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Commodity Futures Modernization Act (CFMA) Definition
CFMA is a law in the US that was enacted in 2000 and deregulated under the derivatives of the OTC (over-the-counter). The law enables the “sophisticated parties” to enter into trade contracts without inspection as stated by the Commodities Exchange Act of 1936. Rather the business activities under these contracts must adhere to the general guidelines and rules of soundness and safety.
A Little More on What is the Commodity Futures Modernization Act (CFMA)
The CFMA law by the US government in 2000 and mandates the management of the Commodity Futures Trading Commission to regulate the US commodity market for five years. The main benefit and this act aim to subsidize the trading stock features. The law focuses on the future individual share in the stock market.
When it was enacted in 2000, the law provides CFMA provides that foreign exchange dealers have to acquire registration certificate from CFTC, and later become a member of Futures Commission Merchant (FCM) forex dealer. The (CFMA) signed by US President Bill Clinton during its enaction created ways for manipulation of the financial instruments that altered the commodity prices in 2003.
The Modernization Act signed into law by President Bill Clinton aimed at solving Security Exchange Commission dispute with Commodities Future Trading Commission that emerged in the early 1980s. Similarly, there was the enactment of legislation that expanded the scope for the definition of commodity. There was overlap in the SEC and CFTC’s regulatory scope.
Commodities were initially agricultural products and raw materials. There was the development of both market and standard contracts for these commodities and purchases and sales then followed. For example, there is the possibility of purchasing a contract for 5000 bushels for wheat in May to be supplied in December the same year. Two types of buyer exist in this market, the end user like flour mill and the investors. The end user in this market is aware of their 5000 bushels of wheat need in December. The investor in this market is aiming at making profits by buying the bushels in earlier at a lower price and selling them late at an increased price.
Similarly, to the buyers, there are two sellers; the farmer or commodity producer and the investor. In this case, the investor is the seller as they do not want to use 5000 bushels of wheat. The seller will sell the commodity in December regardless of the price as at then.
Farmers are at their discretion of selling at any time they want. Their sales proceed the harvests making them aware of the amount they have. Also, they can sell before harvest to allow them to pay for materials needed for their crop. When the farmers sell more than what is produced, there will be a necessity of them buying to cover for the difference.
There is a lot of preference for this contract by the investors to the extent of one treating stock as commodities. For example, in single stock futures stock, one selling 100 shares in 2005 that was to be delivered in Dec.2006. The contract type leads to the Modernization Act implementation.
There is the steadfast tread of regulations of everything in the public markets. Single stock future contacts have both commodity and stock features. As a commodity, it is regulated by CFTC while as a product it is regulated by the SEC. As a result of lack of agreements between the two agencies that wanted the authority of over these contacts, the financial instruments were banned. Due to the demand of the banned financial contract, while it was traded in Europe, the Congress came I with the Commodity future Modernization Act which was purposed to solving the dispute between the two bodies because they were unable to have their agreement.
Congress passed commodity Future Modernization Act in 2000, and single stock futures resumed in US markets even though many issues remain unresolved and banning of product retail until 2003. The Act failed in the specification of exchange that was permitted to deal with the security despite many exchanges that were legalized to provide the stock. Currently, single stock futures are mainly traded in One Chicago exchange, a joint venture between the Chicago Board of Options Exchange and the Chicago Board of Trade. Single stock futures have been prevalent in European markets and currently gaining momentum in the US as a result of the Commodity Futures Modernization Act. For more about single stock futures and its trade one needs to visit OneChicago Exchange.
References for the Commodity Futures Modernization Act
Academic Research on the Commodity Futures Modernization Act
- Who is in the oil futures market and how has it changed?, Medlock III, K. B., & Jaffe, A. M. (2009). Who is in the oil futures market and how has it changed? Up to the year 2008, the prices of oil were relatively stable. After that, the price hiked unprecedently during the year towards the end of the year. This paper seeks to determine the factor behind the increase in the prices of oil. The author presents that dramatic movement in oil price has caused everyone from U.S. congressmen to ministers from the Organization of the Petroleum Exporting Countries (OPEC) to call into question the role of speculative traders in the crude oil market.
