated by the SEC and are
subject to transaction fees that are earmarked to support the SEC’s budget.
4 The Budget for Fiscal Year 2008, Appendix, p. 1040.
5 “CBOT 2005 Volume Surpasses 674 Million Contracts and Marks Fourth Consecutive Year of Growth,” Chicago
Board of Trade Press Release, Jan. 3, 2006.
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traders who are not exchange members are subject to negotiation, but generally range from about
$5 per contract for a discount broker to several times that amount for full-service brokerage.
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A likely model for the proposed CFTC fee is the set of fees that fund the Securities and Exchange
Commission (SEC), which regulates stock and bond markets. There are three principal fees: (1)
all sales of stock on a U.S. exchange or on Nasdaq are subject to a fee, in the form of a percentage
of the sale price; (2) corporations pay a percentage of the value of new stock or bonds registered
with the SEC prior to sale to the public; and (3) certain merger and tender offer transactions are
subject to fees. The SEC is required to adjust the fee rates periodically to ensure that the amount
collected is approximately equal to the agency’s budget.
When the fees are collected, they go to a special offsetting account available to appropriators, not
to the Treasury’s general fund. As a result of the fee collections, no direct appropriations are used
to fund the SEC.
The rates were most recently adjusted in February 2007. For stock sales, the fee is $15.30 per
million dollars, or 0.0015%. For registration of new securities and mergers, the rate is $30.70 per
million, or 0.003% of transaction value.
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The basic argument for a transaction fee is that those who benefit most directly from federal
regulation—users of the futures market—should bear the cost of that regulation, not the general
taxpayer. The benefits of financial regulation, in terms of investor confidence and deterrence of
fraud and price manipulation, are well-recognized. The Administration’s budget notes that the
“CFTC is the only federal financial regulator that does not derive its funding from the specialized
entities it regulates.”6
The futures industry opposes the fee on the grounds that it will make U.S. futures exchanges less
competitive vis-a-vis foreign exchanges and the off-exchange, or over-the-counter market.
According to John Damgard, president of the Futures Industry Association, “[t]he proposed tax
on futures transactions would raise the costs of doing business on regulated futures exchanges and
could discourage institutions and individuals from using futures contracts to manage their risks.
Institutional players today have many choices. If exchange-traded products become less cost-
efficient, they can choose to do business in the over-the-counter derivatives markets or move to
more cost-efficient markets.”7
Opponents of the fee also note that the futures exchanges themselves have regulatory functions,
which are paid for by the trader membership, and that there are additional fees to fund the
National Futures Association (NFA), a self-regulatory organization.8

6 Ibid.
7 “FIA Strongly Opposes Proposed Tax on Futures Transactions,” Futures Industry Association press release, Feb. 7,
2006.
8 The NFA is analogous to the National Association of Securities Dealers (NASD) in securities markets. Professional
futures traders must register with the NFA, just as all stockbrokers must join the NASD. Securities exchanges also
(continued...)
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It is true, as opponents of the fee argue, that the U.S. futures industry operates in a highly
competitive environment. Foreign futures markets have grown rapidly in recent years, and in
2005 accounted for the majority of futures contracts traded.9 This does not imply, however, that
foreign growth has come at the expense of U.S. markets: in 2005, U.S. futures volume grew by
25.4%, while non-U.S. volume rose by 6.5%. Similarly, many contracts traded in the unregulated
over-the-counter market compete directly with exchange-traded products, but there is no
indication as yet that either market has reached a saturation point. Rather than poaching from
each other, it appears that both markets are attracting new customers.
The question is whether the competitive balance among these markets is so delicate that even a
small increase in transaction costs could trigger a flight from U.S. futures exchanges. It is hard to
imagine that any exchange customer, contemplating an investment that stands to gain or lose
hundreds or thousands of dollars in a single day, will be deterred by an additional cost of three to
seven cents. For exchange members, whose trading costs are much lower than those of outsiders
(primarily because they do not pay brokerage fees), the proposed fee would have a
proportionately greater impact, but it is not clear that there would be any significant effect on
trading decisions.
The securities market fees that fund the SEC cannot be directly compared with the proposed
futures fee: SEC fees are percentages of trade value, and they are spread over many more
investors, firms, and market professionals than would be the case in the futures industry.
However, it may be worth noting that the SEC’s budget has more than doubled since the Enron
scandals and the Sarbanes-Oxley Act of 2002,10 and that fee rates were raised at the same pace,
without any marked impact on trading volumes or liquidity.
The Administration’s FY2007 budget called for the fee to “be set at a level to avoid inhibiting the
market’s competitiveness.”11 A standard, per-contract fee at the level needed to fund the CFTC at
its present size (or at the size proposed by the Administration’s FY2008 budget) appears likely to
meet that test.

ž?‘˜›ȱ˜—?ŠŒ?ȱ —?˜›–Š?’˜—ȱ

Mark Jickling

Specialist in Financial Economics
mjickling@crs.loc.gov, 7-7784

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maintain enforcement and market surveillance operations.
9 The Futures Industry Association reports that global futures volume in calendar 2005 was 3.961 billion contracts, with
U.S. exchanges accounting for 1.653 billion, or 42%.
10 From $423 million in FY2002 to a requested $905 million for FY2008.
11 The Budget for Fiscal Year 2007, Appendix, p. 1119.
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