Introduction

Commodities Trading, Commodities Futures Trading, and Commodity Underwriting  Compliance Requirements

BITE is a tool suite that assists companies in multiple domains to reduce risk in their supply chain. Our AI technology assists companies to remain on the right side of compliance through cost-effective, easy-to-use tools.

This document covers information and processes to assist companies understand the risks involved with commodities trading, futures trading and underwriting of commodities.

Commodities Trading, Commodities Futures Trading, and Commodity Underwriting

Traded commodities consist of naturally occurring materials or goods and may include oil and natural gas, metals such as gold, silver and aluminum and “soft”¹ commodities such as sugar, cotton, cocoa and coffee.

Commodity Futures Trading: Commodities can be bought and sold in real time on exchanges like stocks. Well-known exchanges include the Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX) and London Metal Exchange (LME), all of which participate in commodity futures trading.

Commodity Trade: refers to the direct exchange, purchase or trade in commodities (such as cocoa, grain, metals etc), and is more a business to business transaction.

Commodity Underwriting: generally refers to the risk associated with lending money to businesses that trade in commodities, for example lending money to a mining company wishing to build a gold mine.

US Government agencies involved in regulating commodities include the following:

• The Commodities Future Trading Commission² (CFTC) is an independent U.S. government agency that regulates the U.S. derivatives markets, including futures, options, and swaps.
• The National Futures Association (NFA)³ is self-regulatory organization for the U.S. derivatives industry, created under the same legislation as the CFTC.  The NFA helps the CFTC regulate the U.S. derivatives industry and provides investors with protection by ensuring that member firms employ industry best practices and meet regulatory requirements.

The Bank Secrecy Act (BSA), as amended by the Patriot Act, is designed to prevent, detect, and prosecute international money laundering and the financing of terrorism. The BSA and related regulations require futures commission merchants (FCMs) and introducing brokers (IBs) to establish anti-money laundering (AML) programs, report suspicious activity, verify the identity of customers and apply enhanced due diligence to certain types of accounts involving foreign persons. In the future, it is possible that commodity pool operators (CPOs), commodity trading advisors (CTAs), swap dealers (SDs), major swap participants (MSPs), and other CFTC registrants may be required to comply with anti-money laundering (AML) regulations.⁴

Regardless if a commodity-trading entity is required to maintain an AML program under the Bank Secrecy Act, all of those businesses’ trade transactions fall under the Department of Treasury’s Office of Foreign Assets and Control (OFAC)⁵ sanctions requirements and they must screen customer accounts and transactions for matches with individuals and companies on the OFAC Specially Designated Nationals and Blocked Persons (SDN) list. If a SDN match is detected, futures trading entities must block assets, reject transactions, and are generally prohibited from dealing with such persons.⁶ OFAC’s sanctions programs are separate and distinct from BSA AML compliance obligations.  

The commodity trading community - whether they are extracting, manufacturers, shippers, consignees, financiers, futures traders or other entities involved in the commodity supply chain - should employ “reasonable care” in reviewing their transactions to avoid compliance problems.

Why is Sanctions Compliance is Important:

1. National Security: Preventing transactions with denied parties or watch listed entities that pose a threat to national and global security. Sanctions programs such as OFAC deny malign state actors and non-state actors such as Transnational Criminal Organizations from exploiting trade and finance systems for their financial benefit.
2. Economic Security: Protecting national trade competitiveness and supporting foreign policy objectives while maintaining competitiveness in the global trade markets.
3. Global Security: Implementing effective sanction controls supports national contributions to global security – a safe international supply chain is only as effective as its weakest link and malign actors exploit those weak leaks.
4. Avoid corporate reputational damage. Companies that ignore compliance obligations are subject to criminal and severe civil penalties (see matrix below).

Regulations apply based on two core areas:

1. The entity/person, organization or destination that is involved in the commodity trade.
2. The type of commodity being traded.

What are the rules you need to adhere to?

‍There are several compliance control rules and regulations. The primary statutes and regulations are listed below but the commodity futures trade community should be aware several other statutes pertaining to money laundering, conspiracy, and false statements can be additionally charged for egregious, willful violations:

How does BITE Help?

The BITE Playbook, available in the BITE app, helps you navigate these regulatory requirements and quickly understand which agencies enforce what regulations associated with your specific transaction.

BITE Data: our BITE Playbook maps directly to watchlists, Harmonized Schedule codes and commodity screening lists, allowing you to quickly check a commodity or person against the extensive filters in our platform.

Training Modules: BITE Commodity Futures Trading Compliance Training - gets access to concise, easy-to-follow tutorials and guidelines.

BITE Data Mapping

Good Corporate Responsibility: All of the above assist in increasing a corporation’s social responsibility profile, ensuring that they are doing business with entities that are on the right side of government regulation.

Disclaimer: BITE serves as a guide to reduce supply chain risk, however it is not an official risk management tool of the US Government. Please refer to specific agency guidance for official guidance should the need arise. BITE and NU Borders are not liable for any damages, criminal or civil charges or other infractions that might arise before or after you use the tool

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1. “Commodities are often split into two broad categories: hard and soft commodities. Hard commodities include natural resources that must be mined or extracted, such as gold, rubber, and oil, whereas soft commodities are agricultural products or livestock, such as corn, wheat, coffee, sugar, soybeans, and pork.” https://www.investopedia.com/terms/c/commodity-market.asp.
2. https://www.cftc.gov/About/AboutTheCommission.
3. https://www.nfa.futures.org/about/index.html.
4. https://www.cftc.gov/IndustryOversight/AntiMoneyLaundering/dsio_aml_sp.html.
5. International Emergency Economic Powers Act - 50 USC 1701 -1708 (IEEPA) is the foundational authority for U.S. sanctions and administered and regulated by OFAC.
6. https://www.cftc.gov/IndustryOversight/AntiMoneyLaundering/dsio_aml_sp.html.