- Derivatives and the legal origin of the 2008 credit crisis, Stout, L. A. (2011). Harv. Bus. L. Rev., 1, 1. This paper focuses on determining t the derivatives and factors that led to the credit crisis that occurred in 2008. The author focuses on determining the impacts of the Commodities Futures Modernization Act of 2000 (CFMA). The study revealed that the credit crisis that occurred in the economy was not primarily due to changes in the market buts was also attributed to the changes in the law. It was due to changes in the law. He points out that the credit crisis came about as a result of CFMA’s sudden and wholesale removal of centuries-old legal constraints on speculative trading in over-the-counter (OTC) derivatives.
- The Enron Loophole, Jickling, M. (2008, July). Washington, DC: Congressional Research Service, Library of Congress. This paper examines the implication of the Commodity Exchange Act and regulation by the Commodity Futures Trading Commission (CFTC). The study also attributes the financial crisis of these laws and regulations. The author presents that these acts put stringent regulations that affect the effectiveness in the credit borrowing. Various bills that were passed in the 110th congress parliament imposed new regulatory requirements that considerable affected the credit ratings and eventually resulted in the financial crisis.
- Causes of the financial crisis, Jickling, M. (2009). This article focuses on determining the causes of the financial crisis in the economy. The author presents that the financial crisis experience in the economy started in 2007 when the Federal Reserve replaced the inflation as the most important issue. The author state that the crisis was caused by relaxed mortgage lending during the early 2000s. This resulted in rising delinquency and foreclosures in the US financial institutions.
- Back to the (Single Stock) Future: The New Regulatory Framework Governing Single-Stock Futures Trading, Fine, S. A. (2002). Admin. L. Rev., 54, 513. This paper examines the new regulatory frameworks that control single-stock future trading. According to the author, the new regulations are developed following the failure of the previously instituted laws to prevent the financial crisis, especially during the 2000s. The new regulations aim at minimizing the credit lending by the financial institutions.
- Diverging derivatives: Law, governance and modern financial markets, Carruthers, B. G. (2013). Journal of Comparative Economics, 41(2), 386-400. This paper investigates the regulatory, political, and institutional of the derivatives markets in the US between 1980s until the financial crisis of 2008. The study seeks to provide an in-depth understanding of the changes in the foreign exchange market derivatives and over-the-counter derivatives. The author presents that even though strong political connections favoured exchange in some regions of the US, they were eclipsed by the over-the-counter market. In this regard, the further investigates the impacts of laws and regulations in the financial crisis.
- Multinational regulatory competition and single-stock futures, Partnoy, F. (2000). Nw. J. Int’l L. & Bus., 21, 641. This literature examines the regulatory measures that both at the domestic and international level that tends to control the stock future. The authors analyses various incidences of regulatory competition that has occurred both at the international and domestic stock market. The analysis was based on the single-stock futures. The author state that single stock feature provides a better ground for the study.
- In Defense of Market Self-Regulation-An Analysis of the History of Futures Regulation and the Trend toward Demutualization, Keaveny, J. (2004). Brook. L. Rev., 70, 1419. The discussion over the effectiveness of the U.S. system of market self-regulation has been a matter of concern for many years. The author state that the condition whereby the stock is left free to determine the prices without the intervention of the government has raised more argument over a long time. In this regard, this paper examines the implications of market-self regulation in the stock market.
- New legislation permitting stock futures: the long and winding road, Brodsky, W. J. (2000). Nw. J. Int’l L. & Bus., 21, 573. This paper examines the impacts of new legislation that allow the stock futures. The analysis is based on the examines the derivatives that affect prices and credit ratings. The author presents that new regulations on the allowing stock futures have considerable help in control the credit crisis in the economy.
- Single stock futures and cross-border access for US investors, Pan, E. J. (2008). Stan. JL Bus. & Fin., 14, 221. This paper examines single stock futures contracts that use the price of a single stock as the underlying asset. The paper further examines the implication of single stock futures to the investors primarily in the US.
- The role of derivatives in the financial crisis, Greenberger, M. (2010). Com/files/FCIC-Michael_Greenberger_Testimon y. pdf (last visited May 15, 2011). This paper discusses the role of stock derivatives in the financial crisis. The author present that political, and economic derivatives played a great role in causing the financial crisis in the economy. The author links the financial crisis to stringed political laws that affected the economy.